...investment spending. 3. How equilibrium GDP is determined in a closed economy without a government sector. 4. What the multiplier is and its effects on changes in equilibrium GDP. 5. How adding international trade affects equilibrium output. 6. How adding the public sector affects equilibrium output. 7. The distinction between equilibrium versus full-employment GDP. I. Introduction A. This chapter focuses on the aggregate expenditures model. We use the definitions and facts from previous chapters to shift our study to the analysis of economic performance. The aggregate expenditures model is one tool in this analysis. Recall that “aggregate” means total. B. As explained in this chapter’s Last Word, the model originated with John Maynard Keynes (Pronounced Canes). II. Simplifying Assumptions for the Simple Model A. We assume a “closed economy” with no international trade. B. No Government. C. Although both households and businesses save, we assume here that all saving is personal. D. Depreciation and net foreign income are assumed to be zero for simplicity. E. There are two reminders concerning these assumptions. 1. They leave out two key components of aggregate demand (government spending and foreign trade), because they are largely affected by influences outside the domestic market system. 2. With no government or foreign trade, GDP, personal income (PI), and disposable...
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...both exports and imports. (b) A rise in the price level increases the real value of money. (c) A fall in the price level increases the quantity of real wealth. (d) A rise in the price level decreases saving. 3. Find an incorrect statement. (a) The short run aggregate supply (SAS) curve slopes upward. (b) With an inflationary gap, money wage rate begins to fall and the SAS curve shifts rightward. (c) A leftward shift in the short run aggregate supply (SAS) curve causes stagflation. (d) In the long run, the quantity of real GDP is equal to potential GDP. 4. Find an incorrect statement. (a) The short run aggregate supply (SAS) curve slopes upward. (b) With an inflationary gap, money wage rate begins to rise and the SAS curve shifts leftward. (c) A leftward shift in the short run aggregate supply (SAS) curve causes stagflation. (d) In the long run, the quantity of real GDP is greater than potential GDP. 5. With the given money wage rate, as the price level falls below the equilibrium price level, the quantity of real GDP supplied _______ and the real GDP is _______ than the potential GDP. The missing words are: (a) increases; smaller (b) decreases; greater (c) increases; greater (d) decreases; smaller 6. With the given money wage rate, as the price...
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...demand Initial effect of an increase in aggregate demand: Price level LAS SAS The increase in demand raises the price level from 110 to 120 120 110 AD1 AD0 Real GDP Money wage rate response Price level LAS SAS1 130 C SAS0 Money wage increases and SAS0 120 B shifts left to SAS1. Price level rises from 120 to 130. 110...
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...ECON101 ESSAY -Foreign exchange -AE questions -Demand pull/Cost push Fiscal or Monitory policy - Money market (Demand/Supply) (Definition of Economics) Scarcity refers to the situation where resources (like labor and time) are limited but the wants are unlimited. (GDP) - GDP DEFINED GDP or gross domestic product is the market value of all final goods and services produced in a country in a given time period. - Final Goods and Services GDP is the value of the final goods and services produced. A final good (or service) is an item bought by its final user during a specified time period. Real GDP per capita = Real GDP/Population (Real GDP Fluctuations ) A business cycle is a periodic but irregular up-and-down movement of total production and other measures of economic activity. Every cycle has two phases: 1 Expansion 2 Recession and two turning points: 1 Peak 2 Trough (List 4) Factors not in GDP that influence the standard of living are * Household production * Underground economic activity * Health and life expectancy * Leisure time * Environmental quality * Political freedom and social justice (Fixed Prices and Expenditure Plans) Disposable income is either spent on consumption goods and services, C, or saved, S. That is, Yd = C + S (MARGINAL PROPENSITY TO CONSUME) It is calculated as the change in consumption expenditure, △C, divided by the change in disposable income...
