Answer Happy

6. The Great Recession of 2008 was a period of high unemployment. Expansionary fiscal policy was called for. President Obama answered with a mix of government spending (G) and tax cuts (T). Some economists argued that Obama was too timid in not pushing for more government spending. Others argued that he should have relied more on tax cuts. Who was right? After having completed this course you have the tools, and with a little algebra, to answer the question. Solve the following problems to decide who was right (Data in $Billions): Remember to show all the steps you take in order to receive credit. Part a: Starting Point Let's make it easy and assume Xn = 0, so Y = C+I+G, BUT let's add taxes (T), so that consumption is determined by income (Y) after taxes (T) SO in the consumption formula C = a + b(Y-T) C = 20+.90(Y-T) | = 10 G = 10 Xn = 0 Let's assume taxes = 10, so we have a balanced budget G =T Solve for Y (equilibrium GDP) Part b: Option #1 Raise G Suppose in response to a recession Grises by 5 and I stays the same so now G = 15 and T = 10 Solve for Y (equilibrium GDP) using only the mpc and the multiplier. Part c: Option #2 Lower T Instead of Option 1, suppose in response to a recession I falls by 5 and G stays the same so that now T= 5 and G = 10. Solve for Y (equilibrium GDP) using only the mpc and the multiplier. Which policy (Option 1 or 2) is more expansionary and why?