Busn 5620 Current Economics Analysis Week 6 Personal Assignm

Namebusn 5620current Economics Analysisweek 6 Personal Assignment

There are Internet Questions with this assignment after the following problems. Problem 1 If the price level were below PE in Figure 11.5, what macro problems would we observe? Why is PE considered an equilibrium? Problem 2 Why would job losses in the construction industry cause a loss of retail jobs, as in the News Wire “Undesirable Outcomes” on p. 223 suggests? Problem 3 Why did President Obama assert that government intervention was needed to get the economy out of the recession? Could the economy have recovered on its own? Problem 4 What should the new president do in 2017? Is more government intervention in the macro economy needed? For what purpose? Which policy tools should be used? Problem 5 Refer to the below graph while answering these questions: If AD were to increase (shift to the right), which AS curve would lead to a. The biggest increase in output? b. The largest jump in prices? c. The least inflation? Problem 6 Would a constitutional amendment that would require the federal government to balance its budget (incur no deficits) be desirable? Explain. Problem 7 If the MPC were 0.8: a. How much spending would occur in the third round of Figure 12.6 on p. 242? b. How many spending rounds would occur before consumer spending increased by $200 billion? Show your work. Problem 8 If consumers had an MPC of 0.90, by how much would aggregate demand have eventually increased with Obama’s first-year spending stimulus assuming the stimulus was entirely government spending (News Wire "Fiscal Stimulus: Government Spending," p. 240)? Show your work. Internet Questions Question 1 Go to the Congressional Budget Office’s (CBO) Budget and Economic Information page. Use the Historical Budget Data link on this page to answer the question below. a. Identify all periods where the government ran a budget surplus in the past 40 years. (Refer to the “on-budget” deficits and surpluses.) b. Refer to the Bureau of Labor Statistics website for data on inflation during these periods of budget surplus. Was inflation relatively high (over 3%) or low (under 2%) during these budget surpluses? Were the budget surpluses you identified in part (a) consistent with the inflation at that time? Why or why not? Question 2 Go to the Conference Board’s website. Under the “Economic Indicators” section, click on “Consumer Confidence.” Find the most recent memo just below the Consumer Confidence Index®. (Hint: If you need more information to answer the questions below, try this additional website: ) a. What has been happening to consumer confidence over the last six months? What explanation does the memo give for consumer confidence? b. What component of AD is affected by consumer confidence? Is this likely to have a large impact on AD? Why or why not?

Paper For Above instruction

The fluctuations in the economic landscape are intricate, driven by multiple interconnected factors. Understanding the macroeconomic problems that arise when the price level falls below equilibrium (PE) offers insight into the importance of this equilibrium. When the price level drops below PE, the economy faces issues such as decreased revenue for businesses, leading to layoffs, and a slowdown in economic activity. This disequilibrium induces a contractionary period characterized by rising unemployment and falling output. PE is considered an equilibrium because it is the point at which aggregate demand (AD) equals aggregate supply (AS), meaning the economy is efficiently utilizing its resources without inflationary pressures or unemployment surpluses. Deviations from this point signal disequilibrium, resulting in macroeconomic instability.

Job losses in the construction industry can have a ripple effect on retail jobs, as highlighted by the "Undesirable Outcomes" on page 223. The construction sector is a significant employer, and its downturn reduces household income levels. Lower income leads to decreased consumer spending, particularly in retail sectors, which depend heavily on consumer expenditure. When construction jobs decline, the reduced demand for materials and services propagates through related sectors, causing layoffs and reduced income in retail outlets. This interconnectedness exemplifies how a decline in one sector, especially a large one like construction, can trigger a broader economic slowdown, demonstrating the importance of sectoral health in macroeconomic stability.

President Obama’s assertion that government intervention was necessary to mitigate the recession reflects Keynesian economic principles. During a recession, private sector demand falls, causing unemployment and unused capacity. Government intervention, through fiscal policy—such as increased public spending and tax cuts—can stimulate demand, restore confidence, and accelerate recovery. While the economy might recover on its own over the long term, this process could be prolonged and painful, with high unemployment and underutilization of resources. Active government measures are thus justified to smooth out economic fluctuations and support a swift recovery, as evidenced by the stimulus measures implemented during Obama's tenure.

In 2017, the new president's strategy regarding macroeconomic policy should consider the prevailing economic conditions. If the economy exhibits signs of slack, such as unemployment above natural rates, more government intervention might be necessary to stimulate growth. Conversely, if inflation is rising above target levels, restraint may be prudent. Appropriate policy tools include fiscal measures—such as government spending and taxation—and monetary policy, including interest rate adjustments. The choice and timing of these tools depend on current economic indicators, including output gaps, inflation rates, and consumer and business confidence. A balanced approach, utilizing both fiscal and monetary tools, is often most effective in managing economic stability.

Regarding aggregate supply and demand, if AD shifts right, the impact on output and prices depends on the position of the AS curve. A rightward shift of the AS curve (AS1 to AS2) leads to different outcomes: (a) the greatest increase in output occurs if the AS curve is vertical or less elastic because prices are less sensitive, allowing real output to expand significantly; (b) the largest jump in prices occurs if the AS curve is relatively inelastic, causing significant demand-pull inflation; and (c) the least inflation occurs if the AS curve is highly elastic or vertical, absorbing increased demand without much change in prices. Understanding AS elasticity is crucial for policymakers aiming to control inflation while promoting growth.

Proposing a constitutional amendment to balance the federal budget aims to eliminate deficits, but its desirability is contentious. While a balanced budget could foster fiscal discipline and reduce debt accumulation, it may also constrain government ability to respond to economic downturns. During recessions, deficit spending can stimulate demand and smooth economic cycles, so rigid constitutional constraints might impair necessary countercyclical policies. Conversely, in periods of economic stability, fiscal responsibility is beneficial. Thus, the overall impact depends on balancing fiscal prudence with flexibility to address economic cycles effectively.

The Keynesian expenditure multiplier indicates how initial spending triggers further rounds of income and spending. With a marginal propensity to consume (MPC) of 0.8, the multiplier is 1/(1-0.8) = 5. The third round of spending, given the initial injection, would be 0.8^2 times the initial amount, indicating rapid multiplication. To find the number of rounds before spending increases by $200 billion, one calculates successive rounds of spending until cumulative increases reach that threshold, showing the exponential nature of demand stimulus with a high MPC.

If MPC is 0.90, initial government spending of a certain amount would cascade through multiple spending rounds, culminating in substantial aggregate demand increases. For Obama’s first-year stimulus, assuming full government spending, the total increase in aggregate demand can be estimated by multiplying the initial government expenditure by the multiplier (1/(1-MPC)). With MPC at 0.90, the multiplier is 10, so the total increase is ten times the initial spending. Accurate calculations depend on knowing the initial government expenditure, but the high MPC ensures substantial amplification of fiscal stimulus effect.

References

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• Conference Board. (2023). Consumer Confidence Index. Retrieved from https://www.conference-board.org/data/consumerconfidence.cfm
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