Answer Happy

5 Government Expenditures and Debt 1. The political cartoon below appeared in a popular magazine in 2011, when many advanced economies were struggling with the effects of the Great Recession. The cartoon ironically refers to the public discourse of many capitalists, which is usually different in recessions than in normal times. 3 (a) Explain why an increase in government expenditures during a reces sion might favor capitalists' profits. (b) Why does the impact of government expenditures on investment might differ between recessions and normal times?
(c) Explain how the rationale for fiscal expansion during a demand- driven recession (leaving aside the use of monetary policy) relates to the concept of "crowding-in”. KEYNES, YOU ARE OLD-FASHIONED AND USELESS MODERN ECONOMICS HAS TRANSCENDED YOU. OH DEARI I AM PLUMMETING OVER A Curr! SAVE ME KEYNES! When ASI UAS SAYING KEYNES. YOU'RE OF NO USE AT ALL! ir's OKAY... / cor you! THANK you. 2. The Nobel laureate Trygve Haavelmo wrote the paper "Multiplier Effects of a Balanced Budget" in 1945 that shows that the government may in- crease output by increasing expenditures without increasing the primary deficit. How is this possible? (Hint: use the definition of primary deficit and the IS curve. You do not need to read the paper to answer the ques- tion, but reflecting about the title or reading the introduction may help you.) 3. The US has a government debt ceiling by law (i.e. the maximum level of government debt is legally determined). If this ceiling is reached and the
3. The US has a government debt ceiling by law (i.e. the maximum level of government debt is legally determined). If this ceiling is reached and the government wants to expand its debt, the government has not alternative but to negotiate with the Congress an increase of the debt ceiling. During the debt-ceiling crisis of 2011, to circumvent the political deadlock in the Congress, some economists (such as Paul Krugman, another Nobel laure- ate) proposed the creation of a trillion-dollar coin that would be issue by the Treasury and used to pay off (part of) the national debt, but it would be held in the Federal Reserve Bank vault forever. Leaving the legal issues aside, i) explain the economic rationale and mechanism of this proposal (hint: use the Government Budget Constraint), and ii) critically assess the proposal