If you are the chief economist of a country experiencing high unemployment and flat GAP, what macroeconomic policies might you enact in response to these economic conditions? How would you expect these policy changes to impact the economy? A: The primary idea to address is to create employment for this country, which would increase the output of the country and therefore increase GAP. I would both enact an expansionary fiscal policy and monetary policy, which would raise government spending and the country’s money supply.
In turn, this would stimulate genuineness to start employing more people and produce, which would increase GAP. The government’s spending can also be focused on creating Jobs. The increase in money supply would in turn encourage banks to give more business loans, which would stimulate employment and productivity as well. Question 2 Q: How does an economy achieve macroeconomic equilibrium? What affect does a high level of inflation have on macroeconomic equilibrium? A: Macroeconomic equilibrium is achieved in the Keynesian model using a balance of aggregate production as well as aggregate expenditures.
This is a state that forms when 2 opposing forces offset one another Just so, so that nothing changes among them, or until another outside force comes between them. An unexpected decrease in aggregate demand means an excess supply of resources. This means there will be a decrease in the prices of these resources. Therefore, the rate of unemployment will increase, prices will decrease and output will decrease. In the long run, lower costs of resources will mean the economy will product a level of output that’s consistent with full employment, but with lower prices.
An unexpected increase in aggregate emend will mean an output level that is higher than full employment. That means there will be less unemployment, an increased pressure on resource prices and interest rates, which will mean a decrease in aggregate demand. The resource providers will adjust to the new price levels and output will decline. Therefore, a new market equilibrium will occur at a higher price level. In the long run, inflation is the major effect of increased aggregate demand. An unexpected decrease in ASS will decrease the availability of resources.
This means an increase in resource prices, which will cause the aggregate supply curve of goods and services to shift up and left. That means there is a reduced level of output at higher prices. If the unexpected decrease in ASS is temporary, there won’t be any changes in prices or output in the long run. If it’s not temporary, the economy will produce a lower level output at higher prices. An unexpected increase in aggregate supple will mean output and income will expand past what is consistent with full employment, and at a lower price level.
If its cause is temporary, the ASS curve will return to normal levels and prices and output will be the same. If what produced the change is more permanent, there will be a greater amount of output and at lower prices. Question 3 Q: Joe Producer makes a product that sells for $1,000. In the production process, he pays $750 for wages, $125 for materials, and $ 75 for rent. Three-fourths of Joey’s Business Economics Exam By doodled approach and the earnings approach can be used to measure GAP and the role profit plays in these calculations.
Calculate GAP for Joe using both the product and income approaches and show how they must agree. A: Product Approach: GAP is the market value of all goods = 1000 50 The market value of all goods must equal the return to all factors of production used in the production process. Earnings Approach: GAP= sum of earnings of all factors 750(to labor) +75(to land) +50 (to entrepreneurship) +125 (to inputs) ?1000 Profit is the remuneration/costs of Joey’s skills as a businessman for the entrepreneurial services that he provides.
These must be added as returns to a factor input (entrepreneurship) Question 4 Q: An apparel manufacturer purchases cotton and other raw materials for the production of shirts. Would the sale of cotton from a cotton mill to the shirt manufacturer be included in the calculation of GAP? Why or why not? A: Yes, it will be included in the calculation of GAP. Whether it’s included explicitly or implicitly depends on how the GAP is calculated. If calculated on the basis of value added, then it will be added to the GAP because it represents the value added by the cotton mill.
This is explicitly included in GAP. If calculated on the basis of the value of final goods, it will be a part of the GAP but not explicitly but as part of the value of the final product created by the manufacturer. The value of the final product includes the imputed value of the cotton sold by the mill. Question 5 Q: Are all expenditures of a government included in the calculation of GAP for that nation? Why or why not? If not, what government expenditures should be excluded from GAP? Are income taxes collected by the government from consumers included in GAP and, if so, how?
A: No, because GAP includes all government expenditures, which exclude transfer payments made by the state. These are excluded because they don’t represent the acquisition of goods or services. Instead, they’re simply the transfer of money such as social security payments. No, income taxes collected by the government from consumers are not included in GAP. Question 6 Q: Explain the Consumer Price Index (ICP), the GAP Price Index, and the Producer Price Index (PIP). What does each measure? Which is most important to measuring changing price levels in an economy and why?