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...BUSINESS ECONOMICS CEC2 532-751 & 761 PRACTICE MACROECONOMICS MULTIPLE CHOICE QUESTIONS Warning: These questions have been posted to give you an opportunity to practice with the multiple choice format of questioning and to help you review and understand more deeply the material taught. In no way should you assume that the level of difficulty of the multiple- choice questions shown here is the same as that of the questions to be given in the exam. 1. Expansionary monetary policy (a) tends to lead to an appreciation of a nation's currency. (b) usually has no effect on a currency's exchange value. (c) tends to lead to a depreciation of the currencies of other nations. (d) tends to lead to a depreciation of a nation's currency. 2. If the number of people classified as unemployed is 20,000 and the number of people classified as employed is 230,000, what is the unemployment rate? (a) 8% (b) 8.7% (c) 9.2% (d) 11.5% 3. It is often true that as the economy begins to recover from a recession the unemployment rate rises. Which of the following statements would be the best explanation for this? (a) The unemployment rate would rise because as the economy initially recovers from a recession the demand for goods and services falls, so the demand for workers falls. (b) As the economy begins to recover from a recession, workers who were previously discouraged about their chances of finding a job begin to look for work again. (c) The unemployment rate seems to rise as the economy begins...
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...BUSINESS ECONOMICS CEC2 532-751 & 761 PRACTICE MACROECONOMICS MULTIPLE CHOICE QUESTIONS Warning: These questions have been posted to give you an opportunity to practice with the multiple choice format of questioning and to help you review and understand more deeply the material taught. In no way should you assume that the level of difficulty of the multiple- choice questions shown here is the same as that of the questions to be given in the exam. 1. Expansionary monetary policy (a) tends to lead to an appreciation of a nation's currency. (b) usually has no effect on a currency's exchange value. (c) tends to lead to a depreciation of the currencies of other nations. (d) tends to lead to a depreciation of a nation's currency. 2. If the number of people classified as unemployed is 20,000 and the number of people classified as employed is 230,000, what is the unemployment rate? (a) 8% (b) 8.7% (c) 9.2% (d) 11.5% 3. It is often true that as the economy begins to recover from a recession the unemployment rate rises. Which of the following statements would be the best explanation for this? (a) The unemployment rate would rise because as the economy initially recovers from a recession the demand for goods and services falls, so the demand for workers falls. (b) As the economy begins to recover from a recession, workers who were previously discouraged about their chances of finding a job begin to look for work again. (c) The unemployment rate seems to rise as the economy begins...
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...Goods and Services Wages, Rent and Profits Expenditure Method Firms 6 How is national income measured? Employment income + Rental income + Profits + Interest = National Income How is national output measured? Value of goods and services = National Output How is national expenditure measured? Household consumption (C) + Firms’ investment (I) + Government spending (G) + Exports - Imports (X-M) = National Expenditure What is GDP? National Expenditure = National Income = National Output = Gross Domestic Product GDP • GDP = Gross Domestic Product = Total Value of all Spending in an Economy = The Total Value of all final Goods and Services in an Economy regardless of who owns the productive assets. • GDP = C + I + G + (X – M) GNP • GNP = Gross National Product = Total Income Earned by a nation’s factors of production regardless of where the assets are located Real GDP Real GDP = Nominal GDP adjusted for inflation Calculating Real GDP Real GDP = Nominal GDP of year measured The Uses of...
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...the process and steps by which each of the following economic scenarios will shift the economy from one long-run macroeconomic equilibrium to another equilibrium. Under each scenario, elaborate the short-run and long-run effects of the shifts in the aggregate demand and aggregate supply curves on the aggregate price level and aggregate output (real GDP). a. Suppose the household wealth decreases due to a decline in the stock market asset prices (See the set of graphs below and pay attention to the 3-stage shifts in graphs). Answer: In graph one the decline in the stock market asset price causes the AD line to shift downward, decreasing. The long-run equilibrium in the first graph is the point where all three of the lines (LRAS, S1, and D1) are connecting. With a lower GDP, the aggregated demand curve shifts to the left (D1 to D2) creating a new equilibrium point at a lower price level. In the second graph it shows a higher supply with the increase in the SRAS (S1 to S2) curve. It will create a new long run equilibrium at a lower price level. In the last graph it shows both the shift in the AS curve from AD1 to AD2 due to the decrease and it shows the increase in the SRAS curve from S1 to S2 due to higher supplies. It shows both the old and new equilibrium along the LRAS curve. The first one being higher than the other when the shifts to the curves happened it caused the equilibrium to shift down the LRAS curve because of the lower price level. Therefore, there is a...
