Answer to Question #59352 in Macroeconomics for Jhoana Hernandez
1. If actual GDP= $18T, full employment or potential GDP=$20T and the marginal propensity to consume=.7:
a. What kind of fiscal policy is necessary under these conditions?
b. Given the power of the multiplier, how much must actual spending change to close this gap? Show your calculation.
2. One of the main functions of government is to promote full employment and price stability.
a. If the government attempts to balance its budget deficit (G>T), it may increase unemployment. Explain.
b. On the other hand, balancing the budget may be expansionary, i.e. promote full employment. Explain.
3. a. If most deficits are not the result of too much spending, what is causing the deficit?
b. Offer an argument FOR the government incurring so much debt?
1. If actual GDP = $18T, potential GDP = $20T, c = 0.7: a. In this case expansionary fiscal policy (decrease in taxes) is necessary under these conditions. This will increase consumption, which will increase actual GDP. b. The multiplier is m = 1/(1 - c) = 1/(1 - 0.7) = 3.33. To close the gap actual GDP should increase by (20 - 18)/18 = 0.11 = 11%. According to multiplier effect actual spending should be increased by 11%/3.33 = 3.3% to close this gap.
2. One of the main functions of government is to promote full employment and price stability. a. If the government attempts to balance its budget deficit (G>T), it may increase unemployment, because after the increase in taxes and decrease in government spending to cut the budget deficit the real wages after taxes may decrease and the number of working places may decrease too, so the unemployment may rise. b. If balancing the budget is expansionary, the government will use monetary policy (increase in money supply), which will increase inflation, promoting full employment. That's why, if the government wants to balance its budget, it can't hold both unemployment and inflation rates simultaneously.
3. a. The most deficits are not the result of too much spending, because it may be as a result of lower than planned tax revenues. b. An argument for the government incurring so much debt is to support some social projects, the closing of which may cause a lot of problems for the government.
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