Fiscal Policy Multiplier

3. Crowding out reduces the degree to which a change in government purchases influences the level of economic activity. Is it a form of automatic stabilizer?
Crowding out is not a form of automatic stabilizer. Crowding out is “the tendency for expansionary fiscal policy to reduce other components of aggregate demand.” (Rittenberg and Tregarthen, 2012) This means that if the government increased purchases, the impact on change in policy is reduced because there would be an increase in the deficit and borrowing by selling bonds. This leads to the supply of bonds to increase and interest rates to rise. Then investments will decline, the exchange rates rise and exports decline (Rittenberg and Tregarthen, 2012). This is different from automatic stabilizers, which are “any government program that tends to reduce fluctuations in GDP automatically.” (Rittenberg and Tregarthen, 2012) While crowding out sounds like an automatic stabilizer, automatic stabilizers do not shift the aggregate demand curve because they are automatic and their actions are part of the curve already (Rittenberg and Tregarthen, 2012). The effects that lead to crowding out can be graphed as shifts in other components of aggregate demand.

4.

Why is it important to try to determine the size of the fiscal policy multiplier?
The multiplier needs to be determined in order to properly calculate how much the aggregate demand curve shifts. Since the curve shifts “by an amount equal to the initial change in government purchases times the multiplier.” (Rittenberg and Tregarthen, 2012) Without knowing the size of the multiplier, it would be hard to determine how much the aggregate demand curve

shifts.

6. Suppose the president was given the authority to increase or decrease federal spending by as much as $100 billion in order to stabilize economic activity. Do you think this would tend to make the economy more or less stable?
I think that giving the president the authority to increase or decrease federal spending by as much as $100 billion in order to stabilize economic activity would be very destabilizing for economy. This is just my personal opinion, but I do not trust that the president would do what is best for the economy. Rather, I think he would use this money to some how enrich himself, his family, and his donors, and use the money as a political weapon. If the president was someone other than the current president, I still would have trouble trusting that the money would not be used as a political tool rather than one to help the economy. But with our current president, I think he is corrupt, a liar, and cares more about himself than he cares about the country. I think it is already a disaster that he has the authority he has now and do not think that more power would be a good thing.

References
Rittenberg, L. and Tregarthen, T. (2012). Macroeconomics Principles V. 2.0. Licensed under Creative Commons by-nc-sa 3.0 (https://creativecommons.org/licenses/by-nc-sa/3.0/)