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Economic recession & political action

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Assume that the economy is already in a recession, and both the President and Congress have decided to do something to restore the economy. Both agree that lowering taxes would not be a good idea, but do believe that it is in the best interest of the economy to increase government spending in defense, education & infrastructure.

The President and Congress change the budget accordingly, but after 18 months, GDP only increased by three quarters of the expected amount. What factors might be responsible for this situation?

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Recall that there are four things that affect GDP via the Aggregate demand function. Those are the four components of the national income accounting identity. Y = C + I + G + NX. And there are things that affect GDP via aggregate supply. Anything that affects costs affects aggregate supply.

If "G" increases then with ...

Solution Summary

Economic recession & political action are discussed.