In the USA, the government is about to shut down and the economy is about to go bankrupt... do you guys know why? Also, what impact would these have on the AE function and on GDP?
The government of the USA shut down because they would not agree on a budget. The budget includes spending on many different programmes, including defence, education, national assets (such as parks and the statue of liberty), as well as healthcare. Although the new healthcare bill was passed successfully, the republicans are now trying to stop it by not allowing any money to go into it (it was passed, it is law, but they don't want it to work).
Before we blame anyone, please take a little time to consider well the recent past in the political system of the USA. Politicians there have been dysfunctional overall from around the moment when Obama did not have control of all relevant legislative branches. This last spat (although a very nasty one) is just the continuation of a never ending fight for what everyone else does: private benefits. Politicians are not different from everyone else (besides having no moral or self respect that is), they maximise their own welfare... This issue is pretty simple: if the government cannot agree on a budget, no one (except the politicians by the way) receives money, which is exactly what just happened.
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A person answered:
Since the government has stopped spending A LOT of money, this means that Go has decreased greatly. Also, this halt must have created a lot of unemployment, which means that people's MPC will be lower (AE shifts up and rotates). But also, as you mentioned in class, this would mean that savings would go up (higher MPSave and more savings from the government) so NS (was that the name for this?) from the interest rates graph increases (moves to the right), which lowers interest rates' prices and more Q$, which may mean more investments and maybe more consumption(?) and a higher AE. But the consumption part would not make so much sense since a lot of people just lost their jobs... Maybe the people that haven't lost their jobs will take advantage of the lower interest rates and consume more... hm...
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I replied:
I found a little typo: AE shifted down. As for your Crowding-IN of investment, very well done Ayumi!!!! Neo-Classicals would indeed argue that this decrease in government spending would be beneficial to the economy because the national savings would increase, leading to a lower interest rate, which would then lead to more investment. However, that's not going to happen... unfortunately. The Neo-Classical argument of crowding-out and crowding-in works in very few cases, this one not being one of them. I will show you next-next class a concept that explains very well what will happen if this situation persists: The Provencher Liquidity Trap! TaTaTaaaaaaa!!!!!
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