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    Macroeconomic Principles and Policy

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    Assuming 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 and 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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    While Gross Domestic Product (GDP) has been used as an indicator of national progress in most of the world, it isn't a perfect reflection of the state of the economy. It measures only expenditures, regardless of their reasons. Thus, unemployment may have no effect on GDP, and the contribution made by household or volunteer work are ignored. In addition these statistics are often flawed. See http://www.shadowstats.com/cgi-bin/sgs? for an opinion of how far off they may be. Many negative things, such as divorce and crime, serve to increase GDP. ...