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Chapter 13: Q 2 Critical thinking question (page 293)

2. Why do you suppose that many economists perceive a trade-off between short-term stabilization benefits of unemployment compensation and a contribution to a higher unemployment rate in the long run?

Short Answer

Expert verified

It is determined that there is a slim possibility that future GDP will be low.

Step by step solution

01

Introduction

The given is the perception of Economists about the trade-off between short term stabilization and a higher unemployment rate

The objective is to explain why the perception is widely spread

02

Step 1 

The existing Social Security system permits retirees to be compensated out of the pockets of current employees. If every dollar they receive is spent solely on consumption, it contributes to GDP.

However, because that dollar is paid by workers in the form of payroll taxes, the GDP shrinks at the same time. As a result, the net effect on GDP is approaching zero dollars.

03

Step 2

If the savings rate falls, the economy's potential GDP will fall in the long run. The economy will contract, and real GDP will likely decline. Still, the long-term growth of the economy is influenced by a variety of factors other than the savings rate.

As a result, the possibilities of a low future GDP are slim.

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Most popular questions from this chapter

The U.S. government is in the midst of spending more than \(1 billion on seven buildings containing more than 100,000 square feet of space to be used for the study of infectious diseases. Prior to the government's decision to construct these buildings, a few universities had been planning to build essentially the same facilities using privately obtained funds. After construction on the government buildings began, however, the universities dropped their plans. Evaluate whether the government's \)1 billion expenditure is actually likely to push U.S. real GDP above the level it would have reached in the absence of the government's construction spree.

Determine whether each of the following is an example of an automatic fiscal stabilizer.

a. A federal agency must extend loans to businesses whenever an economic downturn begins.

b. As the economy heats up, the resulting increase in equilibrium real GDP per year immediately results in higher income tax payments, which dampen consumption spending somewhat.

c. As the economy starts to recover from a severe recession and more people go back to work, government-funded unemployment compensation payments begin to decline.

d. To stem an overheated economy, the president, using special powers granted by Congress, authorizes emergency impoundment of funds that Congress had previously authorized for spending on govemment programs.

In Figure 13-6, explain why a budget deficit naturally tends to rise at a real GDP level such as Y2to the left of Yf.

Assume that the Ricardian equivalence theorem is not relevant. Explain why an income-tax-rate cut should affect short-run equilibrium real GDP.

Assume that MPC = 45when answering the following questions.

a. If government expenditures rise by \( 1 billion, by how much will the aggregate expenditure curve shift upward?

b. If taxes rise by \) 1 billion, by how much will the aggregate expenditure curve shift downward?

c. If both taxes and government expenditures rise by $ 1 billion, by how much will the aggregate expenditure curve shift? What will happen to the equilibrium level of real GDP?

d. How does your response to the second question in part (c) change if MPC = 34? If MPC =12?
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