Economy Has Been Showing Slow, but Steady Essay

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economy has been showing slow, but steady improvement. I expect that it will continue on this pace for the next three quarters as a result of projects that have been made for the unemployment rates, GDP growth, and inflation. The rate of unemployment has steadily decreased with the rate being 8.2% for March 2012, which was a minor increase over February's rate of 8.3%. The rate in November had been 8.6%, so the rate has been slowly rising. March's report from the U.S. Bureau of Labor Statistics noted that 120,000 nonfarm jobs had been added to the manufacturing, restaurant, and health care industries, but the retail industry lost jobs. (Bureau of Labor Statistics, 2012). This in actuality went against economists' projections of 203,000 new jobs for March (Packowitz, 2012).

The GDP growth rate has been slow to improve, with hovering just below 3%. As in past recoveries from recessions, it is normally expected to be around 6%, but because of the unprecedented unemployment rate and a trade deficit of 3.5%, the GDP is taking longer than expected to recover (Thornberg & Shepard, 2012). The risk of the economy recovering too quickly could provoke an inflationary period, so a delicate balance must be maintained.

2. a.

Year 2000

Year 2010

Good

Qty

Price

Qty

Price

Auto

$50,000

$60,000

Bread

500,000

$10.00

400,000

$20.00

Nominal GDP

$10,000,000

$15,200,000

Real GDP

$10,000,000

$10,000,000

The implicit price deflator for GDP

Fixed-weight price index (CPI)

Auto

1.2

Bread

2

b. The cost of bread has doubled over the 10-year period while the cost of automobiles has only increased by 20%.

P0

Q0

P1

Q1

p0q0

p0q1

p1q0

p1q1

Auto

$50,000

$60,000

$5,000,000

$6,000,000

$6,000,000

$7,200,000

Bread

$10

500,000

$20

400,000

$5,000,000

$4,000,000

$10,000,000

$8,000,000

$10,000,000

$10,000,000

$16,000,000

$15,200,000

Lapeyres

Paasche

ii. The Laspeyres index defines the price of goods during a base period and uses those prices to analyze the change over time. The Paasche index gives a price for the goods today and compares them against historical prices.

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iii. As the senator, I would choose the CPI because it represents the prices of goods purchased by consumers while the GDP deflator represents all goods and services. The CPI would be more representative of consumer spending, which would be important in adjusting the benefits to the cost of living.

3. The expansionary fiscal policy is used during a recession to stimulate the economy. This policy is based on the idea of John Maynard Keynes fiscal policy that was introduced during the Great Depression. He argued that the market and economy is incapable of self-regulation, therefore it was the responsibility of the government to inject money into the economy (Economic Policy). This could be done by increasing government purchases, decreasing taxes, or increasing transfer payments. Transfer payments are most commonly given as welfare payments to the poor, unemployment and Social Security payments to the disabled or elderly. These payments; however are not expected to produce increased economic activity.

a. A person who favors preserving the size of government would favor increasing government purchases. This action puts money directly into the economy by building up infrastructure such as building new bridges and road construction or extending unemployment. People now have money to spend, which continues to stimulate economic growth. The problem; however, with increased government purchases is that the end result is generally a budget deficit, which burdens the future generation of taxpayers.

b. A person who thinks the public sector is too large may opt for decreasing taxes, which will decrease the size of government. This method is often preferred over government purchases. The premise is that by reducing taxes, people will have more disposable income to use for purchases. This in turn should stimulate aggregate production and employment and will ultimately continue to increase income. It is easier to implement tax changes, so this method is preferable by voters and political leaders.....

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