I have 8 questions out of 20 I am stuck on... I was hoping I could get some seco
ID: 1247675 • Letter: I
Question
I have 8 questions out of 20 I am stuck on... I was hoping I could get some second opinions, I will post the ones I got simple answers for, detail is also apparently important as each questions would be 6 marks on an test. Thanks!!Explain why each of the following statements is True, False, or Uncertain according to economic principles. Use diagrams where appropriate. Unsupported answers will receive no marks. It is the explanation that is important.
2.The sentence below is an example of a purely positive economic statement.
“During a recession the government must increase its spending to replace reduced private spending and reduce unemployment even if this leads to an increase in the national debt.”
[My Answer]
This statement is false. A positive statement is a statement about what actually is, as opposed to what ought to be. This statement is normative advice because value judgments are being made about what the government could do with its limited resources and it refers to what ought to be as opposed to what actually is.
These questions are worth 6 marks, I'm not sure that I'm clear enough or have the full point across... Thanks!
Explanation / Answer
Step- 1 True Recession is due to lack of demand in the economy. To bring the economy out of the recession, the government expenditure must be increased. so as to compensate for any decrease in private investments, even if it increases national debt. Step -2 In Keynesian explaination, the level of effective demand determines the level of income, output and employment in the economy. Effective demand equates aggragate demand with the aggragate supply. Higher the level of effective demand, higher will be the level of income, output and employment. Step-3 Aggregate demand has the following components: AD = C + I + G C- Private consumption I - Private Investments G - Government Expenditure Where C = a + bY a - autonomous consumption b- marginal propensity to consume (mpc) Y - Disposable income Step- 4 Lack of demand in the economy could be compensated by an increase in the government expenditure. Any increase in the government expenditure leads to a mutiple times increase in the income and employment level in the economy because of the fact that, a one time increase in the government expenditure leads to an increase in the income by the same amount. Since only a part of the income is consumed, whereas another part is saved. The consumption increases income of others in the economy, and a part of which is again consumed. This process is repeated an infinite number of times, and ultimately leading to a multiple increase in the income level. Change in Income = Multiplier x Change in Government expenditure Where multiplier = 1/(1-b) Higher the value of multiplier, higher is the value of marginal propensity to consume (mpc) Step- 5 A given increase in the government expenditure leads to a multiple increase in the income. That is why Keynes supported the idea of deficit financing by the government, so as to increase the demand. Hence, in recession it is desirable for the governmet to boost up the demand in the economy by increasing its expenditure, even if that causes an increases in its debt.Related Questions
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