Assignment 4 (Chapter 23) Sequestration 2013
Dear Colleagues,
Using the goods and services model from the text (what I have labeled the 'Commodities Model' in my syllabus or the Keynesian Cross), please offer a basic analysis of the sequestration of expenditures by the Federal Government that took effect on March 1st. Please limit your analysis to an expenditure equation containing only personal consumption expenditures (C) and planned investment (Io). (The aggregate expenditures equation would be limited to AE = C + Io.) Please note that I want you to ignore the impact of any direct reduction in governmental expenditures upon aggregate expenditures as is discussed in chapter 24. In particular, discuss and model the effects of the Sequestration on C. Also, would there be a possible effect on Io? Please explain the conclusions that you reach. Before beginning your analysis please read the articles listed below:
Sequestration: The Truth Behind The Spending Cut, Mani.
http://www.istockanalyst.com/finance/story/6318811/sequestration-the-truth-behind-the-spending-cuts
Paragraph 7 in particular in the article above
Fiscal Multipliers, the IMF & the OBR, Weldon, Duncan.
http://touchstoneblog.org.uk/2012/10/fiscal-multipliers-the-imf-the-obr/
Deleveraging Shocks and the Multiplier (Sort of Wonkish), Krugman, Paul,
http://krugman.blogs.nytimes.com/2012/10/09/deleveraging-shocks-and-the-multiplier-sort-of-wonkish/
In your analysis, please use the Keynesian Theory of Consumption as the model to represent household expenditures. You may assume that the aggregate expenditure function (line) has only consumers and business, and business expenditures are not dependent upon income (as presented in the text).
Of what importance is the discussion of the multiplier mentioned in the last two articles?
Is it possible that business expectations about the future will change?
What would change in the model as a result of this change in expectations (Please discuss the potential impact on inventories)?
As you perform your analysis, you do not have to specify exact values on the axes. Your response will be graded upon your ability to determine the direction in which incomes will change, either increasing or decreasing, due to the sequestration and if the change will be large or small. (Recall that income, Y, is represented on the horizontal axis in the Keynesian Cross model.) In your model, be sure to begin your analysis with aggregate expenditures at pre-sequestration levels and equilibrium income. Then indicate the appropriate movement of the consumption function and business planned investment and the effect on equilibrium income.
Also, provide a brief explanation of how unplanned investment would change as a result of the sequestration and how the unplanned investment causes equilibrium income to increase or decrease.
The book Principles of Economics, Tenth Edition, Chapter 23 - Sequestration 2013.
