Question

1. In February 2020 the unemployment rate was 3.5% and economists agreed that the economy was at full employment with real gross domestic product (GDP) of $19 trillions. Bureau of Labor Statistics reported that by the end of April 2020, unemployment rate rose to 14.7% as the result of jobs loses due to the Coronavirus pandemic (Hint: use Okun’s law for some parts of this question).

a. Calculate by how much (how many dollars) do you expect the real GDP to decline if the marginal propensity to consume is 0.6. Explain your answer.

b. The Federal Government has responded with a $2 trillion stimulus package that will mostly go to households and businesses as cash payments to maintain consumption and investments. Use the aggregate demand-aggregate supply model to explain how would this impact the GDP and inflation in the economy. Talk about shifts in AD and/or AS and explain the outcome .

c. By how much would output increase as the result of this stimulus package? Will it be enough to restore the GDP to its original value? Show your work and explain why or why not .

Answer 1

As Okun's Law :

On the off chance that there is 1% increase in the unemployment rate, the GDP will be 2% lower than potential GDP (this is a general finding of the Law).

(a):-

Here, unemployment rate increased by 11.2%.

Hence, current GDP ought to be about 22.4% lower than $19 trillion.

This is about $14.7 trillion, after the pandemic.

In this manner, GDP is $4.3 trillion short of potential GDP.

Presently, MPC = 0.6

In this manner multiplier = 1/1-MPC = 1/0.4 = 2.5

(b):- The $2 trillion boost bundle will animate utilization and speculation, the two principle parts of Aggregate Demand.

This will cause the AD bend to move to one side. AS won't move at first.

This will raise the genuine GDP, carrying it closer to potential GDP.

This will likewise raise the value level, causing expansion.

(c):- Now, Potential GDP = $19 trillion

Current GDP = $14.7 trillion

Multiplier = 2.5

Stimulus package = $2 trillion to move AD bend to one side

Consequently, the impact of this boost is:

In this way, because of the improvement, the GDP is relied upon to ascend by $5 trillion.

From $14.7 trillion, it will roughly reach $19.7 trillion.

This ought to be all that could possibly be needed to close the output gap, and arrive at potential GDP.