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Lecture 8

ECON 203 Lecture 8: chapter 9 book

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ECON 203

Chapter 9 1. What is the appropriate fiscal policy to employ during a recessionary gap, and why (for any of these to work, we need to know what level of RGDP is, what the desired level of RGDP is, and the MPC)- expansionary, so we want to increase government spending or cut taxes to increase aggregate demand- RGDP increases because government spending increases a. Fiscal policy during inflationary gap- cut government spending or increase taxes to decrease aggregate demand- politically unpopular- need to target the private sector because they do a better job of handling money (increase taxes) b. Why is use of fiscal policy complicated with stagflation- if you treat it like a recessionary gap to tackle unemployment, you get higher inflation; if you treat it like an inflationary gap to tackle inflation, you get higher unemployment- TRADEOFF BETWEEN UNEMPLOYMENT AND INFLATION 2. 2 examples of automatic stabilizers- how do they keep aggregate near full employment a. Automatic stabilizer- helps economy get back to normal without specific government action a.i. Unemployment insurance, welfare, personal income tax- (Recession) increase in transfer payments and decrease in taxes (Inflation) decrease in transfer payments and increase in income taxes because more people are working; it makes sure the AD doesn’t increase or decrease too much 3. If gov hires people to count grass, what would happen to GDP? Is wealth created- why or why not?- GDP would increase because government spending is being stimulated, which increases RGDP, and aggregate demand. Wealth is created because those dudes get money for counting grass, and so based on their MPC (ex. Spending 80% of the $100 they get) the money goes back into the economy, going to other people, which increases AD. The amount it is expected to increase is the spending multiplier = 1 / 1- MPC 4. How does mandatory spending differ from discretionary- give examples of both a. Discretionary spending- spending that has to go through Congress and be passed a.i. Court system, infrastructure, education, agriculture, national parks a.ii. Farm subsidies- 74% of corn farmer subsidies go to the 10% richest corn farmers US SPENDS A HUGE AMOUNT ON DEFENSE RELATIVE TO OTHERS b. Mandatory spending- spending that doesn’t have to be voted on, it just happens b.i. Entitlements- automatic spending; social security, medicare 5. What has happened to government spending as a percentage of GDP over time- why it has been increasing massively because of mandatory spending (70% of government spending!!?) we are basically just having a government that does income redistribution 6. What type of pension system is social security- what problems does it face, and what a
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