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Q1: Distinguish the very long run, long run and short run issues of macroeconomi...

May 29, 2024

Q1: Distinguish the very long run, long run and short run issues of macroeconomics. Q2: Define the terms: GDP, CPI, Unemployment Rate Q3: What is the meaning of Philips curve? Q4: Discuss the two sides of GDP calculation from production and consumption perspective. Q5: In AS-AD model, describe how a new technology will affect the very long run equilibrium, ceteris paribus. Q6: In AS-AD model, describe how a monetary expansion will affect the short-run and long run equilibrium, ceteris paribus. Q7: A government increases spending by $1mn. The marginal propensity of consumption is 30%, the income tax rate is 5%. What is the overall effect on the aggregate economy? Also, what if the MPC increases to 90%? Q8: Use the Keynesian multiplier model to explain how a trade war between US and China will impact the aggregate income. Q9: Can we use AS-AD model and Keynesian multiplier to analyze the overall effect on the financial market?

Sure, let's address each of your questions one by one. Q1: Distinguish the very long run, long run, and short run issues of macroeconomics.

Solution

Short Run: In the short run, prices and wages are sticky, meaning they do not adjust immediately to changes in economic conditions. This can lead to periods of unemployment or inflation

Long Run: In the long run, prices and wages are flexible and can adjust to changes in supply and demand. The economy is expected to return to its natural rate of unemployment

Very Long Run: In the very long run, factors such as technological progress, population growth, and capital accumulation play a significant role. These factors determine the economy's potential output and growth rate

Answer

Short run: Prices and wages are sticky. Long run: Prices and wages are flexible. Very long run: Technological progress and capital accumulation are key.

Key Concept

Time Horizons in Macroeconomics

Explanation

Different time horizons focus on different economic factors and their adjustments.

Q2: Define the terms: GDP, CPI, Unemployment Rate

Solution

GDP: Gross Domestic Product (GDP) is the total market value of all final goods and services produced within a country in a given period

CPI: The Consumer Price Index (CPI) measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services

Unemployment Rate: The unemployment rate is the percentage of the labor force that is unemployed and actively seeking employment

Answer

GDP: Total market value of all final goods and services. CPI: Measures average price changes. Unemployment Rate: Percentage of unemployed labor force.

Key Concept

Key Macroeconomic Indicators

Explanation

These indicators provide a snapshot of the economic health and performance of a country.

Q3: What is the meaning of Philips curve?

Solution

Philips Curve: The Philips Curve illustrates the inverse relationship between the rate of inflation and the unemployment rate

Short Run: In the short run, lower unemployment can lead to higher inflation and vice versa

Long Run: In the long run, the Philips Curve is vertical, indicating no trade-off between inflation and unemployment

Answer

Philips Curve: Shows the inverse relationship between inflation and unemployment.

Key Concept

Philips Curve

Explanation

It demonstrates the trade-off between inflation and unemployment in the short run.

Q4: Discuss the two sides of GDP calculation from production and consumption perspective.

Solution

Production Approach: GDP is calculated by summing the value added at each stage of production

Consumption Approach: GDP is calculated by summing total expenditures on final goods and services

Answer

Production: Sum of value added. Consumption: Sum of total expenditures.

Key Concept

GDP Calculation Methods

Explanation

Both approaches should theoretically yield the same GDP figure.

Q5: In AS-AD model, describe how a new technology will affect the very long run equilibrium, ceteris paribus.

Solution

AS Curve Shift: New technology increases productivity, shifting the Aggregate Supply (AS) curve to the right

Long Run Equilibrium: The economy reaches a new equilibrium with higher output and potentially lower prices

Answer

New technology shifts AS curve right, leading to higher output and lower prices.

Key Concept

Technological Impact on AS-AD Model

Explanation

Technological advancements increase productivity, affecting long-run equilibrium.

Q6: In AS-AD model, describe how a monetary expansion will affect the short-run and long-run equilibrium, ceteris paribus.

Solution

Short Run: Monetary expansion increases aggregate demand (AD), shifting the AD curve to the right, leading to higher output and prices

Long Run: In the long run, prices adjust, and the economy returns to its natural level of output, but with higher price levels

Answer

Short run: Higher output and prices. Long run: Return to natural output with higher prices.

Key Concept

Monetary Expansion in AS-AD Model

Explanation

Monetary policy affects aggregate demand, influencing short-run and long-run equilibria.

Q7: A government increases spending by $1mn. The marginal propensity of consumption is 30%, the income tax rate is 5%. What is the overall effect on the aggregate economy? Also, what if the MPC increases to 90%?

Solution

Initial MPC: The spending multiplier is calculated as

\frac{1}{1 - MPC \times (1 - tax\ rate)}

Calculation: For MPC = 0.30, the multiplier is

\frac{1}{1 - 0.30 \times (1 - 0.05)} = 1.428

Effect: The overall effect is

1mn \times 1.428 =

1.428mn

Higher MPC: For MPC = 0.90, the multiplier is

\frac{1}{1 - 0.90 \times (1 - 0.05)} = 9.524

Effect: The overall effect is

1mn \times 9.524 =

9.524mn

Answer

MPC 30%:

1.428mn effect. MPC 90%:

9.524mn effect.

Key Concept

Spending Multiplier

Explanation

The multiplier effect depends on the marginal propensity to consume and tax rate.

Q8: Use the Keynesian multiplier model to explain how a trade war between US and China will impact the aggregate income.

Solution

Trade War: A trade war reduces exports and imports, affecting aggregate demand

Multiplier Effect: The reduction in aggregate demand leads to a multiplied decrease in aggregate income

Answer

Trade war reduces aggregate demand, leading to a multiplied decrease in aggregate income.

Key Concept

Keynesian Multiplier

Explanation

Changes in aggregate demand have a multiplied effect on aggregate income.

Q9: Can we use AS-AD model and Keynesian multiplier to analyze the overall effect on the financial market?

Solution

AS-AD Model: It can show how changes in aggregate demand and supply affect output and prices

Keynesian Multiplier: It can show the amplified effect of changes in spending on aggregate income

Financial Market: Both models can help analyze how economic changes impact financial markets through changes in output, prices, and income

Answer

Yes, both models can be used to analyze the overall effect on the financial market.

Key Concept

Economic Models and Financial Markets

Explanation

AS-AD and Keynesian multiplier models help understand the broader economic impacts on financial markets.