Discussing automatic expenditure, difference between discretionary fiscal policy and automatic stabilizer, effects of expansionary and contractionary monetary policy.
(a) Let's say that the US's GDP was $260 billion in 1980 and $325 billion in 1990. Both figures were calculated as usual in term of market prices for the year involved. The price index rose from 100 in 1980 to 130 in 1990. What happened to real output from 1980 through 1990? In terms of 1980 prices, the 1990 GDP would be? The overall rate of inflation during the ten years is approximately? Show all work
(b) Now suppose that nominal GDP in 1998 totals $8475 billion and rises to $12.5 trillion ten years later for the United States. The GDP deflator for 1998 is 1.85 and for 2008 is 2.75, in what year is real GDP greater? By how much? How did you arrive at this conclusion? Show all work and fully explain your reasoning. Explain why measuring GDP in real terms is important. Now consider the following information for the U.S.: During 2004, consumption expenditures increased by $13.5 billion, gross private domestic investment increased by $5.8 billion, and government expenditures declined by $10.4 billion. In addition, the country experienced a trade deficit of $2.9 billion. Did the U.S.'s GDP increase or decrease during this year? By how much? Show all work and fully explain your reasoning.
(c) Describe three automatic expenditures in the federal budget. What is the difference between discretionary fiscal policy and automatic stabilizers? Discuss the effects of both expansionary and contractionary fiscal policies on the federal budget position? How would a budget deficit impact aggregate demand and crowd out private sector spending? How would this effect change the impact of expansionary fiscal policy on the economy and what are the overall effects in terms of the demand side transmission mechanism? Fully explain your analysis.