A: ICP measures the price level changes of consumer goods and services purchased by households, so it measures the average change with time in the prices paid by consumers for goods and services. GAP Price Index measures the price of specific goods and services in a reticular year, compared to the price of similar goods and services in a reference year. Producer Price Index measures the change in prices that is received by domestic producers for the output. The most important to measuring changing price levels in an economy is the ICP because it’s based on the calculation of inflation rate of a country.
Question 7 Q: Explain the relationship among household disposable income, consumption, and tell us about consumption and saving? Use an example to explain MAC. A: Disposable income is the income left after paying taxes and other mandatory hares, to be spent however the owner likes. As far as the relationship between consumption and savings, this is best illustrated using the consumption function: C a + body a represents autonomous expenditure and b represents marginal propensity to consume with, O < b < 1, and Yd represents disposable income.
The consumption function implies that as the disposable income increases, consumption levels increase. The relationship between savings and disposable income can be illustrated using the savings function: S = Hyde-C = Hyde-a-body = -a + (1 -b) Hyde Here (I-b) > O as b lies between O and 1. The savings function also indicates a direct relationship between savings and disposable income, such as increases in disposable income causing savings to increase. Marginal Propensity to Consume (MAC) is the change in consumption due to one unit change in disposable income.
For example, if disposable income increases by one unit, that is by how much consumption will increase. This is determined using the formula: MAC = change in consumption/change in disposable income The relationship between savings and disposable income is explained by Marginal Propensity to Save (MSP), where MSP = I-MAC MAC = 0. , which indicates that MSP 0. 1 . This means that if disposable income increases by $1, the savings would increase by $0. 1. Question 8 Q: Explain the following statement: “Changes in disposable income lead to movements along the consumption function while changes in wealth lead to a shift of the consumption function. Use examples to illustrate your response. A: The consumption function demonstrates the relation between consumption and income, keeping all other factors constant. Therefore, any change in income is shown as a movement along the curve. (A to B consumption increases as income increases). If any other factor changes to affect consumption, it is shown as a shift of the curve itself (CLC to CO wealth increases and therefore the curves shift up). Consumption Question 9 Q: What impact would you expect each of the following events to have on business cycles?
Label each as a demand-side or supply-side shock. Defense production increases due to the imminent threat of war Net exports decline due to a deep recession in Europe A sharp increase in technology innovation leads to significant productivity growth What economic policy changes might you expect in response to each of these events? A: Defense production increases due to the imminent threat of war Defense results in an increase in prices and therefore an increase in output level. In terms of business cycles, the effect depends on the exact stage.
During a booming economic time, this demand shock would exaggerate the cycle while in a recession it will benefit the economy. Net exports decline due to a deep recession in Europe This is a supply-side shock, which would lower GAP and prices. In a recession it would cause economic downturn, but in a booming economy it will help bring the economy back to normal levels. Ђ A sharp increase in technology innovation leads to significant productivity growth This is a demand-side, as supply rises, prices fall and GAP increases. This would be beneficial to an economy if it were in a recession but would be harmful during an economic boom.
If we were to wish the effects of these shocks to be reversed, then the policy must oppose the effect. In a positive demand shock, a decrease in government spending means a rise in tax rates. With a positive supply shock, it would be the same. With a negative demand shock, it would need expansionary fiscal policy, which would mean rise on spending or lowering tax rates. Question 10 Question: Explain the following statement: Any deviation from planned output or planned expenditures (Consumption + Investment) will throw the economy into disequilibrium.
To illustrate your explanation, provide an example of how actual output might deviate from planned output and how actual expenditures might deviate from planned expenditures. List any economic reactions might you expect in the examples you provide. Answer: Solution: Planned output or planned expenditure = Consumption + Investment Or, E = C + I The output or actual expenditure is denoted as Y. The economy is in equilibrium when the Y as real GAP equals total income and total actual expenditure on goods and services.
The equilibrium condition can be written as: Actual Expenditure or Output = Planned output or planned expenditure Or, Y = E Any deviation from planned output or planned expenditures will put the economy into disequilibrium. Question 11 Q: Three months ago you purchased, at par, a $100,000 bond with a stated interest rate of 5%. Today, the Federal Reserve announced that it is reducing the discount rate by 0. 5%. How would you expect this announcement to affect the value of your bond? Explain your response.