Technical 1) Suppose that GDP is $40 billion below its potential level

Subject:EconomicsPrice:2.86 Bought7

Share With

Technical

1) Suppose that GDP is $40 billion below its potential level. It is expected that next-period GDP will be $20 billion below potential, and that two periods from now it will be back at its potential level. You are told that the multiplier for government spending is 2 and that the effect. The increased government spending are immediate. What policy actions can be taken to put GDP back on target each period?

2) The basic facts about the path of GDP are as in problem 1. But there is now a one-period outside lag for government spending. Decisions to spend today are translated into actual spending only tomorrow. The multiplier for government spending is still 2 in the period that the spending takes place.

a. What is the best that can be done to keep GDP as close to target as possible each period?

b. Compare the ma hot GDP in this question with the path in problem 1 after policy actions have been taken.