National Income And Product Accounts – Coursework Example

National Income and Product National Income and Product Table showing 2007 and 2009 data and the declines 2007
2009
Change
Change
C
10041.6
(220.1)
9847.0
(160.2)
I
2644.1
(85.9)
1878.1
(517.9)
G
2914.4
45.1
3089.1
94.3
Xn
-712.6
81.7
-557.8
162.4
In 2007 consumption expenditure fell the most by 220.1 billion dollars it was followed by investment with 85.9 billion dollars. In 2009 however investment declined the most by 517.9 billion dollars; it was followed by consumption with 160.2 billion dollars. In both year’s government expenditure and investment was on an upward move.
In a recession the economy contracts and there is need for expansionary policies, among them is increased government expenditure that increases the money in circulation. Government expenditure will hence avail money for transactions and hence the aggregate demand will increase as a result of increased purchasing power.
An economy operates below full employment GDP during the recession. The GDP gap in this case is negative implying that actual real GDP is less than potential real GDP. Most firms will lay off workers during the recession due to the financial challenges limiting the firm’s ability to gain returns from its operations. The firm is hence unable to pay its employees; this occurs in the short-run.
A multiplier can have negative impacts if initial actions lead to a decline in the national income. For example, a decrease in government spending will result to loss of employment to some employees. This will reduce consumption and hence affect national income negatively.
In conclusion, an open economy the multiplier relies on the marginal propensity. The two are hence directly related meaning an increase in the marginal propensity will result to an increase in the multiplier. An increase in the marginal propensity to consume, for example, results to an increase in the multiplier.
Reference
Tucker, I. (2014). Macroeconomics for Today, 8th Ed. Mason, OH: South Western Cengage learning.