Question

1) Is the fiscal multiplier higher for government transfers or government purchases of goods and
services? How come?

2)  Give an example of a government program that qualifies as social insurance.

3) How does an increase in the money supply end up affecting aggregate demand? Explain the process.

4) Name 2 factors that shift aggregate demand and 2 that shift the aggregate supply.

Answer 1

1) Let the MPC be 0.5. With respect to government purchases there is direct injection of money so, the first round is fully used for consumption there are no savings. However, in case of transfers, that excess money because of say tax cuts, a part of it will be saved.

Effect on Real GDP		$50 billion rise in government purchase of goods and services	$50 billion rise in government transfers
1st round		$50 billion	$25 billion
2nd round		$25 billion	$12.5 billion
3rd round		$12.5 billion	$6.25 billion
Eventual Effect ( total)		$100 billion	$50 billion

From the above table it can be observed that the multiplier effect on purchase is much stronger than in government transfers

2)  Old Age, Survivors, and Disability Insurance benefits (OASDI)

3) An expansionary monetary policy which entails the increase in money supply. This can be achieved through a method such as purchase of government bonds. This purchase will have increase the money supply and also affect interest rate ( reduce ) which will promote investment.

So, this increase in money supply will show an equal increase in the GDP. Also, this increase will lead to an increase in consumer spending as consumer have more money with them and thus shift he AD curve rightwards.

4) A change in the AD components such which are consumption spending, investment spending, government spending.

For AS- Change in the price of inputs, change in productivity maybe due to technology.