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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

Every 1-percentage-point increase in the marginal income tax rate induces some workers to supply less labour, which cuts real GDP by \( 0.2 trillion. At the same time, each 1-percentage point increase in the marginal income tax rate causes spendable income to drop, which induces some workers to supply labour that yields \) 0.1 trillion more in real GDP. Is the net outcome consistent with the supply-side theory? Why?

Determine whether each of the following is an example of a situation in which a direct expenditure offset to fiscal policy occurs.

a. In an effort to help rejuvenate the nation's railroad system, a new government agency buys unused track, locomotives, and passenger and freight cars, many of which private companies would otherwise have purchased and put into regular use.

b. The government increases its expenditures without raising taxes. To cover the resulting budget deficit, it borrows more funds from the private sector, thereby pushing up the market interest rate and discouraging private planned investment spending.

c. The government finances the construction of a classical music museum that otherwise would never have received private funding.

Recall that the Keynesian spending multiplier equals 1 /(1-M P C). Suppose that in Figure 13-4, the MPC is equal to 0.9. In addition, the amount of the horizontal leftward shift from AD2 to AD3 caused by a crowding-out effect on planned investment spending was 0.5\( trillion, or \) 500 billion. How much investment spending was crowded out?

Based on Schwinn's conclusions, is the government likely to be able to boost real GDP with an increase in government spending if it has raised and lowered its expenditures a number of times in previous months? Explain your reasoning.

Recall that the Keynesian spending multiplier equals 1 /(1-MPC). Suppose that in panel (a) of Figure 13-1, the government determined that the amount by which the AD curve had to be shifted directly rightward from the point E1 was equal to \(1.0 trillion. If the government decided that a \)0.2 trillion increase in real government spending was required to generate this shift, what must be the value of the MPC?
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