Principles of Economics: Problems * Macroeconomics * Gap-Closing
Suppose that it is December 2020, current forecasts are for a year-2022 level of real GDP of $19.5 trillion without policy changes. Suppose further that you have just moved to Washington to work for the newly-chosen President-Elect as Special Assistant to the Chief Economist of the Office of Management and Budget. Suppose still further that the short-term safe interest rates the Federal Reserve controls are still very close to zero and that the Federal Reserve has promised to keep them very close to zero until at least 2023. Suppose still further that risk spreads on interest rates of different assets are at normal levels.
Your boss, the Director of Office of Management and Budget, has asked you to assume that the economy would be producing at potential output come 2022 if it had a real GDP then of $21 trillion, and has asked you to come up with a plan to "get the economy moving again" and restore American production to potential output so that it can once again be, as Ronald Reagan liked to say, "morning in America". In the income-expenditure framework...
What policies come to mind as ones that the government might adopt in order to meet this goal for the economy in 2022? Briefly, explain what you see as the pluses and minuses of these different policies.
Suppose that you choose to recommend an expansion of government purchases G as the way to get the economy's level of production back up to potential output. If you think that the marginal propensity to consume cyis 0.5, how large an expansion of government purchases do you recommend?
Suppose that you choose to recommend an expansion of government purchases G as the way to get the economy's level of production back up to potential output. If you think that the marginal propensity to consume cyis 0.667, how large an expansion of government purchases do you recommend?
Suppose that you choose to recommend a cut in taxes T as the way to get the economy's level of production back up to potential output. If you think that the marginal propensity to consume cyis 0.667, how large an expansion of government purchases do you recommend?
Suppose that you choose to recommend a cut in taxes T as the way to get the economy's level of production back up to potential output. If you think that the marginal propensity to consume cyis 0.5, how large an expansion of government purchases do you recommend?
Suppose that total real exports X in 2022 are forecast to be $3 trillion, and that a 1% decline in the value of the dollar will, you project, raise exports by 1% of their total. The Treasury Secretary believes that if he goes on TV and says "a weaker dollar is in America's interest" that the value of the dollar, the exchange rate, will fall by 10%. If you think that the marginal propensity to consume cyis 0.5, by how much would this adoption of an explicit "weak dollar communications policy" boost year-2022 GDP?
Suppose that the Office of Federal Housing Enterprise Oversight projects that by spending $10 billion in 2022 in housing mortgage subsidies the government could boost housing construction in 2022 by $100 billion. If you believe that the marginal propensity to consume cyis 0.5, by how much would this expansion of mortgage insurance subsidies do to boost year-2022 GDP?
