Economic Stabilization
GDP = Consumer + Investment + Government + Foreign (Imports – Exports)
Therefore: GDP = C + I + G + F
NOTE: The Investment multiplier is 2
1. Keynesian economics, also known as DEMAND-SIDE economics, is designed to lower
unemployment by doing what?
2. The nation of Zedanistan is in the midst of a recession. The nation’s GDP has
declined by $100 Billion. Zedanistan’s president, Stuart “Stu” Pitt, has asked you to
plot three possible plans to get the nation’s economy back on its feet. Using the
Keynesian model of economics, list three scenarios that just might work. Be very
specific.
a. .
b. .
c. .
3. What would be the financial risk the government would undertake in this plan?
Would it be long term or short term?
4. What was economist John Maynard Keynes view toward creating short-term federal
deficits? How did he say they would eventually be corrected?
5. What are examples of automatic stabilizers in the American economy?
6. With unemployment insurance, who gets it, who doesn’t?
7. Supply-Side policies were a hallmark of President Ronald Reagan and – to an extent
– GW Bush. What is the theory behind it?
8. Given the example from #2, if President Stu Pitt was a firm believer in Supply-Side
economics, and wanted you to plot a course for economic correction, what
suggestions would you give to Pitt? Give at least two specific examples.
9. If you were advising Pitt about the possible limitations to his Supply-Side zeal, what
concerns would you voice?
10. Let’s say President Pitt decides to let his Federal Reserve handle the situation
through the money supply only, using MONETARISM.
a. What would be the possible short term impacts? (list at least two)
b. What would be the possible long term impacts? (list at least two)
Chapter 15.2
Economic Stabilization
GDP = Consumer + Investment + Government + Foreign (Imports – Exports)
Therefore: GDP = C + I + G + F
NOTE: The Investment multiplier is 2
1. Keynesian economics, also known as DEMAND-SIDE economics, is designed to lower
unemployment by doing what?
Raising the amount of government spending (G) by the same amount as the
investment sector has decreased (I) so that the equation remains unchanged.
2. The nation of Zedanistan is in the midst of a recession. The nation’s GDP has
declined by $100 Billion. Zedanistan’s president, Stuart “Stu” Pitt, has asked you to
plot three possible plans to get the nation’s economy back on its feet. Using the
Keynesian model of economics, list three scenarios that just might work. Be very
specific.
a. .Answers will vary – all should increase government spending.
b. .
c. .
3. What would be the financial risk the government would undertake in this plan?
Would it be long term or short term? Short term federal deficit
4. What was economist John Maynard Keynes view toward creating short-term federal
deficits? How did he say they would eventually be corrected? When the economy
recovered, tax collections would rise, the government would run a surplus and the
debt could be paid back.
5. What are examples of automatic stabilizers in the American economy?
Unemployment insurance, the progressive income tax, medicaid
6. With unemployment insurance, who gets it, who doesn’t? If you are laid off, lose
your job through no fault of your own – you get unemployment. If you are fired or
quit without good cause – you do not get unemployment.
7. Supply-Side policies were a hallmark of President Ronald Reagan and – to an extent
– GW Bush. What is the theory behind it? The idea is to reduce the government’s
role in the economy.
8. Given the example from #2, if President Stu Pitt was a firm believer in Supply-Side
economics, and wanted you to plot a course for economic correction, what
suggestions would you give to Pitt? Give at least two specific examples.
Answers will vary –answers could in some way reduce the size of government,
through reduction of federal agencies, reduction of federal spending or deregulation
and/or reduction of taxes on businesses and individuals.
9. If you were advising Pitt about the possible limitations to his Supply-Side zeal, what
concerns would you voice? The historical reality of supply-side economic policy
during the Reagan and Bush years shows that while the reduction of taxes likely
stimulated the economy – there was still a reduction in individual income tax
receipts so the tax cuts DID NOT lead to to higher tax revenues.
10. Let’s say President Pitt decides to let his Federal Reserve handle the situation
through the money supply only, using MONETARISM.
a. What would be the possible short term impacts? (list at least two)
It would increase the money supply
It would lower interest rates
b. What would be the possible long term impacts? (list at least two)
Could increase the possibility of inflation
Decreases the value of the dollar