Question

1) Assume this economy hits a recession which leads to an increase in unemployment.

a) Briefly explain the effects on Aggregate Consumption and GDP.

b) What kind of gap does this economy face? Explain what the Government could do to close this gap.

2) In a classic piece of comedy Dave Chappelle (dressed as a fake white anchorman) announces that Congress approved $1 Billion for African-Americans as a reparation payment for slavery.

a) Briefly explain the effects on Aggregate Consumption and GDP.

b) If now T > 0, i.e. positive tax revenue, would this exacerbate or diminish the effects from part i.? If this policy were introduced to prevent the economy from “overheating”, what specific concerns would the Government have about the state of the economy?

Answer 1

1.

A.

Due to increase in unemployment and recession in the economy, people will reduce their consumption level. It will decrease the aggregate consumption level and GDP will decrease. It will make AD to shift to the left direction.

B.

It will create recessionary gap in the economy in the given scenario of recession and unemployment. Here, the government can increase the government spending and or decrease the tax rates so that spending multiplier and tax multiplier sets in the economy and demand is stimulated. It will increase the Aggregate demand and recessionary gap will be closed.

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