How are presidential election outcomes related to the public presentation of the economic system? 2. ( 7 points ) Discuss the difference between Microeconomicss and Macroeconomics. 3. ( 10 points ) Use the constructs of gross and net investing to separate between an economic system that has a lifting stock of capital and 1 that has a falling stock of capital. “In 1933 net private domestic investing was minus $ 6 billion. This means that in that peculiar twelvemonth the economic system produced no capital goods at all. ” Do you hold? Why or why non? Explain: “Though net investing can be positive. negative. or nothing. it is rather impossible for gross investing to be less than zero.
” 4. ( 7 points ) What are the major factors that have affected U. S. family ingestion since the recession in 2001? 5. ( 7 points ) Briefly explicate how the following would switch the IS map to the right. a. A alteration to lump-sum revenue enhancement ( Specify whether addition or lessening is needed to switch IS curve to the right. ) B. A alteration to authorities disbursement ( Specify whether addition or lessening is needed to switch IS curve to the right. ) 6. ( 7 points ) Explain briefly how a alteration to the following MS. MD. or P ( ceteris paribus ) would switch the LM map to the right.
Include in your treatment whether the variable would hold to increase or diminish to do the rightward LM displacement. Discuss which of these the FED exercises control over. a. MS. b. MD ( money demand ) . c. P ( monetary value index ) . 7. ( 7 points ) By how much will GDP alter if houses increase their investing by $ 8 billion and the MPC is. 80? If the MPC is. 67? 8. ( 10 points ) Suppose that private sector disbursement is extremely sensitive to a alteration in involvement rate. Compare the effectivity of pecuniary and financial policy in footings of lifting and take downing existent GDP 9. ( 10 points ) Assume that a conjectural economic system with an MPC of.
8 is sing terrible recession. By how much would authorities disbursement have to increase to switch the aggregative demand curve rightward by $ 25 billion? How big a revenue enhancement cut would be needed to accomplish this same addition in aggregative demand? Why the difference? Determine one possible combination of authorities disbursement additions and revenue enhancement lessenings that would carry through this same end. 10. ( 7 points ) What are government’s financial policy options for stoping terrible demand-pull rising prices? Use the aggregative demand-aggregate supply theoretical account to demo the impact of these policies on the monetary value degree.
Which of these financial policy options do you believe might be favored by a individual who wants to continue the size of authorities? A individual who thinks the populace sector is excessively big? 11. ( 10 points ) Explain why comparatively level as opposite comparatively steep labour demand curves are more consistent with the empirical observation that there are comparatively minor alterations in the existent pay rate over the class of the concern rhythm. 12. ( 7 points ) Is sustainable long-term equilibrium ever reached when the AD and SAS curves intersect? Why or why non? 13.
( 7 points ) If the equilibrium existent pay remains changeless. what happens to the nominal pay when the existent rising prices rate exceeds the expected rising prices rate? 14. ( 7 points ) “In the steady province. the authorities benefits from rising prices. ” Explain. Answers Question 1. Surveies have proven that presidential election results are decidedly related to the public presentation of the economic system. The winning presidential party retains the office of presidential term while personal income grows at a faster. higher rate than the long-run rate. The incumbent presidential party will be voted out of office when income grows at a rate lower than the long term rate.
Question 2. Microeconomicss intending little. is a subdivision of economic sciences that surveies the behaviour of single families and houses by doing determinations on the allotment of limited resources. Normally. it applies to markets where goods or services are bought and sold. Macroeconomicss intending big. is a subdivision of economic sciences covering with the public presentation. construction. behaviour. and decision-making of an economic system in a whole. instead than single markets like in Microeconomics. This includes national. regional. and planetary economic systems. Question 3. Depreciation + Net Investment = Gross Investment
if I rearrange it. it will state ; Depreciation – Gross Investment = Net Investment Since capital stock of an economic system merely rises when net investing is positive. that is when gross investing exceeds depreciation. So of course the capital stock falls when net investing is negative. that is when gross investing is less than depreciation. In 1933 net private domestic investing was minus $ 6 billion. This does NOT intend the state produced no capital goods: what it means is that the production of capital goods was less than what was lost due to have on and rupture. therefore the net impact was an overall loss in capital stock.
Gross private investing in most instances can non be negative. since you can make up one’s mind non to put in new mills. but how do you make up one’s mind to do a negative investing on an economic system broad graduated table. Question 4. Family ingestion has been decreasing or is level to be honest. Income and employment rates have easy been worsening or corsets in one peculiar topographic point. Energy manufacturers have increased the per centum of family budgets for fuel and electricity. Harmonizing to economic sciences. it shows minimum growing since 2001. Question 5. The IS map is the investment-saving map.
A displacement to the right implies that for any given degree of end product the involvement rate has gone up. and frailty versa. Now for the illustrations: ( a ) A alteration in lump-sum revenue enhancement: A lump-sum decrease in the revenue enhancement rate has the same consequence as increased authorities shortage with people and houses increasing their disbursement. forcing out the IS curve. ( B ) A alteration in authorities disbursement: Increased authorities disbursement will hold the same impact as lower nest egg. and will force the IS curve to the right Question 6. The LM map is liquidity penchant minus the money supply.
