Question

5.1 How can the government stimulate the economy in the short run?

5.2. What tends to happen to tax revenue and social security payments over the course of a business cycle?

5.3. Draw the Keynesian income-expenditure model of the economy showing the equilibrium level of real GDP below the full employment level of output. How could the RBA eliminate the cyclical unemployment? Show the effect diagrammatically.

Answer 1

5.1 Government can stimulate the economy in the short run by increasing government spending, or by reducing taxes on income and profits of the people, and businesses. For example, an increase in government spending increases aggregate demand in the economy, which in turn leads higher production of goods and services in the economy.

5.2. The tax revenue and social security payments over the course of a business cycle increases and social security payments decreases depending on what phase of a business cycle the economy is operating in. During upwards phases the tax revenues increase due to higher economic activity, and social security payments decrease as more people are self - dependent and prosperous now. During recessionary phase, opposite of it happens.

5.3 An increase in money supply would lead to an increase in aggregate demand which in turn can bring the economy back to full equilibrium.