Answer to Question #122559 in Macroeconomics for jaskaran singh

Question

1. Suppose the government cuts transfer payments in an economy with an inflationary gap. How would this policy affect bond prices, interest rates, investment, the exchange rate, net exports, real GDP, and the price level? Show your results graphically.

2. Given the nature of the implementation lag discussed in the text, discuss possible measures that might reduce the lag.

3. Federally funded student aid programs generally reduce benefits by $1 for every $1 that recipients earn. Do such programs represent government purchases or transfer payments? Are they automatic stabilizers?

4. The text notes that changes in oil prices can affect the inflation-unemployment outcome. Explain what effect changes in oil prices may have on these two variables.

Answer 1

1.

The inflation gap is the restraint of economic growth, the cooling of the economy.Reducing transfer payments is a cooling measure. The balance will move to a point Y f.e.

Consequently, bonds, interest rates, investments, the exchange rate, net exports, real GDP and price levels will decline

2.The time gap between the occurrence of a negative economic event and the implementation of the fiscal and monetary remedies by the economic institutions is called implementation lag.

The instruments of fiscal policy are expenditures and revenues of the state budget, namely:

1) government procurement;

2) taxes;

3) transfers.

Increased government procurement and transfers and tax cuts

3.This is the program for helping the students; hence, it works as student aid wherein it is considered as the transfer payments.

As the transfer payment falls, the GDP increments. It is because the expansion in the economic activity will make greater business open doors for the students. So this spending in the economy falls and the GDP rises, and it is considered as automatic stabilizers.

4.

The increase in oil prices may negatively affect those companies that are engaged in oil refining, i.e. used as raw materials. Rising oil prices can lead to higher costs in companies and therefore will have to reduce workers, unemployment will increase. the cost of manufactured goods from oil, such as gasoline, can also increase. A rise in gas prices accelerates inflation