1. Why is the growth of the consumer spending considered a positive factor for e
ID: 1213862 • Letter: 1
Question
1. Why is the growth of the consumer spending considered a positive factor for expansion of GDP, even when personal saving is falling to a negative level? Are the long-term and short-term effects of a negative personal saving rate both favorable to economic growth? How would you graphically illustrate the short-term and long-term effects?
2. According to the report, inventories grew at about the same rate as the economy as a whole. Taken in isolation from other things going in the macroeconomy, would you expect this behavior of inventories to bias the economy toward faster expansion in the near future, bias it toward a slowdown in the near future, or to be roughly neutral in it effect?
3. According to the report, exports grew faster than imports during the first part of the year. Would you expect this to have a positive or a negative effect on future economic growth? Why? How would you graphically illustrate the effect of this on future economic growth?
4. The government budget remained in deficit during 2006. What information given here helps understand how the deficit was financed?
Case for Dliscussion EXCERPTS FROM THE ANNUAL REPORT OF THE PRESIDENTS COUNCIL OF ECONOMIC ADVISERS, 2007 The expansion of the U.S economy continued for the fifth consecutive year in 2008. Economic growth was strong, with real gross domestic product (GDP) growing at 3.4 percent during the four quarters of 2006. Consumer spending sustained its strong growth during the four quarters of 2008 (rising 3.7 percent in real terms), continuing its 15-year pattern of rising faster than disposable income. As a result, the personal saving rate fell to a negative 1.0 percent for the year as a wholerits lowest annual level during the post-World War lI era Corporate net saving rose to 3.8 percent of gross domestic income (GDI) during the first three quarters of 2006, its highest level since the 1950s. During 2006, real business investment in equipment and software grew 5 percent slower than the 7 percent average pace during the 3 previous years. Its fastest-growing components included computers, as well as machinery in the agricultural and service sectors, Investment in mining and oil fieid machinery was also strong, Ekely in response to elevated crude oil prices and to the need to replace Gulf of Mexico facilities damaged by the 2005 hurricanes Inventory investment was fairy steady during 2006, and had only a minor influence q arter-to-quarter fluctuations Real nonfarm inventories grew at an average $44 billion annual pace during 2006, a 30 percent rate of growth that is roughty in line with the pace of real GDP growth over the same period Real Federal (purchases of goods and services] grew 2.4 percent during 2006. This was the third consecutive year of growth at roughly 2 percent Defense spending accounted for al of the increase during the four-quarter period, while nondefense purchases fell Norminal Federal revenues grew 15 percent in FY 2005 and 12 percent in FY 2006. These rapid growth rates exceeded growth in outays and GOP as a whole, and the U.S. fscal def cit as a share of GDP shrank from 3 6 percent in FY 2004 to 2 6 percent n FY 2005 to 1.9 percent in FY 2006 The curent account deficit (the excess of imports and income lows to foreigners over rts and toreign income of Americans umped to 7.0 percent of GDP in the fouth quarter of 2005, partly due to petroleum imports that replaced lost Gulf of Mexico production. The current account deficit then retraced some of its earser increase in.the irst three quarters of 2008, when oil imports declined QUESTIONSExplanation / Answer
Dear sir / madam,
1. A downward movement along the AD curve is caused by a fall in the price level. A fall in the price level causes an increase in the aggregate spending, as a result, the AE line shifts upwards, leading to a downward movement along the AD curve to the right. The downward movement along the AD curve implies that the level of GDP will increase in response to a fall in the price level.
In the circular flow of income, we assume that all income that the households receive, they spend on consumption and as a result the money income and spending remains the same. When households save, their expenditure on goods and services declines, as a result the money which the firms receive falls. With reduced money, firms will hire fewer workers and reduce factor payments. This will lead to a fall in the incomes of households. Thus svings reduce the flow of money and expenditure and cause a fall in the economy's total income. Hence saving is a leakage from the money flow.
2. Let us take the value of output as given, and an economy which has neither a govt. nor foreign trade, by Y. Consumption is C and investment spending by I. The first key identity is that output produced = output sold. What happens to unsold output ? We count the accumulation of inventories as part of investment( as if the firms sold the goods to themselves to add to their inventories) , and therefore all the output is either consumed or invested. Output sold can be expressed in terms of the components of demand as the sum of consumption and investment spending. Thus Y=C+I
and Y=S+C, Part of income will be consumed and part will be saved . Here S denotes oprivate sector saving. Thus we can write C+I=Y=C+S
3. The faster growth of exports will create a profit surplus. This will increase the investment and capital formation and lower the rate of interest. Hence the people will increase the output of goods and services as they will have increased factor payments. Hence it will have a positive effect on output
4. Budget deficit can be financed by the Treasury's borrowing from the public. Thus , the Treasury sold bonds to the public. The public pays for the bonds with checks, which the Treasury deposits in an account it held in a commercial bank, thereby making sure it did not affect the stock of high-powered money. When the Treasury used the proceeds of the bond sales to make a payment, it moved the money into its Fed account just before making the payment. As a result, the monetary base was not affected by the Treasury's deficit financing, except for the short time between which the Treasury moved the money into its Fed account and then paid it out .
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.