4. a)The equilibrium will be $300 Billion but it doesnt have to be full employement because the output has to match the demand.
b) The amount of real GDP that has been demanded doesn't match the amoint supplied therefore the price levels will not be equilibrium.
c) The factors of aggregate demand are consumer wealth, consumer expectations, real interest rates and taxes.
5. a) Productivity = total output/total input
Productivity = 100 dollars / 37.5 units
Productivity = 2.667 dollars per unit
b) Per-unit production cost = total input cost/total output
Per-unit production cost = 2 dollars x 37.5 units / 100 dollars
Per-unit production cost = 0.75 dollars per unit
c) Per-unit production cost = total input cost/total output
Per-unit production cost = 3 dollars x 37.5 units / 100 dollars
Per-unit production cost = 1.125 dollars per unit
This increase in the cost of inputs will shift the AS curve inwards and the effect upon price level and output will be that price level will increase and output will decrease.
Saturday 26 May 2007
Unit 3.3 Chapter 9 Questions 7, 8, 9 Date: May 26th
7. If the duplicating machine costs 500 dollars and is expected to contribute 550 dollars to the years net revenue then the machine contributes 50 dollars to profit and the expected rate of return will be:
$50/$500 = 10% rate of return
If the interest rate is 8% then the total interest cost will be 40 dollars which will then leave a 10 dollar profit. Therefore, because there is still profit that can be earned, the handbill publisher should purchase the duplicator.
8. a) 20 billion b)30 billion c) 35 billion
This curve is the investment demand curve because it shows the relationship between the interest rate and the dollars invested in the economy. The relationship between these two is inversely related, therefore this means that as the interest rate increases, the dollars invested in the economy decreases.
9. The multiplier effect is where a change in input to the economy will result in a greater change in real GDP. The larger the MPC then the larger the real GDP will be and the opposite is for MPS.
MPS = 0 = infinite multiplier
MPS = .4 = 2.5 x mulitplier
MPS = .6 = 1.67 x multiplier
MPS = 1 = no multiplier
MPC = 1 = infinite mulitplier
MPC = .9 = 10 x multiplier
MPC = .67 = 3.03 x multiplier
MPC = .5 = 2 x multiplier
MPC = 0 = no multiplier
With a multipler of 0.8, GDP will rise by 6.4 billion dollars with an investment of 8 billion. With a multiplier of 0.67, GDP will rise by 5.36 billion dollars with an investment of 8 billion dollars.
$50/$500 = 10% rate of return
If the interest rate is 8% then the total interest cost will be 40 dollars which will then leave a 10 dollar profit. Therefore, because there is still profit that can be earned, the handbill publisher should purchase the duplicator.
8. a) 20 billion b)30 billion c) 35 billion
This curve is the investment demand curve because it shows the relationship between the interest rate and the dollars invested in the economy. The relationship between these two is inversely related, therefore this means that as the interest rate increases, the dollars invested in the economy decreases.
9. The multiplier effect is where a change in input to the economy will result in a greater change in real GDP. The larger the MPC then the larger the real GDP will be and the opposite is for MPS.
MPS = 0 = infinite multiplier
MPS = .4 = 2.5 x mulitplier
MPS = .6 = 1.67 x multiplier
MPS = 1 = no multiplier
MPC = 1 = infinite mulitplier
MPC = .9 = 10 x multiplier
MPC = .67 = 3.03 x multiplier
MPC = .5 = 2 x multiplier
MPC = 0 = no multiplier
With a multipler of 0.8, GDP will rise by 6.4 billion dollars with an investment of 8 billion. With a multiplier of 0.67, GDP will rise by 5.36 billion dollars with an investment of 8 billion dollars.
Saturday 19 May 2007
Unit 3.3 Chapter 13 Questions 4,6,7 Date May 18 (ish)
4. The components of the M1 money supply are the coins, bills and checkable deposits. The largest component of the M1 money supply is the checkable deposits and the bills are called legal tender. The face value of a coin must be worth more than the intrinsic value of the coin (the value of the metal) because if it is not, then rational people would simply melt down the coins and sell them for the value of the metal. The near monies that are included in the M2 money supply are the savings deposits, small time deposits and the money market mutual funds. The difference between the M2 and M3 money definitions are that the M3 near monies are greater in value, such as the M3 definition includes large time deposits (100,000 dollars or greater) while the M2 includes only small time deposits (below 100,000 dollars).
6. If the price level increases by 1.25 then the new value of the dollar is 0.8 of what it was in year 1. If the price level decreases to 0.5, then the new value of the dollar has doubled from year 1. We can therefore conclude that the dollar and the price level are inversely related.
