ECON312 Course Discussions Week 5


ECON312 Course Discussions Week 5
Which of these four components of AD declined the most during the…

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ECON312 Course Discussions Week 5

ECON312 Course Discussions Week 5

All Students Posts 75 Pages 

Aggregate Demand and Aggregate Supply – 37 Pages 

Go to the BEA website 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.

The component of aggregate demand (AD) that fell the most during the recession was investment expenditure. As the spreadsheet at the bottom of this post shows, private investment fell much farther than any of the other components of AD. Government spending has a 1 or less than 1 multiplier effect on money multiplication. Government investment also crowds out the private sector. The US government has only borrowed to spend and bet that historically low interest rates will stay low so they can pay it back over the next 30 years. Its a bet no Vegas bookie would every touch. No Aggregate increase in demand seen. If the government cut spending, some public sector workers may lose their jobs. This will cause an initial fall in national income. However, with higher unemployment, the unemployed workers will also spend less leading to lower demand elsewhere in the economy. An increase in the marginal propensity to consume reduces the value of the denominator on the right-hand side of the equation, which then increases the overall value of the fraction and thus the size of the multiplier…

Fiscal Policy – 38 Pages 

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.

The immediate effect was an increase in aggregate demand without a corresponding increase in aggregate supply. This is an ingredient for an economic disaster which went unrestrained and increased the price of goods and services. The reason for this is that the nation’s energy production has been reduced for some uncertain time and its water freight transportation has been disrupted. A significant amount of crude oil, natural gas and gasoline production has been halted by the hurricane…