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...the a) GDP deflator.* b) consumer price index. c) producer price index. d) d. gross domestic product. 2. If the value of a price index was 125 for 2005 and 75 for 1982, and GDP was 2500 in 2005 compared to 600 in 1982, the value of real 2005 GDP in terms of 1982 prices is a) 1500.* b) 1000. c) 2500. d) 360. 3. The index that measures the change in price of a typical basket of consumer goods is a) the GDP deflator. b) the consumer price index.* c) nominal GDP. d) real GDP. 4. Personal income equals personal disposable income plus a) payroll taxes. b) transfer payments. c) dividend payments. d) personal saving. e) personal taxes.* 5. If real GDP exceeds potential GDP, this means that a) output is below the level produced at the benchmark rate for high employment and high rate of resource utilization. b) this cannot occur; the economy can never be at a point where real GDP exceeds potential GDP. c) cyclical output is above what the economy can sustain in the long-run.* d) the economy is expanding. 6. In the base year, the relationship between nominal and real GDP is a) uncertain. b) one of equality.* c) real GDP is higher. d) nominal GDP is higher. 1 7. Gross domestic product includes a) all intermediate and final goods and services produced. b) the current production of final goods and services with a country’s borders.* c) exchanges of assets. d) the current production of final goods and services by a country’s citizens. e) All of the above 8. Chain-weighted GDP deflator...
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...[pic] Question 1 Use the AS/AD framework to show the separate effects on GDP, inflation and public sector borrowing on any single national advanced economy of: a. an increase in public infrastructure spending b. an increase in the rate of tax on profits c. a slowdown in the GDP growth of less developed economies. (Make sure that you include clear and appropriate diagrams for this question). Answer a. an increase in public infrastructure spending An increase in public infrastructure spending is part of a fiscal policy in which the government needs to fund by borrowing from the private sector. The Government finances its spending issuing bonds which compete with other private bonds. An excess supply of bonds causes bond prices to fall and interest rate to rise. So in the IS/LM the IS curve shifts up, and GDP will go up because of the extra demand for goods and services. This is reflected in the AD-AS framework in which a government spending increase leads to an increase of AD (AD1 ( AD2) and this is reflected in an increase of level of output from Y1 to Y2 and a price level that increases (P1 ( P2). In this case the stimulus is intensive and it leads to get an aggregate demand which exceeds the full capacity national output. There is an excess of demand for good and services and a possible shortage of input resources. In the meanwhile there will be a derived demand for labour which will lower the unemployment rate, increasing labour...
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...rate in 2009= (116.2-114.6)/114.6 x 100=1.4 c) Inflation rate decreased in 2009 d) These CPI numbers could be biased because of the new good bias and quality change bias (with the technological progress more and more goods are coming out each year replacing old goods, like cars and computers. These new goods get better and more expensive each year). Another source of bias is the commodity substitution bias (people start to buy cheaper alternatives as prices rise), and outlet substitution bias (people start using discount stores more frequently as prices rise). e) The GDP deflator is the ratio of nominal GDP to real GDP. Because it uses current period and previous period quantities, rather than fixed quantities, it overcomes sources of bias in the CPI. Chained Price Index for Consumption (CPIC) is the ratio of nominal consumption expenditure to real consumption expenditure. Like the GDP deflator it uses quantities in current and previous periods, rather than fixed quantities from an earlier period, it overcomes sources of bias in the CPI. 3 a) investment. It is used to generate revenue. b) consumption. Food is a part of consumption expenditure c) investment. A taxi cab is used to make income. d) consumption. It is a part of recreation consumption expenditure. e) consumption. A vacation in a foreign country is a part of entertainment consumption. 4 a)...
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...identity for calculating aggregate demand (AD) is as follows: AD = C + I + G + (X-M) Where C: Consumers' expenditure on goods and services: This includes demand for consumer durables (e.g. washing machines, audio-visual equipment and motor vehicles & non-durable goods such as food and drinks which are “consumed” and must be re-purchased). Household spending accounts for over sixty five per cent of aggregate demand in the UK. I: Capital Investment – This is investment spending by companies on capital goods such as new plant and equipment and buildings. Investment also includes spending on working capital such as stocks of finished goods and work in progress. Capital investment spending in the UK typically accounts for between 15-20% of GDP in any given year. Of this investment, 75% comes from private sector businesses such as Tesco, British Airways and British Petroleum and the remainder is spent by the public (government) sector – for example investment by the government in building new schools or investment in improving the railway or road networks. So a mobile phone company such as O2 spending £100 million on extending its network capacity and the government allocating £15 million of funds to build a new hospital are both counted as part of capital investment. Investment has important long-term effects on the s supply-side of the economy as well as being an important although volatile component of aggregate demand. G: Government Spending – This is government spending on...
