Question

1. Read the following two articles and TYPE up clear answers the questions below. Use full

sentences and draw half-page diagrams where required.

https://www.economist.com/news/united-states/21736554-threat-inflation-less-worrying-some-investors-think-what-will-result

https://www.wsj.com/articles/the-other-risk-from-rising-wages-1519641000

(a) What kind of output gap exists in the USA currently? Provide evidence from one or

both of articles above that support your position.

(b) Depict the USA's market for loanable funds diagrammatically. What impacts will the

new tax plan and increased government spending have on the national savings (NS)

and/or investment demand (ID) curves? Make a prediction regarding how these changes

will impact the equilibrium level of investment and the real interest rate.

(c) Will the increase in the government deficit lead to a crowd-in or crowd-out of private

savings? Explain brie

(d) Given your answer to (a), draw a properly labeled AD/AS diagram depicting the current

state of the USA's macroeconomy. All else equal, how will Trump's tax plan and the

increase in government spending (i.e., fiscal stimulus) affect the curves? Explain and

add this to your diagram.

(e) Given your knowledge of macroeconomics, what types of policies would you recommend

the US undertake given its current state of affairs? Why?

(f) The articles above reference the notion that the recent stock market volatility may be

due to investors' expectations of high inflation in the near future. Does the AD/AS

diagram you drew in (d) predict this? Briey list a few reasons (noted in the articles)

why this prediction may not be accurate.

please answer question a-c, thank you!!!!!!!

Answer 1

(a). The first article points out that there has been an increase in the productivity. Even though there may be a gap of 1.5% between the predicted and actual GDP. There is a strong sign of growth with increasing productivity due to increase in wage rates. Reports indicate a slow or decreased growth in employment but this has been offset by the growth in productivity. The unemployment rate stands at only 4.1%. The output gap is not very wide and it seems to be improving with more government spending and increased productivity.

(c). Government deficit is a result of more spending than revenue. This results in an increase in the bank reserves and also an increase in private savings in the bank. This is because the increased money supply will be used to buy government securities such as bonds and treasury bills. Hence, there will be a crowd in of private savings.