Question

During the Great Depression total production in the US stayed below potential output for many years, and the unemployment rate reached 25% in 1933. Many economists argue that the WWII allowed the US to pursue one of its biggest government spending programs in history (as a result, the US government budget deficit was greater than 20% during the war. Currently the government deficit is about 2.5% of GDP). Moreover, the government debt became more than 110% of GDP in late 1940s (currently, it’s about 100% of GDP). The massive mobilization of resources during the war helped the US economy recover. And certainly, following WWII, the US became by far the greatest economic power in the world.

Some economists argue that currently there is still room for the government to increase its spending (G), so that aggregate demand increases, and then the output necessary to satisfy the greater demand does too; this would create jobs, and then the economy would start moving forward by itself (a “virtuous” cycle would begin). Certainly, these economists argue that the additional government spending (that is, a new stimulus program) should be concentrated in improving and expanding infrastructure, since this type of expenditure gives “the most bang for the buck”. Notice that President Trump has talked about investing hundreds of billions of dollars in improving the national infrastructure and creating millions of jobs in the process.


a) I would like to know what you think about this policy recommendation (to implement a new stimulus program). Would you support it? Yes? No? (2 POINTS)

b) Why? Give TWO specific reasons that you are in favor or against this proposed policy. List them clearly (1 and 2). EXPLAIN each of your reasons using at least SIX lines for each reason. (8 POINTS)

Answer 1

a)Yes

b) 1,Due to covid-19 impact the economy is in a regression due to panic private investment will not come to the economy the government should do some investment activities and fiscal expenditure for bring back the economy.

2, through this new stimulus program it create a lot of employment opportunities for the people which help them to increase their purchasing power and they demand more goods they consume more so the production unit can able to produce more and the economy will come back to a normal situation.