Fiscal policy assume the U.S economy has the following GDP is 18,500 billion dow
ID: 1173480 • Letter: F
Question
Fiscal policy assume the U.S economy has the following GDP is 18,500 billion down from 19,350 nine months ago. Unemployment is at 6.8% up from 4.2% nine months ago. inflation is stable at 2.0% MPC+.75... NRU=4.0% and target inflation is 2,0%.. how do you figure this out using OKUN"S law p;ease help calculate?? ALSO NEED TO RECALCULATE MY GOVERMENT SPENDING AND TAX CUT,,,,,, TO MAKE SURE THE INCREASED GOVERMENT SPENDING AND HOUSEHOLD SPENDING DIDN.T LEAD TO A RESULT OF A GREATER GAP, PLEASE EXPLAIN
Explanation / Answer
Value of multiplier in economy = 1/1-MPC
= 1/1-0.75
= 1/.25
= 4
To plug this gap government must increase its spending by ;
X*4 = 850
X = 850/4
= $ 212.5 Billion.
It will restore previous equilibrium level of GDP.
Through okun law:
Increase in unemployment = 2.6 %
Okun law says that 2 % rise in GDP leads to rise in employment rate by 1 %. Hence to restore previous equilibrium, government must increase GDP by 5 .2%.
5.2 % of 18500 = 962
X *4 = 962
X = 962/4
= 240.2
Government must increase its spending by $ 240.2 billion.
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