Suppose the Government Increases Spending on the War on Drugs

question 88

Essay

Suppose the government increases spending on the war on drugs by one-half a percent of GDP.
(A)Suppose no other policy accompanies this increase in spending.Describe this policy's effect on interest rates and on consumption,investment,and net exports as a share of GDP.
(B)Suppose,because of a balanced budget agreement,the funds for this policy must come from funds initially earmarked for other spending programs.Describe this policy's effect on interest rates and on consumption,investment,and net exports as a share of GDP.
(C)Suppose the government decides to adopt a national sales tax to pay for the higher government spending.Describe this policy's effect on interest rates and on the four shares of GDP.

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Definitions:

Present Value

It represents the discounted worth of future cash flows using a specific discount rate, highlighting the time value of money concept.

Capital Investment

Funds invested in a firm or enterprise for the purposes of furthering its business objectives.

Internal Rate

Refers to the rate of growth a project is expected to generate.

Return Method

A sales return approach where the selling price of returned goods is deducted from gross sales to calculate net sales.