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1. The data provided represent Eastland's economy in 2018, when it was in short...
May 8, 2024
A
Key Concept
Actual Rate of Unemployment
Explanation
The actual rate of unemployment is the sum of the natural rate of unemployment and the cyclical rate of unemployment. Using the formula U=Unatural+UcyclicalU = U_{natural} + U_{cyclical}, where Unatural=4%U_{natural} = 4\% and Ucyclical=1%U_{cyclical} = 1\%, the actual rate of unemployment is U=4%+1%=5%U = 4\% + 1\% = 5\%.
B
Key Concept
Expected Real Interest Rate
Explanation
The expected real interest rate is calculated by adjusting the nominal interest rate for expected inflation using the formula r=i−πer = i - \pi^{e}, where rr is the real interest rate, ii is the nominal interest rate, and πe\pi^{e} is the expected inflation rate. With i=5%i = 5\% and πe=3%\pi^{e} = 3\%, the expected real interest rate is r=5%−3%=2%r = 5\% - 3\% = 2\%.
C
Key Concept
Phillips Curve
Explanation
The Phillips curve illustrates the inverse relationship between inflation and unemployment. The short-run Phillips curve (SRPC) shows this relationship for the short term, while the long-run Phillips curve (LRPC) is vertical at the natural rate of unemployment, indicating no trade-off between inflation and unemployment in the long run. The equilibrium point E is plotted at the actual unemployment rate of 5% and the expected inflation rate of 3%.
D
Key Concept
Fiscal Multiplier and Aggregate Demand
Explanation
The fiscal multiplier effect describes how a change in government spending can lead to a larger change in aggregate demand. The change in aggregate demand (ΔAD\Delta AD) is calculated using the government spending multiplier formula ΔAD=11−MPC×ΔG\Delta AD = \frac{1}{1 - MPC} \times \Delta G, where MPC is the marginal propensity to consume and ΔG\Delta G is the change in government spending. With an MPC of 0.75 and ΔG=$20\Delta G = \$20 million, the maximum possible change in aggregate demand is ΔAD=11−0.75×$20\Delta AD = \frac{1}{1 - 0.75} \times \$20 million = \$80 million.
E
Key Concept
Loanable Funds Market and Real Interest Rate
Explanation
In the loanable funds market, an increase in government borrowing can lead to an increase in the equilibrium real interest rate due to higher demand for loanable funds. This is depicted by a rightward shift of the demand curve for loanable funds.
F
Key Concept
Long-Run Economic Growth and Financial Capital Inflows
Explanation
An increase in the real interest rate can negatively affect long-run economic growth by reducing investment spending due to higher borrowing costs. It can also attract more financial capital inflows as foreign investors seek higher returns on their investments in Eastland.$
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