Question

During the recent recession sparked by financial crisis, the U.S. economy suffered tremendously. Suppose that, due to the recession U.S. GDP dropped from $14 trillion to $12.5 trillion. This fall in GDP was due to a drop in consumption of $1 trillion and a drop in investment of $500 billion. The U.S. government, under the Obama administration, responded to this recession by increasing government purchases Instructions: Round your answer to one decimal place a. Suppose that government spending had no impact on consumption, investment, or net exports If the Obama administration wanted to bring GDP back up to $14 trillion, government spending would have to rise by S 15 trillion Instructions: Round your answer to the nearest whole number b. Many economists believe that an increase in government spending doesn't just directly increase GDP but it also leads to an increase in consumption If government spending rises by $1 trillion in order to bring GDP back to $14 trillion consumption would have to rise by billion

Answer 1

YzC+I+G+ (x- DY N N where, Y 2 Real GDP Ca Consumption Iz Investment G 2 Goverment spending X 2 Expost M2 Impost. So, as the consumption and investment decreased by $1 Toillion and $0.5 Prillion respectively. So, in order to maintain the same GDP the government should increase its expenelituse by an amount of 181.5 Trillion & b) As, it is mentioned the consumption is lowered by $1 Trillion and investment also gone down by 90.5 Trillion. And as we have seen the government spending sises by 81 Trillion. The remaining deficit amount needs to be filled by consumption le $0.5 Trillion or $500 Billion