Fiscal and Monetary Theory

Macroeconomics Quiz #5: Kevin Miller

Here is the final quiz in an intro to macroeconomics class that I took along with charts.

Kevin Miller  17/20

Prof. Kerr

7/8/10

ECO 221

Assignment #5

 

Econ 221 HW#5 Charts

Recessionary expenditure gap (aggregate expenditures approach) – The amount by which aggregate expenditures at the full-employment GDP fall short of those required to achieve the full employment GDP. Insufficient total spending contracts or depresses the economy, A change in a component of total spending leads to a larger change in GDP; the multiplier effect. Keynes points to two different ways to close a recessionary expenditure gap and achieve full employment. The first is to increase government spending; the second is to lower taxes. Both work by increasing aggregate expenditures.

  1. The addition of government purchases to private spending (C + Ig + Xn) yields a new, higher level of aggregate expenditures (C + Ig +Xn + G). So then for the recessionary gap increasing net government expenditures also increases the real output at a higher level of GDP thereby closing the recessionary gap. The graph would shift to the right to actuate this change in facts, A change in a component of total spending leads to a larger change in GDP; the multiplier effect. Keynes points to two different ways to close a recessionary expenditure gap and achieve full employment. The first is to increase government spending; the second is to lower taxes. Both work by increasing aggregate expenditures.

 

 

Multiplier is 1/1-MPC * change in G = change in Y  -1

 

  1. The American Recovery and Reinvestment Act of 2009 which totaled 787 Billion dollars (government purchases G = 787 billion dollars) was used to cut taxes, social welfare expenditures, and domestic spending in various infrastructure projects (education, healthcare, transportation, etc.) these government spending provisions yielded a higher level of GDP (GDP=DI) and with (real output and aggregate expenditures also increasing) this led to a dramatic increase in the recessionary expenditure gap. As higher government spending (G) led to a higher budget deficit while increasing the GDP (GDP=DI). This means that the recessionary expenditure gap graph would shift to the left further expressing the change in the recessionary expenditure gap and aggregate expenditures (C + Ig + Xn + G). Keynes points to two different ways to close a recessionary expenditure gap and achieve full employment. The first is to increase government spending; the second is to lower taxes. Both work by increasing aggregate expenditures.
  2. Pres Obama’s tax proposals seem to run counter to the idea of the future well being of the American economy by increasing taxes there was no increase of taxes for manufacturerson the manufacturers of goods while decreasing taxes for the consumers of said goods. Since the manufacturers are the main to contributors to jobs and industry in the country they will have to lay off employees from their jobs and prevent other employees from being hired while they reign in other spending. Where is this coming from?? There is no value added tax in the proposal, there was and income tax credit for consumers -1This will lead to higher unemployment and the added value tax on the payrolls of producers will lead to supply side inflation pressure, and a decrease in real output. The decrease in real output is further exacerbated by the fact that there is a decrease in the worker productivity using the Leontif happiness utility function (.)

 

And also the increase in unemployment coupled with the decrease in utility lead to a further decrease in real output. The decrease in real output leads to a decrease in GDP which leads to an increase in the recessionary expenditure gap. To President Obama’s credit the increase in aggregate government expenditures leads to an increase in the net GDP. The net GDP is also increased through the increase in net exports leading to a further leveling off of the export gap. However these are all long term measures and the offsetting factors explained above are immediate and intractable. The multiplier that is used would be the one to compute aggregate expenditures which is Ca + Ig + Xn + G. the effect on consumers with these policies is immediate and dramatic. A jobless recovery is then eminent and the jobs which are available are mediocre and blue collar leading to angst and anguish expressed through crime and general frustration. Low income groups will be effected the most while the people who are suppose to be hiring will have to offer lower wages for the jobs that are available and smaller payrolls due to the increase in payroll taxes. Citation for source??-1

 

  

 

This graph expresses the added value taxes (cancellation of the Bush tax cuts) that has not yet occurred and it is on the consumers, ie, households and not on the manufacturers as you stated above increase in the recessionary expenditure gap (Ca + Ig + Xn + G). This multiplier has the added effect of increasing the amount of debt that the government must issue.  That does not have an effect on the spending multiplier.  There is an effect on the tax multiplier What is that effect?? Insufficient total spending contracts or depresses the economy. The graph moves to the left or downward (M(-)) slope to express the recessionary expenditure gap (Aggregate Expenditure (3) (AE3)), A change in a component of total spending leads to a larger change in GDP; the multiplier effect. Multiplier = change in real GDP/ initial change in spending. Keynes points to two different ways to close a recessionary expenditure gap and achieve full employment. The first is to increase government spending; the second is to lower taxes. Both work by increasing aggregate expenditures.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s