Economics

posted by .

Assume that the economy is already in a recession, and both the President and Congress have decided to do something to restore the economy. Both agree that lowering taxes would not be a good idea, but do believe that it is in the best interest of the economy to increase government spending in defense, education & infrastructure.

The President and Congress change the budget accordingly, but after 18 months, GDP only increased by three quarters of the expected amount. What factors might be responsible for this situation?

  • Economics -

    If the GDP increased by 3/4 of the expected amount in 18 months, something is working right. Given this little information, I'd recommend continuing what they were doing.

  • Economics -

    Reasons abound. I will give you 3 to get you started.

    Obvious reason #1) If government spends more without taxing more, it must borrow the funds. An increase in demand for loanable funds raises interest rates, which in turn, lowers private investment. This is referred to as "crowding out"

    Reason #2) There was certainly an expected multiplier effect associated with the extra spending. However, in a recession, people reduce their spending on consumer goods (i.e., the marginal propensity to consume goes down.) So, the multiplier effect may not have been as large as expected.

    Reason #3) Besides government spending, GDP is comprised of Consumption (C), investments (I), and net exports (M-X). Any forecast error in any of these components would lead to a lower GDP than expected.

Respond to this Question

First Name
School Subject
Your Answer

Similar Questions

  1. Economics

    Which combination of fiscal policy actions would be most contractionary for an economy experiencing severe demand-pull inflation?
  2. College Economics

    An economy has the follwoing comsumption function: C= 200+ 0.8di The government budget is balanced with government purchases and taxes both fixed at $100. Net exports are $100. Investments $600. Find the equilibrium GDP. What is the …
  3. economics

    Assume that the economy is already in a recession, and both the President and Congress have decided to do something to restore the economy. Both agree that lowering taxes would not be a good idea, but do believe that it is in the best …
  4. Economics

    Which of the following is least likely to affect an economy's capacity to produce?
  5. Economics

    President George Bush maintained a “hands-off” policy during the 1990-1991 recession. How did he expect the economy to recover?
  6. Need HELP ASAP - PLEASE ` economics

    Suppose the economy has been producing its potential, but it is now experiencing a recession. Which of the following is a discretionary fiscal policy that would bring the economy closer to its potential output?
  7. english/usgov URGENT

    can you guys help me write a conclusion for this and also help me elaborate my essay better. I've worked so hard and it's due tomorrow Politicians can't agree on how to create more jobs and this is a major problem. The U.S. economy …
  8. Finance

    Calculate the return and standard deviation for the following stock, in an economy with five possible states. If a Boom (Probability=25%) economy occurs, then the expected return is 30%. If a Good (Probability=25%) economy occurs, …
  9. Math

    Bayes' theorem problem, Struggling with this the whole night, please help.Thank you. Two states of nature exist for a particular situation: a good economy and a poor economy. An economic study may be performed to obtain more information …
  10. Social Studies

    A new oil field found in North Dakota would most likely have which effect on the United States?

More Similar Questions