Critical Thinking Questions
In its report, The Conference Board’s Global Economic Outlook 2015, updated November 2014 (http://www.conference-board.org/data/globaloutlook.cfm), projects China’s growth between 2015 and 2019 to be about 5.5 percent. International Business Times (http://www.ibtimes.com/us-exports-china-have-grown-294-over-past-decade-1338693) reports that China is the United States’s third largest export market, with exports to China growing 294 percent during the past 10 over the last ten years. Explain what impact China has on the U.S. economy.
What may happen if growth in China continues or contracts?
Does it make sense that wages would be sticky downward but not upward? Why or why not?
Suppose the economy is operating at potential GDP when it experiences an increase in export demand. How might the economy increase production of exports to meet this demand, given that the economy is already at full employment?
What does it mean when the aggregate expenditure line crosses the 45° line? In other words, how would you explain the intersection in words?
Which model, the AD/AS model or the aggregate expenditure model, better explains the relationship between rising price levels and GDP? Why?
What are some reasons that the economy might be in a recession, and what is the appropriate government action to alleviate the recession?
What should the government do to relieve inflationary pressures if the aggregate expenditure is greater than potential GDP?
Two countries are in a recession. Country A has an MPC of 0.8 and country B has an MPC of 0.6. In which country will government spending have the greatest impact?
Compare two policies: a tax cut on income or an increase in government spending on roads and bridges. What are both the short-term and long-term impacts of such policies on the economy?
What role does government play in stabilizing the economy, and what are the tradeoffs that must be considered?
If there is a recessionary gap of $100 billion, should the government increase spending by $100 billion to close the gap? Why? Why not?
What other changes in the economy can be evaluated by using the multiplier?
Do you think the Phillips curve is a useful tool for analyzing the economy today? Why or why not?
Return to the table from the Economic Report of the President in the earlier Figure 11.19 feature titled “The Phillips Curve for the United States.” How would you expect government spending to have changed during the past six years?
Explain what types of policies the federal government may have implemented to restore aggregate demand, and the potential obstacles policymakers may have encountered.
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