Question

PLEASE DO NOT USE OTHER ALREADY GIVEN ANSWERS TO ANSWER THIS BY COPY PASTING.

Suppose you are the economic advisor of a fictitious president who lives in a world with only one time period. Consumers and firms in this economy are similar to the consumers and firms studied. Assume that the substitution effect is stronger than the income effect. The government can only collect revenue through lump-sum taxes. Suppose you are in a meeting and the president tells you the following “I am worried about my re-election prospects; I will increase public spending to construct roadways. What do you think?” At first, you believe that this public spending is unproductive, then you quickly pick up pencil and paper to

a) Show the president that an increase in unproductive government spending makes consumers worse off.
FOR A PLEASE FOLLOW RULES:::
Draw the appropriate graph to show the effect Label the axes, name the curves, and identify the optimal consumption bundle. Show how the increase in unproductive government spending change the graph and explain with words why this change happens. Identify the new optimal consumption bundle and explain with words why the consumers are worse off.

After your brilliant explanation, the president says: “Why are you assuming this spending is unproductive? We will construct roadways, which increase the stock of capital firms use to produce.”

b) Show the president that an increase in productive government spending that increases the stock of capital has ambiguous effects on the welfare of consumers
FOR B: Draw the appropriate graph to show the effect twice.  Label the axes, name the curves, and identify the optimal consumption bundle. Show how the increase in productive government spending changes the graph. First, draw the case in which consumers are worse off after the change. Explain with words why. In the second graph, draw the case in which consumers are better off (). Explain with words why ).

Finally, the president says: “Why do you keep talking about welfare? Welfare does not make the headlines. We need increases in GDP.” After this lesson on politics you c) Show that, in either case, the output increases because of increases in public spending.

FOR C:

Question 2 - c): (5 points)

Rubric: In the graphs produced in Question 2a and Question 2b, identify the total output (Explain with words why output increases because of increases in public spending

Answer 1

Answer A: Increase in ineffective spending by governement prompts a bigger deficiency or higher tax assessment in the economy. Furthermore, regardless of whether we diminish consumptions without improving use profitability will prompt downsizing public area yield. Keeping up high tax assessment restricts the assets accessible for the private area. The outcome can be littler public or private venture, lower financial development, less assets accessible for use somewhere else, and a more noteworthy obligation trouble later on and this will make the circumstance of economy and shopper more awful off.

So by killing useless uses, a nation can either decrease the financial shortfall without diminishing the arrangement of basic public projects, lessen burdens, or grow the arrangement of other basic public projects.

Answer B: If the economy is at full limit, the expansion in government spending would will in general group out the private segment prompting no net increment in Aggregate interest from changing from private division spending to government part spending. Furthermore, swarming out likewise influence government assistance of shopper by implication. So when governments raise charges so as to present or extend government assistance projects, people and organizations are left with less optional salary, which can lessen magnanimous commitments. In this regard, public segment uses for social government assistance can diminish private-part giving for social government assistance, counterbalancing the administration's spending on those equivalent causes.

And all these factor will have ambigous influence on government assistance of the customer.

Answer C: Increased government spending is probably going to cause an ascent in total interest . This can prompt higher development temporarily. It can likewise conceivably prompt expansion.

Higher government spending will likewise affect the gracefully side of the economy – relying upon which region of government spending is expanded. In the event that spending is centered around improving framework, this could prompt expanded profitability and a development over the long haul total flexibly. In the event that spending is centered around government assistance advantages or annuities, it might lessen disparity, however it could swarm out more gainful private area venture.

So Impact of public spending on Demand side will prompt Potential decreased imbalance, Improved training and work efficiency, more open merchandise, Potential swarming out and so on.

Flexibly side will prompt Higher financial growth,higher charge, Possible swelling, higher bond yeilds and so forth.

Thusly, above clarification expresses that yield expands as a result of increment out in the open spending.

********PLEASE UPVOTE AS SMALL TOKEN OF APPRECIATION**********