Assignment 3

Assignment 3
ECON 103: Pingle

A. The federal government recently ran a budget surplus, but has since returned to running a budget deficit.

1. Explain why reducing the budget deficit can cause short-term pain in the form of lower employment, higher unemployment, and a recession.

2. Explain why expansionary monetary policy would help decrease the likelihood of a recession if it were adopted at the same time the budget deficit was being reduced.

3. Present an analysis that identifies any long term gains which could result from a reduction in the budget deficit. (Analyze the composition of output.)

B. Suppose the economy is in a recession and the unemployment rate is exceptionally high.

4. Explain why Keynes felt “deficit spending” was an appropriate action for government if the goal is to get out of the recession, even though it may hurt the standard of living of the average worker.

5. Show that a technological breakthrough that greatly increases labor productivity could help reduce the unemployment rate without hurting the standard of living of the average worker. (You only need to use the labor market here.)

C. Thomas Malthus presented a dismal forecast for man-kind, largely due to the effects of population growth.

6. Show that immigration, like population growth, tends to create unemployment in the short run and reduce the standard of living of workers in the long run, even though it does enhance the economy’s ability to produce.

7. Show how the composition of output changes as the result of population growth.