Current Economics Analysis: Consumer Spending, Payroll Tax, GDP Growth, Inflation and Unemployment Rate

This analysis covers topics such as consumer spending, payroll tax, GDP growth, inflation and unemployment rate. It includes tables, figures and references to support the discussion.

Running head: CURRENT ECONOMICS ANALYSIS
Current Economics Analysis
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1CURRENT ECONOMICS ANALYSIS
Table of Contents
Problem 1.........................................................................................................................................2
Problem 2.........................................................................................................................................2
Problem 3.........................................................................................................................................2
Problem a.....................................................................................................................................2
Problem b.....................................................................................................................................3
Question 1........................................................................................................................................3
Question a....................................................................................................................................3
Question b....................................................................................................................................4
Question c....................................................................................................................................4
References list..................................................................................................................................6

2CURRENT ECONOMICS ANALYSIS
Problem 1
Consumer spending is an important component of aggregate demand. During increase in
stock market value, consumers in the economy find themselves wealthier. This increases
spending by consumers. The increase in consumption spending increases aggregate demand.
Aggregate demand fluctuates with plunges in stock market. In times of crash in crash,
consumers cut back spending and firms reduce their investment (Goodwin et al. 2015). This
lowers aggregate demand at the given level of price. Reverse is the case at times of increase in
stock market value.
Problem 2
A typical payroll tax reduces disposable income of American consumers. With a lower
disposable income consumer has the tendency to lower their consumption as much as possible.
The decline in demand and spending on groceries mean a lower income for grocery stores like
Wal-Mart. The lower sales volume reduces profitability of the company. As reported in the
article there are nearly 46 percent of the consumers who are unable to spend as much as before
the payroll tax.
Problem 3
Problem a
Give that marginal propensity to consume was 0.9.
The expiration of payroll tax reduces consumers’ income by $110 billion. Given the MPC, tax
would lower consumption by ($110 * 0.9) = $99 billion.

3CURRENT ECONOMICS ANALYSIS
Problem b
The effect on aggregate demand can be estimated using the multiplier effect
∆ Y = −MPC
1−MPC ×∆ T
¿ −0.9
1−0.9 × ( 6.2−4.2 )
¿ −0.9
0.1 × 2
¿−9 ×2
¿ 18
Considering the multiplier effect, the ultimate demand would decline by $18 billion
Question 1
Question a
Table 1: Inflation and Unemployment rate in United States
Year
Unemployment
rate
Inflation
rate
2013 7.36 1.76
2014 6.18 1.75
2015 5.27 1.83
2016 4.87 2.19
2017 4.35 1.85

4CURRENT ECONOMICS ANALYSIS
Question b
Table 2: Nominal and real GDP growth rate in United States
Year
GDP in current
dollar
Real
GDP
2013 3.63% 1.84%
2014 4.39% 2.45%
2015 3.98% 2.88%
2016 2.68% 1.57%
2017 4.16% 2.22%
Question c
In assessing economic performance of a nation, some important economic indicators are
GDP, inflation and unemployment rate. Annual changes in these indicators reflect prosperity of a
nation. Two alternative measures of GDP are GDP measured in current dollar and GDP
computed using values of a based year. Annual change in GDP indicates the economic growth of
a nation. Both current dollar GDP and real GDP has recorded an increase in 2017 compared to
the previous year. GDP at current dollar increased from 2.68 percent in 2016 to 4.16 percent in
2017. Real GDP on the other hand increased from 1.57 percent in 2016 to 2.22 percent in 2017.
The increase in GDP growth sourced from an increase in aggregate demand (Bernanke,
Antonovics and Frank 2015). Aggregate demand increase following an increase in government
spending and net export. Consequently, aggregate demand curve shifts outward causing an
increase in GDP and price level.

5CURRENT ECONOMICS ANALYSIS
Figure 1: AD-AS framework explaining annual changes
Increase in aggregate demand and associated increase in GDP help to reduce
unemployment in the economy. As shown from the unemployment statistics, there is a gradual
decline in unemployment rate. Inflation increases continuously from 2014 to 2016. Part of the
inflation can be explained by increase in aggregate demand. Anti-inflationary measure in recent
year pull down inflation in 2017 to 1.85 percent.

6CURRENT ECONOMICS ANALYSIS
References list
Bernanke, B., Antonovics, K. and Frank, R., 2015. Principles of macroeconomics. McGraw-Hill
Higher Education.
Goodwin, N., Harris, J.M., Nelson, J.A., Roach, B. and Torras, M., 2015. Macroeconomics in
context. Routledge.