Macroeconomics and Government Essay

How be presidential election awaycomes related to the performance of the frugality? 2. (7 stoppages) Discuss the difference amid Microeconomics and Macroeconomics. 3. (10 points) Use the concepts of gross and pass investment to distinguish between an frugality that has a rising stock of capital and one that has a move stock of capital. In 1933 net private domestic investment was deduction $6 billion. This connotes that in that particular year the economy produced no capital goods at completely. Do you agree? Why or why not? excuse Though net investment croup be positive, negative, or zero, it is quite im practicable for gross investment to be slight than zero. 4. (7 points) What atomic number 18 the major factors that become affected U. S. household intake since the time out in 2001? 5. (7 points) Briefly explain how the following would firing the IS exercise to the right. a. A smorgasbord to lump-sum measureation (Specify whether profit or decrease is neede d to shift IS deviate to the right. ) b. A diverseness to regime using up (Specify whether summation or decrease is needed to shift IS curve to the right. ) 6. (7 points) Explain briefly how a win over to the following MS, MD, or P (ceteris paribus) would shift the LM function to the right.Include in your discussion whether the variable would fox to en king-size or decrease to cause the rightward LM shift. Discuss which of these the FED exercises apply over. a. MS. b. MD ( bills essential). c. P ( expenditure index). 7. (7 points) By how much(prenominal) pass on GDP change if firms increase their investment by $8 billion and the MPC is . 80? If the MPC is . 67? 8. (10 points) judge that private sector clearing is highly thin to a change in take outrank. Compare the effectiveness of monetary and fiscal polity in depots of rising and lowering square GDP 9. (10 points) excise that a hypothetical economy with an MPC of .8 is experiencing severe recession. By how m uch would presidency spending have to increase to shift the aggregate demand curve rightward by $25 billion? How large a tax frame out of meat would be needed to hand this homogeneous increase in aggregate demand? Why the difference? Determine one possible combination of judicature spending increases and tax decreases that would accomplish this same goal. 10. (7 points) What are governing bodys fiscal policy options for ending severe demand-pull pompousness? Use the aggregate demand-aggregate supply model to show the trespass of these policies on the price level.Which of these fiscal policy options do you think might be favored by a person who wants to preserve the size of disposal? A person who thinks the public sector is too large? 11. (10 points) Explain why relatively flat as opposite relatively centre labor demand curves are more consistent with the empirical reflexion that there are relatively minor changes in the accepted engage pass judgment over the course of the business cycle. 12. (7 points) Is sustainable long run equalizer always reached when the AD and SAS curves spoil? Why or why not? 13.(7 points) If the equilibrium real wage remains constant, what happens to the nominal wage when the unfeigned inflation rate exceeds the expected inflation rate? 14. (7 points) In the buckram state, the government benefits from inflation. Explain. Answers nous 1. Studies have proven that presidential election outcomes are definitely related to the performance of the economy. The winning presidential party retains the office of presidency while personal income grows at a faster, higher rate than the long-term rate. The incumbent presidential party give be voted out of office when income grows at a rate lower than the long term rate.Question 2. Microeconomics squiffying small, is a branch of economics that studies the behavior of soul households and firms by making decisions on the allocation of limited resources. Normally, it applies t o markets where goods or operate are bought and sold. Macroeconomics meaning large, is a branch of economics dealing with the performance, structure, behavior, and decision-making of an economy in a whole, rather than individual markets like in Microeconomics. This includes national, regional, and orbiculate economies. Question 3. Depreciation + loot Investment = Gross Investmentif I rearrange it, it go out say Depreciation Gross Investment = Net Investment Since capital stock of an economy only rises when net investment is positive, that is when gross investment exceeds depreciation. So naturally the capital stock waterfall when net investment is negative, that is when gross investment is slight than depreciation. In 1933 net private domestic investment was minus $6 billion. This does NOT mean the country produced no capital goods what it means is that the production of capital goods was less than what was lost due to wear and tear, thus the net impact was an overall loss in capital stock.Gross private investment in most cases cannot be negative, since you can decide not to invest in new factories, but how do you decide to make a negative investment on an economy wide scale. Question 4. Household consumption has been diminishing or is flat to be honest. Income and employment rates have slowly been declining or stays in one particular place. verve producers have increase the percentage of household budgets for fuel and electricity. According to economics, it shows nominal growth since 2001. Question 5. The IS function is the investment-saving function.A shift to the right implies that for every given level of output the interest rate has gone up, and depravity versa. Now for the examples (a) A change in lump-sum taxation A lump-sum decline in the tax rate has the same effect as increased government deficit with people and firms increase their spending, push button out the IS curve. (b) A change in government spending Increased government spending leave alone have the same impact as lower savings, and result push the IS curve to the right Question 6. The LM function is liquidness preference minus the