Macro And Micro Economics | EssayIvy.com

Macro and Micro Economics

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Macro and Micro Economics
Sequestration in this context is referred to as the cutting of budget by the government
with an aim of reducing budget deficits in recession. Sequestration includes government
spending cuts policy, tax increases policy, or a mixture of both. The reductions uniformly
divided between defense related discretionary spending and non-defense discretionary spending.
In microeconomics perspective, reduction in government spending leads to increase in
unemployment. This, on the other hand, reduces revenues on tax. Moreover, government
spending plays a crucial role in gross domestic product growth (Olivier and Robert, 2002).
Sequestration was enacted in the 2011 debt ceiling crisis. The Budget Control Act of
2011 focused on significant across the board reductions in government spending starting
January, 2013. However, these reductions in spending were postponed to March, 2013. This
was arrived at with an aim of avoiding the fiscal cliff.
However, in this context, sequestration aims at reducing the government debt. This
ensures stability to financial markets and investors by ensuring a Greek-style meltdown less
probable (International Monetary Fund, 2010). With fragile overall economic activity, many
fear that a decline in government expenditures could result to recession in the U.S. economy.
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The impacts of the cut in government spending of eighty five billion U.S. dollars have on U.S.
economic activity. However these impacts on economy largely depend on economic multiplier.
According to most estimates economic multipliers of spending are smaller than 1; this means
that, a rise in one dollar on government spending result to less than one dollar increase of gross
domestic product. The spending multiplier is usually less than one due to crowding out effect.
Recourses utilized by the government are obtained from the private sector.
The most recent estimates of spending multipliers were developed by Barro and Redlick.
They focused on variant in defense and non-defense expenditure in the United State on various
time from 1917. Defense spending resulted to greater variation, especially in World War II and
the Korean War. The variation was as a result of war instead of economic perspective. Non-
defense expenditure has a challenge of lack relative of variation as well as the issues of reverse
causality (Bania, Gray and Stone, 2007). As a result, Barro and Redlick claim that defense
expenditure gives the best means to estimate expenditure multipliers. For provisional defense
expenditure, their estimates range from 0.4 to 0.5 for contemporary GDP impacts and 0.6 to 0.7
for GDP impacts in duration of 2 years. The multipliers are higher by 0.1 to 0.2 if the defense
spending is permanent. This implies that extra dollar added to defense expenditure improve
gross domestic product by a smaller amount than a dollar.
According to Alesina and Ardagna, 2010, fiscal incentive centered on tax cuts is more
probable, to enhance growth than those centered on expenditure increases. On the other hand,
fiscal policies centered on expenditure cuts with no tax raise are more probable to do well at
cutting deficits and debt. Moreover, the International Monetary Fund analyzes one hundred and
seventy instances of fiscal policies in 15 developed economies over the 30 years. The finding
was that expenditure cuts are much less negative impact to short term growth than are tax raise
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(International Monetary Fund, 2010). According to the finding of IMF, one percent spending
cut has no significant effect on growth. Moreover, reductions into transfer payments have no
statistical impacts on short run growth. The point estimate indicates that cuts fuel growth. On
the other hand, cuts to government expenditure and investment slow economic growth in the
short run. They approximate that reducing public investment by one percent of GDP reduces
GDP by 0.6 % after three years (David Logan, 2011).
From the first graph sequestration result to a shift of AD curve to the left. This result
increased unemployment. However, sequestration in the short run does not have effect on GDP;
hence it has no effect on economic growth. On the other hand, sequestration will have a very
small significance on GDP in the long run. Therefore, in the long run sequestration will slow the
economic grow.
In conclusion, with right fundamental ground in an economy, sequestration is good. It
does not affect slow economic growth in the short run, but budget deficit in an economy is
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reduced. The application of sequestration largely depends on spending multiplier effect. In the
long run sequestration is likely to slow economic growth. However, the effect is not that
significant.
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Work Cited
Alberto Alesina and Silvia Ardagna, Large changes in fiscal policy: taxes versus spending, in
Tax Policy and the Economy, Vol. 24 (2010).
Bania, N., Gray, J. and Stone, A. Growth, taxes, and government expenditures: growth hills for
U.S. states, 60 National Tax Journal 193-204 (2007).
International Monetary Fund, Will it hurt? Macroeconomic effects of fiscal consolidation, in
World Economic Outlook: Recovery, Risk, and Rebalancing (2010), web. 12 May
2013<http://www.imf.org/external/pubs/ft/weo/2010/02/pdf/c3.pdf.>
Olivier Blanchard and Robert Perotti, An Empirical Characterization of the Dynamic Effects
of Changes in Government Spending And Taxes On Output, 107 Quarterly Journal Of
Economics 1329-1368 (2002).

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