Question.3073 - Go to the BEA website www.bea.gov. On the left tab under Publications, go to the Interactive Data Tables. Select National Income and Product Accounts. From Table 1.1.6 and 1.1.7 examine all four components of GDP (C, I, G, and Xn). Which of these four components of AD declined the most during the 2007 and 2009 recession? Do you think an increase in government's spending (G) can boost the Aggregate Demand (AD) in a recession? Analyze why the economy may operate below full-employment GDP in the short run. How can the multiplier have a negative effect? What is the relationship between the multiplier and the marginal propensities? Explain. Question 2: Give an example of an event or incident that has taken place in the U.S. economy which has a major economic impact--be specific, e.g., 9/11 attack, natural disaster, rise or fall in oil prices due to OPEC policies, consumer optimism or pessimism about an expected economic expansion or downturn, increase in government spending on healthcare, tightening of the legal and institutional environment, and so forth. What effect would this event have on AD or AS, other things being constant? What would be the resulting effect on equilibrium price level? Explain. What will be the effect of the different tools of fiscal policy to stabilize the economy? Give an example of a built-in stabilizer and explain how it would work to reduce this rise or fall in the level of AD.
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Question 1: Go to the BEA website www.bea.gov. On the left tab under Publications, go to the Interactive Data Tables. Select National Income and Product Accounts. From Table 1.1.6 and 1.1.7 examine all four components of GDP (C, I, G, and Xn). Which of these four components of AD declined the most during the 2007 and 2009 recession? Do you think an increase in government's spending (G) can boost the Aggregate Demand (AD) in a recession? Analyze why the economy may operate below full-employment GDP in the short run. How can the multiplier have a negative effect? What is the relationship between the multiplier and the marginal propensities? Explain. Answer: As per my understanding the government spending can boost the AD curve in the recession until unless 1. There is space capacity in the economy and 2. The private sector is buying bonds at low interest rates. If these conditions don’t apply then the boost shall parallel be phased out by crowding out effect. Full employment means that the economy is utilizing all its resources to the full. Nonetheless, in the short run, with inflexible resource prices, resource markets are not in equilibrium which means that the real production can be either greater or less than the level that would fully employ all resources. The multiplier is simply the ratio of the change in real GDP to the initial change in spending. The multiplier effect can be positive or negative. An initial increase in spending will result in a larger increase in real GDP, and an initial decrease in spending will result in a larger decrease in real GDP. The multiplier is directly related to the marginal propensities. By definition, the multiplier is related to the marginal propensity to save because it equals 1/MP S. Thus, the multiplier and the MPS are inversely related. The multiplier is also related to the marginal propensity to consume because it also equals 1/ (1–MPC). Question 2: Give an example of an event or incident that has taken place in the U.S. economy which has a major economic impact--be specific, e.g., 9/11 attack, natural disaster, rise or fall in oil prices due to OPEC policies, consumer optimism or pessimism about an expected economic expansion or downturn, increase in government spending on healthcare, tightening of the legal and institutional environment, and so forth. What effect would this event have on AD or AS, other things being constant? What would be the resulting effect on equilibrium price level? Explain. What will be the effect of the different tools of fiscal policy to stabilize the economy? Give an example of a built-in stabilizer and explain how it would work to reduce this rise or fall in the level of AD. Answer: The 9/11 attack on the US would shift the demand curve and the supply curve downwards. The attack had a major impact on the economy of the country. The AD curve as well as the AS curve shall shift left for the time period. The resulting equilibrium price level shall also move downwards as a result of the above. The different tools of fiscal policy like increasing government spending and cutting tax rates shall boost the economy. This shall shift the demand curve to the right. Automatic stabilizers are built-in responses to changes in GDP which increase budget deficits during a recession, and increase budget surpluses during periods of inflation. Lets take an example of tax revenues. As GDP rises, net taxes also rise. Because the net taxes exceed government expenditure, a budget surplus is created. This shall have a contractionary effect on the economy, relieving inflationary pressures. On the other hand, during recession, net taxes will decrease. The resulting budget deficit will help expand GDP back to pre-recession levels.More Articles From Economics
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