7. The main determinant for transactions demand is the level of the nominal GDP and the main determinant of asset demand is the interest rate. When asset demand is added horizontally to transaction demand and the equlibrium interest rate is determined by the intersection point of the supply of money and total demand for money. An increase in the use of credit cards will shift the total demand of money outwards because with the increased use of credit cards, an increase in the asset demand will occur. A shortening of worker pay periods will also decrease the total demand of money because the number of times the dollars are spent per year will increase. This increase will change the transaction curve because the curve is determined by the nominal GDP / the number of times a dollar is spent in a year, therefore an increase in the dollars spent will decrease the transaction curve, which will decrease the total money demand curve. An increase in nominal GDP would shift the total money demand supply outwards because as nominal GDP increases so does the transactions demand.
6. If the price level increases by 1.25 then the new value of the dollar is 0.8 of what it was in year 1. If the price level decreases to 0.5, then the new value of the dollar has doubled from year 1. We can therefore conclude that the dollar and the price level are inversely related.
7. The main determinant for transactions demand is the level of the nominal GDP and the main determinant of asset demand is the interest rate. When asset demand is added horizontally to transaction demand and the equlibrium interest rate is determined by the intersection point of the supply of money and total demand for money. An increase in the use of credit cards will shift the total demand of money outwards because with the increased use of credit cards, an increase in the asset demand will occur. A shortening of worker pay periods will also decrease the total demand of money because the number of times the dollars are spent per year will increase. This increase will change the transaction curve because the curve is determined by the nominal GDP / the number of times a dollar is spent in a year, therefore an increase in the dollars spent will decrease the transaction curve, which will decrease the total money demand curve. An increase in nominal GDP would shift the total money demand supply outwards because as nominal GDP increases so does the transactions demand.
Tuesday 15 May 2007
Unit 3.3 Chapter 12 Questions 7 + 10 Date: May 10(?)
7.
The full employment budget is a form of measure of the Federal budget surplus or deficit that would occur if the economy operated at full employment. The full employment budget is used to adjust the actual federal budget surpluses and deficits to eliminate the automatic changes in tax revenues.
If the full employment budget is at GDP 3 instead of GDP 2 and then there is a decrease downwards then it is undergoing a deficit and we can assume that the fiscal policy is expansionary. The decrease in the full employment budget indicates that the government has either increased its government spending or decreased its taxes.
10. The problems with the time lags in enacting and applying fiscal policy is that the recession or inflation may have time to grow more serious than it would have been if it were perhaps recognized and acted upon sooner. Recognition lag is a main part of this problem because of the time it takes to recognize a problem, but also Administrative and operational lag contribute to the problem by not acting quickly enough and then for the solution needing time to take effect. A political buisness cycle is when a politician changes the fiscal policy in order to gain popularity or public support, usually by cutting taxes. Politicians dont always have the economy in mind when they enact these fiscal changes so the result may not always be beneficial. If the public suspects that a tax cut or increase will be short term, they will simply spend or save accordingly so when they tax cut or increase occurs, they can continue to spend at the same level of consumption that they do now and thereby defeating the purpose of the fiscal change. Crowding out is when the government borrows money from the public sector and the decrease in avaliable funds, pushes some investment out.
The full employment budget is a form of measure of the Federal budget surplus or deficit that would occur if the economy operated at full employment. The full employment budget is used to adjust the actual federal budget surpluses and deficits to eliminate the automatic changes in tax revenues.
If the full employment budget is at GDP 3 instead of GDP 2 and then there is a decrease downwards then it is undergoing a deficit and we can assume that the fiscal policy is expansionary. The decrease in the full employment budget indicates that the government has either increased its government spending or decreased its taxes.
10. The problems with the time lags in enacting and applying fiscal policy is that the recession or inflation may have time to grow more serious than it would have been if it were perhaps recognized and acted upon sooner. Recognition lag is a main part of this problem because of the time it takes to recognize a problem, but also Administrative and operational lag contribute to the problem by not acting quickly enough and then for the solution needing time to take effect. A political buisness cycle is when a politician changes the fiscal policy in order to gain popularity or public support, usually by cutting taxes. Politicians dont always have the economy in mind when they enact these fiscal changes so the result may not always be beneficial. If the public suspects that a tax cut or increase will be short term, they will simply spend or save accordingly so when they tax cut or increase occurs, they can continue to spend at the same level of consumption that they do now and thereby defeating the purpose of the fiscal change. Crowding out is when the government borrows money from the public sector and the decrease in avaliable funds, pushes some investment out.
Monday 14 May 2007
Unit 3.3 Chapter 12 Questions: 2+3 Date May 8 (maybe...)
2.
The Government Spending Multiplier:
MPC / MPS = 1 / 0.2 = 5
200 billion dollars is wanted, therefore:
200 billion / 5 = 40 billion dollars must be spend
Or the government could decrease taxes:
40 billion / MPC = Amount to be decreased by
40 billion / .8 = 50 billion
3. The governmental fiscal policy for ending severe demand-pull inflation is to use a contractionary policy, through decreasing government spending or increasing taxes upon the public.Increasing taxes will reduce the Disposible income, which will decrease the consumption and the investment,therefore, in addition to the decreased government spending, all of these measures will shift the aggregate demand curve inwards and thereby slow down demand because they are all determinants of demand and when they decrease, then so does the aggregate demand, which in turn reduces or stops demand-pull inflation. If someone wished to preserve the size of the government then they would favour the decreasing government fiscal policy, but if they wished to decrease the public sector, then they would increase taxes.
