Explain what the long-run effects would be on real gdp
Microeconomics
Many people believe that Congress will eventually have to reduce Social
Security benefits in order to reduce the budget deficit. Although most of the
changes would not take place until later, assume for the purpose of this
problem that Social Security benefits were cut today by $100billion per year.
A) If the marginal propensity to consume is 0.8, explain what the long-run
effects would be on real GDP, public saving, and national saving.
B) The US is a large open economy with a trade deficit. Use the appropriate
graphs to illustrate and state what the reduction in Social Security benefits
would do to each of the following inthe long run: national saving, investment,
the US real interest rate, net capital outflows, the real exchange rate, and
the trade deficit.
C) Now, consider the small open economy of Norway, which has a trade surplus.
If the US, a large open economy, were to reduce its Social Security benefits,
use the appropriate graphs to illustrate and state what would happen in the
long run to Norway’s national saving, investment, interest rate, real exchange
rate, and trade surplus.
