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Assume the United States economy has the following:
 
 GDP is $16,000 billion down from $16,350 billion eight months ago.
 
 Unemployment is at 7.4% up from 5.7% six months ago.
 
 inflation is stable at 1.7%.
 
1. Government could address the problem by either increasing government spending, cutting taxes, or both. If the government decided to increase spending to address the problem, how much should spending be increased? If the government decided to cut taxes to address the problem, by how much should tax be cut?
 
2. Should the government cut taxes or increase spending or some combination of both to address the problem?
 
3. What could happen to make the policy you recommended ineffectively?

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Chika Ilonah
Chika IlonahLv10
28 Sep 2019

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Related questions

Assume the United States economy has the following:

GDP is $16,000 billion down from $16,350 billion eight months ago.

Unemployment is at 7.4% up from 5.7% six months ago.

Inflation is stable at 1.7%.

MPC=.75

NRU=5%

Should the government cut taxes or increase spending or some combination of both to address the problem? I need help with a detailed explanation of this question.

During the recent recession, when countries around the world suffered high unemployment rates and the governments were experiencing huge budget deficits, economists debated whether to raise or cut taxes or to raise or cut government spending. Many argued that the governments could raise taxes on certain income groups and, at the same time, increase spending to give a boost to the economy.
a) Let us consider a hypothetical example to examine the merit of this argument. Assume that an economy was in a liquidity trap and its initial GDP was 10,000 billion dollars and the marginal propensity to save was 10%. Assume away the foreign trade sector. How much would be the change in income (GDP) if the government increased both spending and taxes by 20 billion dollars?
b) Do you expect the same result to hold in the standard model where the IS curve and the LM curve are of normal shapes? Explain.

Assume the United States economy has the following?
 
GDP is $17,700 billion up from $16,350 billion four years ago.
Unemployment is at 4.9% down from 7.7% three years ago.
Inflation is at 3.2% up from 1.2% four years ago.
 
1. Explain in detail the problem the country is facing.
2. Should the Federal Reserve adopt easy money or the right monetary policy?
3. Which policy tool should the Federal Reserve use to carry out the policy you recommend in Question 2?
4. What could happen to make the policy you recommend in Question 2 ineffective?

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