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...Aggregate price level LRAS SRAS P1 E1 AD1 Y1 YP Potential output Real GDP a. Is Albernia facing a recessionary or inflationary gap? b. Which type of fiscal policy—expansionary or contractionary—would move the economy of Albernia to potential output, YP ? What are some examples of such policies? c. Illustrate the macroeconomic situation in Albernia with a diagram after the successful fiscal policy has been implemented. 1. Solution a. Albernia is facing a recessionary gap; Y1 is less than YP. b. Albernia could use expansionary fiscal policies to move the economy to potential output. Such policies include increasing government purchases of goods and services, increasing government transfers, and reducing taxes. c. Aggregate price level LRAS SRAS P2 P1 E2 E1 AD2 AD1 Y1 YP Real GDP Potential output Recessionary gap S-169 MACROECONOMICS 29 13 ECONOMICS chapter: S169-S182_Krug2e_Macro_PS_Ch13.qxp 2/25/09 8:02 PM Page S-170 S-170 MACROECONOMICS, CHAPTER 13 ECONOMICS, CHAPTER 29 2. The accompanying diagram shows the current macroeconomic situation for the economy of Brittania; real GDP is Y1, and the aggregate price level is P1. You have been hired as an economic consultant to help the economy move to potential output, YP. Aggregate price level P1 LRAS SRAS E1 AD1 Potential output YP Y1 Real GDP a. Is Brittania facing a recessionary or inflationary gap? b. Which type of fiscal...
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...proved not to be the case. A decline in GDP growth is the cause of recessions. Typically, there will be a “goldilocks” economy or an irrational exuberance prior to a recession, followed by a market crash. Prior to the 2007 – 2009 recession, the housing market was going up. Everyone “knew” house values could only go up and behaved accordingly; banks lent too much money to consumers bought too much house. Once the market crashed, the stage was set for a recession. Many factors affecting the aggregate demand curve had declines. As mentioned, home equity declined, as well as the stock market. This decrease in wealth decreased consumption and consumer confidence leading to lower spending. As consumers cut back on spending, business confidence also fell with additional decreases in consumption and also investments. Additionally, foreign GDPs were also declining leading to a decrease in exports. The changes in these variables all caused a shift back in the aggregate demand curve, lowering the GDP. Attempting to counteract the recession, the Federal Reserve pumped money into the economy, increasing the nominal money supply. As the value of the dollar decreased, interest rates were kept low, allowing the exchange rate to remain favorable for exports. Additionally the government increased spending by way of stimulus packages for banks, automakers and tax rebates and incentives. These changes in variables caused the aggregate demand cure to shift out. However, the effect of the exchange...
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...affected by changes in consumer tastes and typically increases shifts to the right with increases in income, increases in the price of substitute goods, or decreases in the price of complementary goods. -On the other hand when the U.S. economy's price level increases, then the quantity of U.S real GDP demanded declines in part, due to the fact that, the U.S. products become more costly compared to foreign products ( McEachern, 2015 p. 78). The aggregate demand curve shows the quantity of goods, and services that households want to buy at each price level. Any rises, non price changes, or an overall increase in consumption will cause the aggregate demand curve to shift right. -A shift in the supply curve occurs when variables other than the price of a particular good change. These factors are the other determinants of supply. For example new and improved technology, causes the market supply curve to shift to the right. -The aggregate supply curve represents the production in the economy as a whole, rather than one good or service. More labor, natural resources, capital, and technological knowledge shifts aggregate supply right. Unit III Homework Chapter 5 Answer 6. (Supply-Side Economics) AS-1 AS-2 AD Real GDP 0 Q2 Q1 P1 P2 GDP Deflation E1 E2 AS-1 AS-2 AD Real GDP 0 Q2 Q1 P1 P2 GDP Deflation E1 E2 Unit III Homework Chapter 5 Answer...
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