Example of an automatic stabilizer

Assignment Help Macroeconomics

Reference no: EM133952945

Assignment:

1. Give an example of an automatic stabilizer and explain how it would work in a recession caused by a negative demand shock and whether it reduces or increases the size of the negative demand shock.

2. Discuss the benefits and costs of balancing the budget (i.e., not allowing budget deficits).

3. The economy was hit by a negative supply shock.

a. What fiscal policy would you use to deal with this situation? How would the policy you choose work (give details)? Please use a diagram to illustrate what would happen in the long-run

b. What are the costs and benefits associated with using the policy you propose in part a)? What happens to the GDP and price level?

c. Some economists argue that the government shouldn't do anything but let the economy self-adjust. What are the costs and benefits associated with letting the economy self-adjust? Please illustrate how this would look in a diagram.

4. Governments may finance budget deficits by borrowing abroad. Suppose a government cannot borrow abroad (for example, because it has too much debt or because there are sanctions against it). List two other ways the government can finance its budget deficits and discuss the costs associated with each of them.

5. Does discretionary government spending (G) have a larger, smaller, similar effect on the economy as transfers (e.g., unemployment insurance)? Pick one option and explain why.

Reference no: EM133952945

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