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Automatic stabilizers vs discretionary spending

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(1) Discuss how Gross Domestic Product is calculated using the expenditure and the income approach. Explain the difference between Real and Nominal GDP.
Research the most recent data for REAL GDP growth in the US (www.bea.gov).

(2) Suppose an economy is going through a Recession -what type of Fiscal Policy needs to be implemented?
How do we understand the difference between Automatic Stabilizers and Discretionary Fiscal Policy?

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(1) The expenditure approach uses the total values of goods and services purchased in the economy. It includes government expenditures, household consumption, and business investments in inventory, taxes less subsidies, and so forth. The formal equation is given as Y = C + I + G + X, where C = consumption, I = investment, G = government spending, and X = net exports.

The income approach, on the other hand, considers all incomes accrued by economic agents. This includes all salaries paid to employees, corporate incomes, and so forth. The formal equation ...

Solution Summary

Gross Domestic Product calculations; difference between nominal and real GDP. Automatic stabilizers distinguished from discretionary spending.

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See Also This Related BrainMass Solution

Determining the Effects of Discretionary Fiscal Policies

Part I
Determine whether each of the following is an example of a discretionary fiscal policy action. Give reasons to support your answer.
a. A recession occurs, and government-funded unemployment compensation is paid out to laid-off workers.
b. Congress votes to fund a new jobs program designed to put unemployed workers to work.
c. The Federal Reserve decides to reduce the quantity of money in circulation in an effort to slow down inflation.
d. Under powers authorized by an act of Congress, the president decides to authorize an emergency release of funds for spending programs intended to head off economic crises.

Part II
Now, determine whether each of the following is an example of an automatic fiscal stabilizer. Give reasons to support your answer.
a. A government agency arranges to make loans to businesses automatically when an economic downturn begins.
b. As the economy heats up, the resulting increase in equilibrium real GDP immediately results in higher income tax payments, which dampens consumption spending somewhat.
c. As the economy starts to recover from a recession and more people go back to work, government-funded unemployment compensation payments begin to decline.
d. To stem overhead economy, the president, by using special powers granted by Congress, authorizes emergency impoundment of funds. These funds were previously authorized for spending on government programs.

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