MEASURING GDP AND ECONOMIC GROWTH

1. An article in the Wall Street Journal criticized the concept that an increase in government spending can generate an increase in GDP equal to a multiple of the amount spent:
“In what passes for debate in Washington, the prevailing notion seems to be ‘putting money in people’s pockets.’ This might be called single-entry Keynesianism, since the money the government puts in pockets arrives by immaculate conception. Something like this was indeed taught in Econ 101 in the 1950s; the government ‘injected’ money, remember, to be ‘multiplied’ a number of times depending on ‘the marginal propensity to consume.’ Consumption good, savings bad.

“By the 1960s, the monetarist school of economics had revived, and asked, where does the government get this money it ‘injects.’ If it’s created by the Fed, you’re talking about monetary policy, not fiscal policy. If it isn’t, you have to siphon whatever you ‘inject’ out of the private sector by taxing or borrowing. How does it stimulate to take with one hand and give with the other?” (Bartley, Robert L. “Thinking Things Over: Does Spending Stimulate? Do Deficits?” Wall Street Journal, February 4, 2002 (Eastern edition): pg. A.17)

The criticism above implies that fiscal policy alone cannot change aggregate demand because any increase in government purchases must be financed either by raising taxes or borrowing.

a. Suppose taxes paid by households are raised by $100 million in order to finance an additional $100 million of government expenditure. Explain why there would be a net increase in aggregate demand as a result.

b. Suppose that to finance $100 million of additional government expenditure, the government runs a $100 million budget deficit instead of increasing taxes. How will this policy affect aggregate expenditure and aggregate demand?

2. Three years after congress passed President Bush’s tax cuts, a Wall Street Journaleditorial explains the economic impact of the 2003 tax cuts: (“The Tax Cut Record,” Wall Street Journal.: May 12, 2006. pg. A. 18)

“The 2003 tax cuts on dividends and capital gains were designed precisely to help business supplant consumer spending as the engine of recovery. By boosting the after-tax return on capital and increasing incentives to invest, the tax cuts provided an immediate lift to stock-market valuations and improved business balance sheets.”

Almost at the very time the tax cuts looked like they would pass, business investment began to pick up, and it has kept rising since. This has been a classic investment-led expansion with record amounts of business spending on new plant, equipment, machinery, software, and research and development.”

The above quote accurately describes which one of the impacts of fiscal policy on investment and saving discussed in your textbook?
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Course: Macroeconomics: ECO1021511
Assignment: Assignment 5
Fiscal Policy
1. An article in the Wall Street Journal criticized the concept that an increase in government spending can generate an
increase in GDP equal to a multiple of the amount spent:
“In what passes for debate in Washington, the prevailing notion seems to be ‘putting money in people’s pockets.’ This might be called singleentry
Keynesianism, since the money the government puts in pockets arrives by immaculate conception. Something like this was indeed taught in Econ 101 in the
1950s; the government ‘injected’ money, remember, to be ‘multiplied’ a number of times depending on ‘the marginal propensity to consume.’ Consumption good,
savings bad.
“By the 1960s, the monetarist school of economics had revived, and asked, where does the government get this money it ‘injects.’ If it’s created by the Fed,
you’re talking about monetary policy, not fiscal policy. If it isn’t, you have to siphon whatever you ‘inject’ out of the private sector by taxing or borrowing. How
does it stimulate to take with one hand and give with the other?” (Bartley, Robert L. “Thinking Things Over: Does Spending Stimulate? Do Deficits?” Wall Street
Journal, February 4, 2002 (Eastern edition): pg. A.17)
The criticism above implies that fiscal policy alone cannot change aggregate demand because any increase in
government purchases must be financed either by raising taxes or borrowing.
a. Suppose taxes paid by households are raised by $100 million in order to finance an additional $100 million of
government expenditure. Explain why there would be a net increase in aggregate demand as a result.
b. Suppose that to finance $100 million of additional government expenditure, the government runs a $100 million
budget deficit instead of increasing taxes. How will this policy affect aggregate expenditure and aggregate demand?
2. Three years after congress passed President Bush’s tax cuts, a Wall Street Journaleditorial explains the economic
impact of the 2003 tax cuts: (“The Tax Cut Record,” Wall Street Journal.: May 12, 2006. pg. A. 18)
“The 2003 tax cuts on dividends and capital gains were designed precisely to help business supplant consumer spending as the engine of recovery. By
boosting the aftertax
return on capital and increasing incentives to invest, the tax cuts provided an immediate lift to stockmarket
valuations and improved
business balance sheets.”
Almost at the very time the tax cuts looked like they would pass, business investment began to pick up, and it has kept rising since. This has been a classic
investmentled
expansion with record amounts of business spending on new plant, equipment, machinery, software, and research and development.”
The above quote accurately describes which one of the impacts of fiscal policy on investment and saving discussed in
your textbook?
2/17/2016 National Paralegal College View
Assignments National
Paralegal College
http://nationalparalegal.edu/Students/ViewAssignment.aspx?intAssignmentID=2193 2/3
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2/17/2016 National Paralegal College View
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