Term Paper on "Economics Increased Government Spending Is a Form"
Term Paper 4 pages (1238 words) Sources: 1+
[EXCERPT] . . . .
EconomicsIncreased government spending is a form of fiscal stimulus, so every dollar of new government spending has a multiplied impact on aggregate demand. How much of a boost the economy gets depends on the value of the multiplier, which is the multiple by which an initial change in aggregate spending will alter total expenditure after an infinite number of spending cycles and is equal to 1/(1 - MPC).
The multiplier is our case is 1/(1-0.9) = 1 / 0.1 = 10
Therefore, the total change in spending = multiplier X new spending injection
The marginal propensity to consume (MPC) is the fraction of each additional (marginal) dollar of disposable income spent on consumption; the change in consumption divided by the change in disposable income. The impact of fiscal stimulus on aggregate demand includes both the new government spending and all subsequent increases in consumer spending triggered by the additional government outlays.
Increase in AD = multiplier X fiscal stimulus
In our case, the desired increase in aggregate demand equals the shortfall, i.e. $1.5 trillion. Therefore, the fiscal stimulus (the new spending injection on the part of the government is equal to the increase in AD divided by the multiplier: $1.5 trillion / 10 = $150 billion dollars, supposing the government has that much money.
As for tax cuts, they directly increase the disposable income of consumers, but the more important question is how does a tax cut affects spending.
The amount consumption increases depends on the marginal propensity to consume.
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The effect of a tax cut that increases disposable incomes is to stimulate consumer spending. A tax cut contains less fiscal stimulus than an increase in government spending of the same size so the initial spending injection is less than the size of the tax cuts.
The aggregate demand shortfall can be closed with a tax cut.
In this case, the tax cut = Total increase in consumption / MPC; that is increase in AD divided by the multiplier: $1.5 trillion / 10 = $150 billion dollars.
The best policy would be to use government spending and tax cuts in conjunction, in order to avoid too much public spending or excessive fiscal relaxation.
2. A third fiscal-policy option to stimulate the economy is to increase transfer payments such as social security, welfare, unemployment benefits, and veterans' benefits.
The initial fiscal stimulus of increased transfer payments is:
Initial fiscal stimulus (injection) = MPC X increase in transfer payments
An increase in unemployment benefits of $165 billion will turn into an increase in the aggregate demand, which will cover for the shortage.
The increase in AD = 10 X $165 billion = $1.65 trillion
3. The different impacts of taxes and government expenditures implies that virtually any level of GDP may be achieved, while also maintaining a balanced-budget for the government.
If government expenditures are increased by $1, and increase taxes by the same amount, aggregate expenditures will go up by $1 for the government expenditures; but the tax increase induces a fall of only 90 cent in consumption expenditures, while the remaining 10 cents used to pay the additional dollar tax comes out of savings. Therefore, a combination of increased government expenditures and increased taxes will have an even effect on the macro-economy. The net increase of 10 cents in aggregate expenditures ($1-$0.90) again undergoes the multiplier effect, and gives us an increase in equilibrium GDP of 10 (Multiplier) x 10 (expenditure increase) cents = $1.
4. If the government increases discretionary spending by $180 billion, it will need to raise taxes, since only $150 billion were necessary
By using a combination of government expenditures and tax increases (adopting a… READ MORE
Quoted Instructions for "Economics Increased Government Spending Is a Form" Assignment:
“Questions #5
Assume that a country has a marginal propensity to consume of 0.90. It has an aggregate demand (AD) shortfall of $1.5 trillion.
a) Can the country eliminate the shortfall using government spending only? How? What about using tax policy only?
b) What if the AD shortfall results in an increase in unemployment benefits of $165 billion? Will this change alone wipe out the shortfall? Why or why not?
c) What is the only possible way to eliminate the shortfall if the government wants to keeps it budget perfectly balanced. How do you know?
d) If the government increases discretionary spending by $180 billion, will it need to raise or cut taxes? By how much? What if, due to election year pressures, it did not want to increase spending by more that $100 billion? How, then, is the AD shortfall eliminated?
Question #6
a) What is the effect on the money supply (M2) of a new $10,000 bank deposit?
b) What will be the eventual effect on the money supply assuming that the reserve requirement ratio (RRR) is 0.08 and that all banks lend out all their excess reserves?
c) Assume, in addition, that the Federal Reserve raises the discount rate to the point where banks will all now hold an additional four percent of total deposits on reserve (to avoid having to borrow from the Fed at the higher rate if they get caught short of reserves). How does this change the answer to (B)?
d) Do increases in the discount of federal funds rates influence other interest rates in any way? How about the selling of government bonds by the Federal Reserve? Explain how?
PROBLEM ANSWERS MUST SHOW ALL CALCULOATIONS AND/OR PROVIDE COMPLETE EXPLANATIONS. THE ANSWER ONLY WILL NOT SUFFICE.
How to Reference "Economics Increased Government Spending Is a Form" Term Paper in a Bibliography
“Economics Increased Government Spending Is a Form.” A1-TermPaper.com, 2004, https://www.a1-termpaper.com/topics/essay/economics-increased-government-spending/502751. Accessed 29 Sep 2024.
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