Answer to Question #313158 in Macroeconomics for captain nyagah

Question

suppose that GDP is 40 billion below its potential level. It is expected that next period GDP will be 20 billion below potential and that two periods from now it will be back at its potential level. You are told that the multiplier for government spending is 2 and that the effects of the increased government spending are immediate. What policy actions can be taken to put GDP back on target each period?

Answer 1

suppose that GDP is 40 billion below its potential level. It is expected that next period GDP will be 20 billion below potential and that two periods from now it will be back at its potential level. You are told that the multiplier for government spending is 2 and that the effects of the increased government spending are immediate. What policy actions can be taken to put GDP back on target each period?

Solution

The first step would be to change the country's monetary policy. Monetary policy impacts the money supply in an economy, which influences interest rates and the inflation rate. It also impacts business expansion, net exports, employment, the cost of debt, and the relative cost of consumption versus saving all of which directly or indirectly impact aggregate demand. With lower interest rates, aggregate expenditures on investment and interest‐sensitive consumption goods usually increase, causing real GDP to rise.