Question

Two related long-term concepts are those of economic growth and the natural rate of unemployment. Frequently, policymakers target these well-known indicators.

(a) Explain how the following policy actions affect the rate of economic growth.

i.Investment tax credits encourage firms to increase spending on research and development.

ii.Marginal tax cuts combined with increased government spending cause the federal budget deficit to rise.

iii.Increased access to government grants allow greater access to higher education and vocational training. Identify how the f

b) Identify the following policy actions affect the long-run Phillips curve and the natural rate of unemployment.

i.Unemployment benefits are extended from 27 to 54 weeks.

ii.Frictional and structural unemployment decrease due to federal work programs.

Answer 1

a).

i. As the spending on research and development increases , the economy becomes more efficient and and increases technological progress in the economy and as technological growth rate of the economy increases, the rate of economic growth of the economy will increase.

ii. Increase the level of national income because of expansionary fiscal policy but budget deficit also increases rate of interest which reduces investment level in the economy and increase in national income is less than amount of increase in government spending. Economic growth increases but quantum of increase is less.

iii. The access to higher eduction and vocational training increases which are merit goods of the economy , the workers will become skilled and increase overall growth rate of the economy.

b).

i. Increase in unemploment benefits will not impact natural rate of unemployment and long run Philips curve because it is short term measure to solve the problem of unemployment in the economy and not a long term measure. The long run Philips curve will shift inward when unemployment rate declines.

ii. Decrease in frictional and structural unemployment in the economy will also decrease natural rate of unemployment in the economy which is the sum of frictional and structural rate of unemployment in the economy.