Democratic presidential nominee Sen. Bernie Sanders is running on a platform tha

Question

Democratic presidential nominee Sen. Bernie Sanders is running on a platform that, calls for large increases in government spending and taxes, and raising tariffs, which would curtail international trade. To estimate the impact of Sen. Sanders1 economic policies, consider the augmented AS-AD model: g_y = y_z + g_L (1) g_z = 2gL (2) g_m + g_v = pi + g_y (3) pi = Epi + 0.2(g_y - g_y) (4) g_v = 0.8g_s - 0.4g_T + 0.1g_NX + 0.1gNX + 0.5_gL, In this context, g_s is government spending growth, g_tau is tax revenue growth, and gNx is net export growth. The population growth rate is 1%. For the following questions, you do not need to draw any graphs. Round all of your calculations to two decimal places. a) Suppose the U.S. economy is in a LREQ where money growth is 5%, g_8 and g_T are 2%. and g_x is 3%. What is the Solow growth rate? What is long-run inflation? b) If Sen. Sanders is elected president come November, experts expect g, and gT to rise to 5%, hut fjxx to tall to %. Calculate the SRFQ if Sen. Sanders wins the election. c) Economist Gerald Friedman from UMass Amherst has stated he expects Bernic Sanders' spending and tax plans to more or less permanently increase U.S. RGDP growth. Using the AS-A1 model, do you agree? briefly explain.

Explanation / Answer

a) Given that gv = 0.8gs – 0.4gT + 0.1gNX + 0.5gL. Substituting the values in the equation gives:

gv = 0.8(2) – 0.4(2)+ 0.1(3) + 0.5(1)

= 1.6 – 0.8 + 0.3 + 0.5

gv = 1.6

This should be used in equation (3)

gm/gv = /gy

5/1.6 = /3gL or

3.125 = /3

Inflation rate = 9.38%

So when the economy is in long run, inflation rate is 9.38%. Solow growth rate is gy = 3%.

b) When gsand gTrise to 5% and gNXfalls to 1%, the dynamics change as:

gv = 0.8gs – 0.4gT + 0.1gNX + 0.5gL.

gv = 0.8(5) – 0.4(5)+ 0.1(1) + 0.5(1)

= 4 – 2 + 0.1 + 0.5

gv = 2.6

This should be used in equation (3)

gm/gv = /gy

5/2.6 = /3gL or

1.923 = /3

Inflation rate = 5.77%

So when the economy is in short run, inflation rate is 5.77%.

c) Use the Phillips curve equation to examine the claim:

= E + 0.2(gu – gu’)

5.77 = 9.38 + 0.2(gu – 3)

-1.805 = gu – 3

gu = 1.195

Hence the growth rate is reduced from 3 % to 2%.

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