NOTE: Under \"d\" there are two answeres required. In the first quarter of 2009,
ID: 1095463 • Letter: N
Question
NOTE: Under "d" there are two answeres required.
In the first quarter of 2009, President Obama pushed his massive fiscal stimulus package of $862 (It was originally at $787 billion) through the Congress and later passed by the House and the Senate, whose centerpiece was spending most of this stimulus funds in repairing and building infrastructure in transportation, healthcare, science and technology, and education. Pres. Obama also urged to make a modest tax cut for middle-income families making a household income less than $250K per year (it has been modified to $400k starting from January 2013). The push for this combined package of spending and partial tax cut was also criticized by several opponents in politics, academia, and businesses on the ground that the spending was too large under government financing to balance the growing budget deficit and national debt that might threaten future economic stability of the country.
d) Using the Keynesian Cross model diagram (The diagram with 45 degree line by splitting AD (C+I+G+NX) on the vertical axis and RGDP on the horizontal axis, See in Ch. 9,10 & 13 of the textbook) and equation, critically and briefly illustrate the short run and long run economic impact (negative effect on RGDP growth, employment, and other variables) of Recent "Sequester" measure of $85 billion (automatic spending cut of Government spending, G) passed by the US Congress.
(Hint: The impact will be in terms of major macroeconomic variables of US economy such as GDP growth, unemployment rate, interest rates, and inflation). 3 pts.
However, many critics contended that this "sequester" measure is only temporary and too small given the $4T US government budget to have a significant impact on the economy. Therefore, many economists considered this spending cut as too small to bring the economy back into recession. Do you agree or disagree with this contention?
Hint: You may also observe he most recent economic trend and the stock prices in the Wall Street, especially during the end of the second quarter of 2013. 2 pts.
Explanation / Answer
Economist like Krugman sees that the economy was deeply gone into recession. The economy was at risk to have the Japan's syndrome called liquidity trap which would be very hard to get out.Based on the Keynesian model, it should not use the austerity program like in Europe,but government spending. He sees that the package is still too little.There is nothing to worry about the budget deficit, but the life of American citizens who lost jobs.The budget deficit will cure itself when the economy picks up.That is a real argument.
d)
The actual GDP is still behind the potential GDP since the unemployment rate is still high (8.7%). It is still a recessionary gap. To move the actual GDP upward to the potential GDP and reduce the unemployment rate to 5%(natural rate), it has to increase more government spending and cut taxes.The spending multiplier and tax multiplier will save the economy.
Effects of High U.S. Debt Levels
High U.S. Debt Levels Risk
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