Question #1: The Big One
The U.S. Economy is impacted by many factors. Debates have been waged over various causes or potential results of macroeconomic changes in the components of the economy. Using the Fairmodel tool, we can use a comprehensive computer model to predict the impact of a “shock” to the economy. We can analyze the impact of this “shock” on overall Real GDP (Aggregate Expenditure) as well as the impact upon the individual components that make up GDP (i.e. other macroeconomic components and indicators such as bond rates, money supply, etc.) For this analysis, we have created two models of the U.S. economy and will look specifically at the short run case (the first 5 - 8 quarters spanning 2012-2013). First, we created a “baseline” model which assumed that no change in aggregate expenditures occurred. Next, we created a model with a shock to the economy starting in the first quarter of 2012 by reducing state and local government purchases (COS) by $20 billion per quarter. By comparing the resulting data sets for these two scenarios across several variables, we can predict the impact that the “shock” to government spending would have on both the overall economy and the specific components of GDP.
The reduction in state and local government spending was spurred by an overall reduction in tax collections. The government decided to reduce spending as a result. What is not initially clear is why there was a reduction in tax revenues, but there are several possibilities. The reduction in tax revenue could be due to fiscal policy changes, where the population was taxed at a lower rate than in previous periods. However, we know that the reduction in government spending was not due to policy changes, but resulted from changes in other economic conditions such as collecting less property tax, sales tax or general business tax.
To begin the analysis, we created a...