Things to Read at Dinnertime on April 2, 2014
Thursday Idiocy: E.L. of the Economist: Cambridge University Press Knuckles Under to Russian Oligarchs

Problems: Principles of Economics: Problems * Macroeconomics * Gap Closing II

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.

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...

Suppose that the Federal Reserve disagrees with your boss, the Director of Office of Management and Budget.

Suppose that the Federal Reserve believes that the year-2022 level of potential real GDP is not $21 trillion but rather $19.5 trillion, and that rather than promising to keep interest rates very low until 2023 the Federal Reserve has announced that it will, if necessary, raise interest rates in order to keep real GDP in 2022 from exceeding potential output.

  1. What policies now come to mind as ones that the government might adopt in order to meet your boss's goals for the economy in 2022? Briefly, explain what you see as the pluses and minuses of these different policies.

  2. Suppose that you consider the same expansion of government purchases G that you recommended in (A2), and that you still think that the marginal propensity to consume cyis 0.5. What do you forecast would be the effects of the (A2) policy on the state of the economy in 2022?

  3. Suppose that you consider the same expansion of government purchases G that you recommended in (A3), and that you still think that the marginal propensity to consume cyis 0.667. What do you forecast would be the effects of the (A3) policy on the state of the economy in 2022?

  4. Suppose that you consider the same cut in taxes T that you recommended in (A4), and that you still think that the marginal propensity to consume cyis 0.6667. What do you forecast would be the effects of the (A4) policy on the state of the economy in 2022?

  5. Suppose that you consider the same cut in taxes T that you recommended in (A5), and that you still think that the marginal propensity to consume cyis 0.5. What do you forecast would be the effects of the (A5) policy on the state of the economy in 2022?

  6. 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, what do you think would be the effects of this adoption of an explicit "weak dollar communications policy" on the year-2022 economy?

  7. 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, what do you think the effects of this expansion of mortgage insurance subsidies would be on the year-2022 economy?

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