Problem Set 3 Econ 214

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Question description

Complete all questions listed below. Clearly label your answers.

1. Will increases in government spending financed by borrowing help promote a strong recovery from a severe recession. Why or why not?

Yes and no, because in the case of severe recession, there would be severe shortage of funds. The population wouldn’t have enough money while the government would be unable to provide enough subsidies to them.  

In case of financial recession, there is a shortage of funds in the country. The people living in the country do not have enough money and government is also not able to provide enough subsidies to them. One of the ways to avoid the recessionary conditions and ensure better support to the economy is borrowing money from abroad. Borrowing of funds from other countries might solve the problem of the economy in the short run but, in the long run, the fiscal deficit for the country will increase. This will again put the economic condition of the country at stake. In this way, borrowing from abroad is not a proper method of coming out of recession.



2. Does fiscal policy have a strong impact on aggregate demand? Did the shift of the federal budget from deficit to surplus during the 1990s weaken aggregate demand? Did the government spending increases and large budget deficits of 2008–2011 strengthen aggregate demand? Discuss.

3. What is the current rate of unemployment? (See bls.gov and state the month you are reporting.) How rapidly has GDP grown during the past 3 years? (See bea.gov and state the annual growth rate for each year.) What do these figures indicate about the validity of the Keynesian view?

4. Are changes in discretionary and fiscal policy likely to be instituted in a manner that will reduce the ups and downs of the business cycle? Why or why not?  

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