The Keynesian

1-    answer to the questions below: (Min 250 words) No quoting Answer based on knowledge of the topic

If the economy were close to high potential output, would policymakers present their policy prescriptions to increase real output any differently than if the economy were far from the potential output? Why?

2-    Make constructive comment on each Response below: (betw 100-125words each)

Response 1: Potential output refers to the level of economic growth it could reach while the real output shows the real GDP that the nation is currently at. If the economy were close to high potential, policymakers would not present the prescription differently because the goals of the policymakers Is to try to get the real output close to potential output as possible. If the real output is not close to the potential output than policymakers would try to come up with a different approach to try to make it close to the potential output. One of the reasons economists place potential output is to set a goal for the economists and the policymakers to ensure that the real output is headed to the right direction. Sometimes where events happen such as pandemic that can have an impact on the economy can change a policy maker plan even if it is close to the high potential income. If the economy is far from the potential outcome, policymakers will try to create new plans and even experiment with new approaches to see if it can take the economy faster to the potential output. There exists a gap between the real and potential output where it can have an impact on the prices of the goods. If real output exceeds potential output, then it will cause increase in prices due to demand and if potential output exceeds real output then it will cause prices of the goods to fall because of the low demand. One of the reasons it is important for economists to measure potential output, because it can have an effect on the prices of goods and reflects on how the market is doing.

Response 2: Suppose the economy was close to high potential output, the policymakers present their policy prescriptions to increase real output differently than if the economy were far from the potential output. Real output is the increase in the number of manufactured goods and services, while the potential output is what could have been produced by maximally using all possible resources. The discrepancy between the real output and the potential output can occur when the real output is higher or lower than the potential output. When the real output exceeds the potential output, the output gap is positive and usually refers to an inflationary gap. When the real output is less than the potential output, the output gap is negative or a recessionary gap. The biggest concern for policymakers is how to eliminate the output gaps and recover the economy. So, policymakers typically prescribe policies that increase real output in response to economic conditions and pace. The output gap is critical in policymaking since it shows that the economy is not operating efficiently because, in case of a positive gap, it is overperforming its efficient resources. In case of a negative gap, it underperforming. In order to eliminate the output gaps, the fiscal policy can be suggested by the policymakers. Fiscal policy refers to the change in taxes or government spending, and it is intended to make the economy steady. When there is a recessionary gap, the expansionary fiscal policy can be implemented that is lowering taxes or increasing government spending. On the other hand, in the case of inflationary gaps, contractionary fiscal policy can be used that is increasing taxes or lowering government spending.

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