Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
September 30, 2013, the two parties of the United Stated Congress failed to break the
deadlock about the government spending bill in the deadline. Therefore, the federal
government’s non-core sectors had to be closed officially from October 1, 2013. Even
though only a part of government shut down, the core department, such as the army,
frontier defense and public security, were not affected actually. However, about 800,000
federal employees had to stay at home and enjoy their “surprise holiday", 368 national
parks had to close, more than 200,000 passport applications were stopped, and tourism and
airlines faced a huge impact. Meanwhile, in the capital Washington D.C, nobody will
responsible for collecting the garbage during the government shutdown.
How is the government shutdown impact the fourth-quarter of the GDP?
We know that the United States belongs to a large open economic environment, so we
must use the large open economy model to analyze this problem.
First of all, the House of Representatives had approved to pay the stoppage employees
after the government re-opened the door, this decision results in an increase in the
government purchases. In order to achieve the market equilibrium, an increase in
government purchases must be accompanied by an equivalent reduction in investment. At
the same time, the interest rate must rise in order to decrease the investment. “Government
purchases are said to crowd out investment" (Mankiw, 2012, p.72).
Secondly, the increasing government purchases also reduce national saving S. Thereby,
reduction in national savings brings the fall of the supply of loanable funds and the
