Question

1- Why wouldn’t investment and savings flows at full employment always be equal? 2- Why was President Obama so concerned about the economy at the outset of his presidency? 3- How can you tell if the economy is in equilibrium? How could you estimate the GDP gap?

Answer 1

Savings and investment flows at full employment may not always be equal due to various economic influences. President Obama was concerned about the economy because of the 2008 financial crisis and its impact. Economic equilibrium occurs when supply equals demand, and the GDP gap is indicative of either a recessionary or inflationary gap.

Step-by-step explanation:

Savings and Investment Flows at Full Employment

Investment and savings flows may not always be equal at full employment due to factors like expected returns on investments, interest rates, and economic policies, which can influence the levels of saving and investment separately. Also, in an open economy, these flows can be supplemented or drained by international capital flows.

President Obama's Concern About the Economy

At the outset of his presidency, President Obama was concerned about the economy due to the severe financial crisis of 2008, which led to significant job losses, failures of major financial institutions, and a deep recession. The economic stability and recovery were critical challenges he needed to address.

Economic Equilibrium and GDP Gap

Economic equilibrium occurs when aggregate supply equals aggregate demand. The GDP gap can be estimated by comparing actual GDP to potential GDP, which represents full employment. If actual GDP is lower than potential, it indicates a recessionary gap; if higher, it indicates an inflationary gap.

Government Budget Deficits and Macroeconomy

Increased government budget deficits can affect the macroeconomy in three ways:

Reducing national saving

Increasing interest rates

Affecting exchange rates and trade balances

Larger budget deficits would generally be expected to decrease private sector investment in physical capital by either 'crowding out' private investment through higher interest rates or by using up financial resources that might otherwise have been available for private investment.

Ricardian Equivalence

The theory of Ricardian equivalence suggests that when a government increases debt to fund spending without changing taxes, rational consumers anticipate future taxes and save accordingly, which neutralizes the fiscal stimulus.

Fiscal Policies for Economic Growth

Fiscal policies that encourage economic growth include tax incentives for investment, government spending on infrastructure, and policies designed to increase human capital and technological advancement.

Answer 2

Explained

Step-by-step explanation:

1)When leakages (taxes, consumer savings, business saving and imports) fail to balance injection (investment, autonomous consumption, government purchases and exports) then the imbalances arises at full employment. There occurs an undesired investment caused due to the undesired inventory. Consequently at full employment the savings and investment flow would not always be equal.

2) As per the reports of Department of Labor, roughly 8.7 million jobs were shed from the period between February 2008 to February 2010, and GDP declined by 5.1%, making the Great Recession the worst since the Great Depression. Unemployment increased in November 2007 from 4.7% to peak at 10% in October 2009. The United States was upset over rising unemployment and a rapidly deteriorating economy; and to overcome it President Obama had undertaken numerous steps in many sectors.

3) The equilibrium real output and the price is calculated when the aggregate demand equals the aggregate supply of economy. Thus the equilibrium is at the intersection AD and AS of economy. The point is known as equilibrium because; there will be no excess demand and excess supply at the point and price corresponding to the point is know as equilibrium price.