Business

The governments mainly reduce spending cuts and increases tax on both the nation and firms, and back to applying economics belief, the action will only cause a contraction of the aggregate demand of the whole economy, hence, reducing GDP. It is reported that the fiscal measure includes a 60 percent revenue and 40 percent spending cuts. These actions, has decreased the willingness of firms and companies to invest since the after-tax return has been reduced. Next, the of cutting government spending can also mean less jobs for the peoples in the public sector. Unemployment rate increasing from 9.4% to 11.3% (Ferreira.Joana,2017). Using the multiplier effect will be the best to explain, when there is less jobs for the people, it will mean no income for the unemployed and a drop in purchasing power, more importantly it will be very hard for the people to pay the high taxes. It is also reported that the bailout money has all been used to repay the banks instead of using it to correct the

4. Based on your analysis in (1) – (3) above, what is your overall conclusion regarding the

a. I = 4%, PV = $74,000, N = 20, FV = $162,143 b. FV = $2 million, N = 25, I = 8%, PMT = $27,357 c. PMT = $160,000, N = 20, I = 4%, PV = $2,174,452 d. FV = $3.5 million, N = 30, I = 7%, PMT = $37,052

10. Refer to the model and estimates in the previous question. You want to test that

The policies chosen will lead to s real gross domestic product of $41.12 billion. Inflation will be at five percent and unemployment will be at 4.46 percent. The simulation shows once the multiplier and the long-run potential output is known a determination is made to follow a contractionary fiscal policy or an expansionary policy. A determination can also be made to determine the exact amount that should be adjusted for government spending and / or taxation to bring the economy closer to the long-run potential output. The Permanent Income Hypothesis gives a reason why the multiplier may not work the way the theory predicts. People make consumption

(iv) Do the model estimates in (3.2) seem reasonable - or do the results provide evidence that it is a poor model? Explain. (2 marks)

(d) Suppose the government decides to use an increase in government spending to restore national income

Refer to the sets of the aggregate demand, short-run aggregate supply, and long-run aggregate supply curves. Use the graphs to explain the process and steps by which each of the following economic scenarios will shift the economy from one long-run macroeconomic equilibrium to another equilibrium. Under each scenario, elaborate the short-run and long-run effects of the shifts in the aggregate demand and aggregate supply curves on the aggregate price level and aggregate output (real GDP).

The Congressional Budget Office (2012) assesses short-term impact of fiscal policy by relying on the predicted impact of changes in monetary policy by the Federal Reserve and the products of Macroeconomic Advisors and HIS Global Insight (Reichling and Whalen, 2012). The models used by these organizations assume economic output depends on labor supply, technology, available capital, and demand for goods and services. The validity of this model depends largely on the assumption that economic cycles recur with minor changes only.

◆ According to the basic Keynesian model inadequate spending is an important cause of recessions. To fight recessions- at least, those caused by insufficient demand rather than slow growth of potential output- policymakers must find ways to stimulate planned spending. Policies that are used to affect planned aggregate expenditure, with the objective of eliminating output gaps, are called stabilization policies. Policy actions intended to increase planned spending and output are called expansionary policies: expansionary policy actions are normally taken when the

The reason for the government’ decision of expansionary fiscal policy to stimulate economic growth is evident with an understanding of Keynesian economic theory and the Keynesian Transmission Effect. This is a theory of macroeconomics, developed by John Maynard Keynes , based on the principle of aggregate demand being the major determinant of economic growth.

IS-LM model can be used to show the effect of expansionary and tight monetary policies. A change in money supply causes a shift in the LM curve; expansion in money supply shifts it to the right and decrease in money supply shifts it to the

A form of expansionary policy is fiscal policy, which portrays itself in tax cuts, transfer payments, rebates, and increased government spending. Macroeconomists were more against fiscal policy than monetary expansion. Keynesian economists gave fiscal policy a pivotal role in combating recessions. Monetarists contested saying the fiscal policy would be ineffective if the money supply remained constant, as a result, this view point became rare. Now macroeconomists subscribe to the idea that fiscal policy, and monetary policy can aggregate demand curve. They also concur that government should not try to proportion the budget no matter what state the economy is in. They agree that the budget acts as a balancing option to keep the economy stable.

Keynes economics theory refers to the concept that optimal economic performance could be achieved. In addition to optimal performance , Keynes believed that economic downfall could be prevented. To attain this outcome , Keynes believed that through activating stabilizers such as taxes, optimal economic performance and prevented downfall in the economy could be achieved. Intervention policies by the government would also be necessary. Keynes theory was considered to be a “demand side” theory. The notion that the reduction in wage rates could be a possible way to restore full employment in an economy was opposed by Keynes. In the Keynesian theory it is stated that employers will not employ additional employees to produce goods or services that do not sell well or are making a loss for the company because demand for such products or services is decreasing. Keynes noted that there may be a reduction in capital investment when prices are reduced as companies may see the market reducing and profits from such a market decreasing , rather than investing in equipment purely because the price of the equipment has dropped. They will take into account the real value of the purchase. This would have a knock on effect on the overall expenditures and employment , resulting in a reduction of overall expenditure and employment. Keynes believed that an increase in aggregate demand for good and services would boost the economic situation of any given

Keynes idea is that there is a spending multiplier model that shows that $1 introduced into the economy flows and circulates into smaller and smaller pieces; ultimately yielding a final aggregate impact number that is much larger than the original amount spent. This model can be applied to each variable of aggregate demand in order to increase the GDP. (GDP=AD=C+I+G+X)