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Problem Set 3 Econ 214

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Problem Set 3

1. Will increases in government spending financed by borrowing help promote a strong recovery from a severe recession. Why or why not? * Yes. The Keynesian view that private spending will decline during a recession and that the government needs to expand its spending in order to restart the private sector.

2. Does fiscal policy have a strong impact on aggregate demand? Did the shift of the federal budget from deficit to surplus during the 1990s weaken aggregate demand? Did the government spending increases and large budget deficits of 2008–2011 strengthen aggregate demand? Discuss. * Aggregate demand does not depend on fiscal policy. So, therefore it has no impact. * It does not indicate if it had a strong or negative impact or not. * the growth of real output and income during the next decade shold be strong, if the Keynesian are right.

3. What is the current rate of unemployment? (See bls.gov and state the month you are reporting.) How rapidly has GDP grown during the past 3 years? (See bea.gov and state the annual growth rate for each year.) What do these figures indicate about the validity of the Keynesian view? * 6.1% in Aug 2014 * 2011: 1.8 * 2012: 2.2 * 2013: 1.3
It indicates that the GDP has very litte impact than what they expected. 4. Are changes in discretionary and fiscal policy likely to be instituted in a manner that will reduce the ups and downs of the business cycle? Why or why not? * It is very unlikey that it will be insitituted in a manner that will reduce the ups and downs of the business cycle.

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