Final_Essay

Department of Economics University of California Berkeley Fall 2012 Economics 1 Professor Olney The Comprehensive Essay Question This is exactly the question you will be given on December 11 as your comprehensive essay question. Options: [1] You can write your essay during the final on Dec. 11. Or [2] You can turn the essay in by Dec. 7. If you choose to write your essay during the December 11 exam, we’ll provide you with lined paper. If you choose the Dec. 7 (early) option: Essay must be submitted via bspace “assignments” tab. Due date is Friday December 7, 5:00 p.m. No late electronic submissions. 10-11-12 pt font; double spaced; 1,000 words maximum; your name & SID & GSI’s name on first page. Use “quote marks” and cite your sources. Works cited page not included in 1,000 word maximum. Congratulations! You’re an intern in your U.S. Senator’s office in Washington DC. Fabulous job!! You’ve been asked to write a briefing paper for the Senator outlining the economic issues inherent in the negotiations over the “Fiscal Cliff” (or as some term it, the “Austerity Bomb”). Her memo to you follows. You want to impress your new boss with how much you learned in your econ class at Cal. You also want to make a positive contribution, so you want to be clear and organized. The Senator truly wants your recommendation, which should be well supported by the arguments you put forth in the briefing paper. You’ve got at least a week before she wants your paper, so that’s plenty of time to do a bit of research if you need to learn more about the issues. On January 1, a set of federal tax increases and spending cuts totaling about $600 billion are scheduled to go into effect. Congress can take action before or after January 1. I must decide what action I will support. The options seem to be [1] do nothing and let the tax increases and spending cuts take effect on January 1; [2] do something small, letting most but not all of the changes take effect; or [3] do something big, letting few if any of the tax increases and spending cuts take effect. I need your economic analysis to guide me as I make my decision. There’s a bit of political brinkmanship going on in terms of the timing of what we in Congress do. Your analysis doesn’t need to address whether we enact changes before or after January 1. I’ve got a Poli.Sci. intern writing a briefing paper on that issue. I’d appreciate it if you could address the following issues in your briefing paper. If there are other important issues that you think I should also consider, feel free to include those in your paper. But do address these issues, please. • Impact on businesses of increases in taxes they pay. I’ve heard some say that increasing taxes paid by businesses could trigger thousands of bankruptcies. Others dispute this claim and say the businesses will just pass the taxes on to their consumers. I need help making sense of all this. Debt and deficit issues. Some say this is the time to reduce the federal budget deficit because it is “too big.” Others say this is not the time because the economy is still weak. Yet others say that the structural deficit isn’t as big as the total deficit, and it’s the structural deficit that matters. How do I sort all this out' Monetary policy. I’ve heard some say that because the Fed is facing the zero lower bound, they can not use interest rate policy to offset the contractionary effects of tax increases and spending cuts. How would they normally react to the fiscal changes' Is it true that they are unable to aid the economy now' Unemployment and inflation. What would be the effect of the tax increases and spending cuts on unemployment and inflation' I’d like to protect my constituents as best I can. If the spending cuts were all focused on some other region of the country, would that protect the workers in our state' The mix of taxes and spending. It sounds as if whatever we do, there will be damage to the economy. Can we mitigate some of that damage by picking and choosing whose taxes to increase and which spending to cut' Can you provide some suggestions' • • • • Finally, I’d appreciate your opinion. What option do you recommend I follow and why' I’m particularly interested in the reasons behind your recommendation. And, as always, Go Bears!