1. The following table shows economic information regarding this year and the forecast for next year: Year Potential GDP Real GDP Price Level 2017 $17.9 trillion $17.9 trillion 113.7 2018 Forecast $18.8 trillion $18.1 trillion 115.9 Should the Congress & the President use expansionary or contractionary fiscal policy in 2018? Consistent with this answer, should they raise or lower government purchases? Should they raise or lower taxes? If Congress & the President succeed in achieving real GDP in 2018 that reaches its potential level, will each of the following be higher, lower, or the same in 2018 as it would have been if they had taken no action (explain each of your answers): Real GDP Potential GDP The inflation rate The unemployment rate 2. Suppose that real GDP is currently $17.1 trillion, potential GDP is $17.4 trillion, the government purchases multiplier is 2, and the tax multiplier is -1.6. Holding other factors constant, by how much will government purchases need to be increased to bring the economy to equilibrium at potential GDP? Show your calculations and explain. Holding other factors constant, by how much will taxes need to be cut to bring the economy to equilibrium at potential GDP? Show your calculations and explain. What is an example of a combination of increase in government purchases and tax cuts that would have the desired effect of bringing the economy to equilibrium at potential GDP? 3. Suppose the federal budget deficit for the year was $100 billion and the economy was in a recession. If the economy had been at potential GDP, it is estimated that tax revenues would have been $60 billion higher and government spending on transfer payments $50 billion lower. Using these estimates, what was the cyclically adjusted budget deficit or surplus for the year? Show your calculations and explain. 4. How could the existence of an unemployment insurance system or other transfer programs have reduced the severity of the Great Depression? Reflect on whether they are working currently. What adjustments do you recommend? (Support your answers with academic journal articles.) Please note you are required to provide charts, graphs, and explanation of answers for it to be considered an economic analysis.
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