It tells that existent money balances are a primary map of the involvement rate and existent income. This is normally represented as M/P = L ( r. Y ) . which states existent money balance M/P. where M is nominal money balance and P is monetary value degree. depends on the existent involvement rate R and existent end product Y. An addition in money supply will do the LM curve to switch to the right. therefore take downing the equilibrium involvement rate and increasing the equilibrium end product. An addition in the demand for money should hold the same impact: switch the LM curve to the right.
If the monetary value degree falls the LM curve will switch to the right since existent money balances will increase in such a instance. The Fed has control over the nominal money supply but non on money demand and monetary value degree. Money demand depends on the dealing demand of money and the Fed can non act upon the monetary values ( they are determined by the market and clients ) so every bit powerful as the Fed is they can non act upon demand for money. Question 7. If MPC = 0. 67. multiplier = 1/1-0. 67 = 1/0. 33=3. Income should increase to 3?8 so it would stop up at $ 24 billion.
If Mp = 0. 8. Multiplier = 1/1-0. 8=1/0. 2=5. income should increase to 5?8 so it would stop up at $ 40 billion. Question 8. Ok. if the private sector disbursement is extremely sensitive to alterations in involvement rates so the pecuniary policy will be more effectual in finding the motion of existent end product. This is due to the fact that a little rise in involvement rates so a little decrease in money supply will squelch any demand-pull rising prices and therefor conveying the economic system back to the long-term equilibrium.
While a little decrease in involvement rates should force up the aggregative demand in similar steps. Government policy has a bigger impact on the independent portion of aggregative outgo and hence will hold a lower impact in such a scenario. Question 9. MPC = 0. 8. we can state that the multiplier. which is defined to be Multiplier = 1/MPS = 1/ ( 1-MPC ) so is equal to 5. So. we increase AD by $ 25 billion the authorities has to increase disbursement by $ 5 billion. A larger revenue enhancement cut would be needed to accomplish the same end since people do non desire to or wish
to pass everything they get. Given that people are passing 80 % of each extra dollar if the authorities provides a revenue enhancement cut of $ 5 billion I would state people would merely pass $ 4 out of that. Thus the concluding impact will be 4?5 = $ 20 billion. To acquire people to pass $ 5 billion. the authorities has to take down revenue enhancements by $ 6. 25 billion ( 6. 25?0. 8 = 5 if the expression I used ) . Any combination that hopes to accomplish the $ 25 billion rise in AD will hold to increase initial disbursement by at least $ 5 billion.
Suppose the authorities addition disbursement by G and provides a revenue enhancement cut T. so any combination that satisfies: G + 0. 8T = 5 will function the intent. Question 10. The authorities has two options when it wants to act upon the macroeconomic: A. it can alter revenue enhancements or B. It can alter its disbursement forms. If economic sciences is confronting a demand-pull rising prices it means AD is lifting quicker than expected. The four constituents of AD are ; 1. family ingestion ( C ) . 2. gross private investing ( I ) . 3. authorities outgo ( G ) . 4. Net exports ( NX ) . Normally we would take I. G and X to be exogenic variables.
Soto curtail a demand-pull rising prices the authorities has to work on somehow restricting ingestion ( C ) and imports ( M ) . or we can besides cut down its ain personal disbursement. The two options with the authorities in such a instance so would be: ( a ) Cut down authorities disbursement: a decrease in G will so besides make a cut down in AD. ( B ) Addition revenue enhancements: This would convey down the disposable income and will so besides conveying down both C and M. For a individual who wants to continue the size of the authorities the 2nd option I think would be a better pick. since the authorities is retaining its size and is still able to convey the needed alteration in AD.
A individual who thinks public sector is excessively big will choose for the first move. cut downing G. since that will instantly intend the authorities has become smaller. Which I personally would vote for. out authorities could utilize a small trimming. Question 11. The simplest manner for me to look at it is like this ; If the demand curve is level. so a decrease or an increase in labour demand does non change the monetary value at all. But on the other manus. if the demand curve is. so an tantamount alteration in demand has much bigger alteration in the pay rates.
Empirical consequences suggest that rewards are gluey. and the steep labour demand curve can non explicate this observation. Question 12. When the AD and SAS intersect it is called a “short-run macroeconomic equilibrium. ” This is NOT sustainable unless it the intersection point falls on the LAS curve. The ground is any such intersection to the left of the LAS curve will non be utilizing any resources. and companies will hold an inducement to increase production without seting excessively much force per unit area on the costs. while an intersection to the right will set excessively much inflationary force per unit area therefor doing it unsustainable.
Question 13. Inflation- Nominal Wage Rate = Real Wage Rate So therefor. Expected inflation- Expected Nominal Wage Rate = Expected Real Wage Rate. It can besides be written as ; Expected Real Wage Rate + Expected rising prices = Expected Nominal Wage Rate. If the equilibrium existent pay rate remains changeless. meanwhile rising prices exceeds expected rising prices so the nominal pay rate has to lift. there is no other pick. Question 14. In the steady province. the authorities benefits from rising prices. I assume that the steady province here means the long-term macroeconomic equilibrium.
The economic system would wish some little rising prices at some point since with a little rising prices the existent costs for companies ever fall and they have to hold an inducement in order to increase production. To see why see the contracts that companies set up. They are all based on nominal variables. A little rising prices will cut down the existent value of these contracts. and maintaining with the Domino affect the houses have an inducement to increase existent end product at lower existent costs. Entire end product will lift in this peculiar instance. forcing out the LAS curve. The authorities would besides profit with higher revenue enhancement net incomes.