funds supply.It tells that real money balances are a primary function of the interest rate and real income. This is usually delineate as M/P = L(r, Y), which states real money balance M/P, where M is nominal money balance and P is price level, depends on the real interest rate r and real output Y. An increase in money supply will cause the LM curve to shift to the right, thus lowering the equilibrium interest rate and increasing the equilibrium output. An increase in the demand for money should have the same impact shift the LM curve to the right.If the price level locomote the LM curve will shift to the right since real money balances will increase in much(prenominal) a case. The Fed has control over the nominal money supply but not on money demand and price level. Money demand depends on the dealing demand of money and th e Fed cannot persuade the prices (they are determined by the market and customers) so as powerful as the Fed is they cannot influence demand for money. Question 7. If MPC = 0. 67, multiplier = 1/1-0. 67 = 1/0. 33=3. Income should increase to 38 so it would end up at $24 billion.If Mp = 0. 8, Multiplier = 1/1-0. 8=1/0. 2=5, income should increase to 58 so it would end up at $40 billion. Question 8. Ok, if the private sector spending is highly sensitive to changes in interest rates thus the monetary policy will be more effective in determining the movement of real output. This is due to the fact that a small rise in interest rates and so a small decrease in money supply will quell any demand-pull inflation and therefor speech the economy back to the long-run equilibrium.While a small reduction in interest rates should push up the aggregate demand in similar measures. Government policy has a bigger impact on the autonomous part of aggregate expenditure and hence will have a lower i mpact in such a scenario. Question 9. MPC = 0. 8, we can say that the multiplier, which is defined to be Multiplier = 1/MPS = 1/(1-MPC) then is equal to 5. So, we increase AD by $25 billion the government has to increase spending by $5 billion. A larger tax cut would be needed to achieve the same goal since people do not want to or wishto spend everything they get. Given that people are spending 80% of each additional dollar if the government provides a tax cut of $5 billion I would say people would only spend $4 out of that. Thus the final impact will be 45 = $20 billion. To get people to spend $5 billion, the government has to lower taxes by $6. 25 billion (6. 250. 8 = 5 if the formula I used). Any combination that hopes to achieve the $25 billion raise in AD will have to increase initial spending by at least $5 billion. theorise the government increase spending by G and provides a tax cut T, then any combination that satisfies G + 0. 8T = 5 will serve the purpose. Question 10. Th e government has two options when it wants to influence the macroeconomic A. it can change taxes or B. It can change its spending patterns. If economics is veneering a demand-pull inflation it means AD is rising quicker than expected. The quaternion components of AD are 1. household consumption (C), 2. gross private investment (I), 3. government expenditure (G), 4. Net exports (NX). Normally we would take I, G and X to be exogenous variables.Soto curtail a demand-pull inflation the government has to mold on somehow curtailing consumption (C) and imports (M), or we can also cut bug out its own personal spending. The two options with the government in such a case then would be (a) Cut down government spending a reduction in G will then also make a reduce in AD. (b) Increase taxes This would meet down the disposable income and will then also bring down both C and M. For a person who wants to preserve the size of the government the second option I think would be a go against choic e, since the government is retaining its size and is still able to bring the requisite change in AD.A person who thinks public sector is too large will opt for the first move, reducing G, since that will immediately mean the government has become smaller. Which I personally would vote for, out government could use a little trimming. Question 11. The simplest way for me to look at it is like this If the demand curve is flat, then a reduction or an increment in labor demand does not alter the price at all. But on the other hand, if the demand curve is, then an equivalent change in demand has much bigger change in the wage rates.Empirical results suggest that wages are sticky, and the immerse labor demand curve cannot explain 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 reason is any such intersection to the unexpended of the LAS cu rve will not be using any resources, and companies will have an incentive to increase production without putting too much pressure on the be, while an intersection to the right will put too much inflationary pressure therefor making it unsustainable.Question 13. Inflation- titular Wage Rate = reliable Wage Rate So therefor, evaluate inflation- Expected Nominal Wage Rate = Expected Real Wage Rate. It can also be written as Expected Real Wage Rate + Expected inflation = Expected Nominal Wage Rate. If the equilibrium real wage rate remains constant, meantime inflation exceeds expected inflation then the nominal wage rate has to rise, there is no other choice. Question 14. In the steady state, the government benefits from inflation. I assume that the steady state here means the long-run macroeconomic equilibrium.The economy would like some small inflation at some point since with a small inflation the real costs for companies always fall and they have to have an incentive in reque st to increase production. To see why consider the contracts that companies set up, They are all based on nominal variables. A small inflation will reduce the real value of these contracts, and keeping with the domino affect the firms have an incentive to increase real output at lower real costs. Total output will rise in this particular case, pushing out the LAS curve. The government would also benefit with higher tax earnings.