The Government Spending Multiplier:
MPC / MPS = 1 / 0.2 = 5
200 billion dollars is wanted, therefore:
200 billion / 5 = 40 billion dollars must be spend
Or the government could decrease taxes:
40 billion / MPC = Amount to be decreased by
40 billion / .8 = 50 billion
3. The governmental fiscal policy for ending severe demand-pull inflation is to use a contractionary policy, through decreasing government spending or increasing taxes upon the public.Increasing taxes will reduce the Disposible income, which will decrease the consumption and the investment,therefore, in addition to the decreased government spending, all of these measures will shift the aggregate demand curve inwards and thereby slow down demand because they are all determinants of demand and when they decrease, then so does the aggregate demand, which in turn reduces or stops demand-pull inflation. If someone wished to preserve the size of the government then they would favour the decreasing government fiscal policy, but if they wished to decrease the public sector, then they would increase taxes.
Saturday 5 May 2007
Econ Last Word Homework
1) Weigh the two arguments regarding unemployment in Europe. Is unemployment high because of high natural rates of unemployment or because of deficient aggregate demand?
Unemployment is high because of the high social security and the care that the unemployed receive from the government. The workers have large benefits that they receive from the government in the event that they become unemployed, so they aren't all that worried about being unemployed which leads to a relatively lower average of overall motivation, which would lead to more workers being fired. Also, the high wages that companies must pay dictate that the number of workers they hire will be lower because they cannot afford to hire as many. However, the government doesn't want to increase inflation, so therefore it doesn't increase government spending, which doesn't shift the aggregate demand curve outwards, which won't increase employment. So, this shows that it is not solely the fault of social intervention by the government but also the inability of the government to combat unemployment by increasing aggregate demand.
2) Explain the experience of the US between 1996 and 2000 when the economy was at greater than full employment with high GDP growth while maintaining low levels of inflation. What allowed this so-called "New Economy" to occur, and what brought it to an end in 2001?
The U.S was able to maintain this level of high growth because of increased aggregate demand and of increased aggregate supply. The resulting shift outwards in both aggregate supply and demand had the effect of increasing the real GDP while at the same time keeping inflation low through the aggregate demand shifting the real GDP up but at the same time increasing inflation, and then aggregate supply further increasing real GDP while decreasing inflation at the same time. The U.S had greater than full employment because the aggregate demand curve was already on the vertically sloping part of the aggregate supply curve. What brought this increase in growth to an end could be a decrease in any of the determinants of aggregate demand, however with the onset of the war in Iraq and therefore the increased government spending, this seems unlikely. Therefore a decrease in aggregate supply must have occurred, perhaps through the firms finally having to layoff workers because of the increased cost of hiring workers due to the short supply of workers perhaps further exacerbated by the people in the army having to leave part time jobs to go fight in Iraq.
Unemployment is high because of the high social security and the care that the unemployed receive from the government. The workers have large benefits that they receive from the government in the event that they become unemployed, so they aren't all that worried about being unemployed which leads to a relatively lower average of overall motivation, which would lead to more workers being fired. Also, the high wages that companies must pay dictate that the number of workers they hire will be lower because they cannot afford to hire as many. However, the government doesn't want to increase inflation, so therefore it doesn't increase government spending, which doesn't shift the aggregate demand curve outwards, which won't increase employment. So, this shows that it is not solely the fault of social intervention by the government but also the inability of the government to combat unemployment by increasing aggregate demand.
2) Explain the experience of the US between 1996 and 2000 when the economy was at greater than full employment with high GDP growth while maintaining low levels of inflation. What allowed this so-called "New Economy" to occur, and what brought it to an end in 2001?
The U.S was able to maintain this level of high growth because of increased aggregate demand and of increased aggregate supply. The resulting shift outwards in both aggregate supply and demand had the effect of increasing the real GDP while at the same time keeping inflation low through the aggregate demand shifting the real GDP up but at the same time increasing inflation, and then aggregate supply further increasing real GDP while decreasing inflation at the same time. The U.S had greater than full employment because the aggregate demand curve was already on the vertically sloping part of the aggregate supply curve. What brought this increase in growth to an end could be a decrease in any of the determinants of aggregate demand, however with the onset of the war in Iraq and therefore the increased government spending, this seems unlikely. Therefore a decrease in aggregate supply must have occurred, perhaps through the firms finally having to layoff workers because of the increased cost of hiring workers due to the short supply of workers perhaps further exacerbated by the people in the army having to leave part time jobs to go fight in Iraq.
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