Kevin Clark

Assignment 1- Marcroeconomics

1. U.S. GDP will increase by $350 since it measures the final production
within the US borders. U.S. GNP will increase by $575 because it includes
production owend by U.S. companies in and outside of their border. The
Canadian GNP will not increase because the businesses that made the and
sold the Coca Cola were American. GDP in Canada increases by $225 due to
the extra value of the plant.
2. a) Government Purchase
b) Investment
c) Net Export
d) Consumption
e) Investment
3. a) A decrease in taxes will lead to an increase in consumer spending as
they will have more disposable income. It will, however, decrease investment
in the economy. The economys output is fixed by factors of production so an
increase in consumption must be met by a decrease in investment.
b.) An increase in consumption and a decrease in investment will
generally lead to higher interest rates. It crowds out investment and increase
interest rates.
c.) I would say this is a fiscal crowding out. The decrease in taxes has the
final results where the government must borrow more money. A decrease in
taxes has the same effect as an increase in government purchases.
4. If the government wants to increase the amount of savings in the
economy, it should decrease the amount of government spending. This will
in turn lower the interest rate. We can use the interest rate savings graph. If
we shift out savings line then it will lead to a lower amount of desired
investment which will also lead to a decrease in interest. (Figure 3-8)
5. a) T-G is 100 billion 0 = 100 billion. Public saving rises 100 billion
b) Y-T-C= -100 -(.6 x -100) =-40 billion Private saving falls 40 billion
c) National Saving is public + private saving which would be a rise of 60
billion
 d) National Savings is equal to investment so investment would rise 60
billion as well.
6. I think that a fall in consumer and business confidence would definitely
lead to a rise in savings. People would be unsure about their financial
situation so they would want to save as much as possible. They would
decrease borrowing out of fear of possible unemployment. I dont know if this
is directly related as much to interest rates, but I would imagine generally
they may drop a bit as they would want more people to borrow. However, if
confidence is that low this may have no effect on consumers or businesses.
7. I think government spending has much more negative value then positive
when we expand it out too much. Usually when the government spends
more, there is less money out there for investments. So if there is less money
invested and more of a federal deficit, this will not stimulate the economy. If
a government increases spending but does not increase taxes, they must
take money out of the public sector. This hurts the economy more than it
helps.
There are some ways it could stimulate growth I suppose. If the
government spent more money on education or infrastructure, this could
help stimulate economic growth. Generally I am not a big proponent of more
government spending when our government is already very large.