Macroeconomics and Government Essay

How are presidential election outcomes related to the performance of the parsimony? 2. (7 points) handle the difference between Microeconomics and Macroeconomics. 3. (10 points) Use the concepts of gross and net investment to distinguish between an parsimony that has a rising stock of capital and iodine that has a falling stock of capital. In 1933 net private domestic investment was deduction $6 billion. This means that in that particular year the economy produced no capital goods at all. Do you agree? Why or why non? Explain Though net investment keister be positive, negative, or zero, it is quite impossible for gross investment to be less than zero. 4. (7 points) What are the major factors that have affected U. S. household breathing in since the recession in 2001? 5. (7 points) Briefly explain how the following would shift the IS function to the right. a. A change to lump-sum taxation (Specify whether enlarge or decrease is needed to shift IS arc to the right. ) b. A ch ange to giving medication spending (Specify whether increase or decrease is needed to shift IS curve to the right. ) 6. (7 points) Explain briefly how a change 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 have to increase or decrease to cause the rightward LM shift. Discuss which of these the FED exercises mastery over. a. MS. b. MD (money pauperization). c. P (price index). 7. (7 points) By how overmuch impart GDP change if firms increase their investment by $8 billion and the MPC is . 80? If the MPC is . 67? 8. (10 points) Suppose that private heavens spending is highly sensitive to a change in invade respect. Compare the effectiveness of monetary and fiscal policy in terms of rising and lowering reliable GDP 9. (10 points) Assume that a hypothetical economy with an MPC of .8 is experiencing severe recession. By how much would administration activity spending have to increa se to shift the aggregate demand curve rightward by $25 billion? How large a tax slashed would be needed to achieve this same increase in aggregate demand? Why the difference? Determine one possible combination of government spending increases and tax decreases that would accomplish this same goal. 10. (7 points) What are governments fiscal policy options for ending severe demand-pull pretentiousness? Use the aggregate demand-aggregate go forth model to show the impact of these policies on the price aim.Which of these fiscal policy options do you think might be favored by a soul who wants to preserve the coat of government? A person who thinks the public sector is too large? 11. (10 points) Explain why relatively flat as polar relatively steep labor demand curves are more consistent with the empirical observation that there are relatively minor changes in the real number wage rate over the course of the business cycle. 12. (7 points) Is sustainable long-run equilibrium alway s reached when the AD and SAS curves queer? Why or why not? 13.(7 points) If the equilibrium real wage remains constant, what happens to the nominal wage when the actual inflation rate exceeds the expected inflation rate? 14. (7 points) In the calm state, the government benefits from inflation. Explain. Answers interrogative mood 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 objet dart personal income grows at a faster, higher rate than the long-term rate. The incumbent presidential party allow for be voted out of office when income grows at a rate lower than the long term rate. research 2. Microeconomics meaning small, is a branch of economics that studies the behavior of individual households and firms by making decisions on the parceling of limited resources. Normally, it applies to markets where goods or services are bought and sold. Macro economics 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 exchangeable in Microeconomics. This includes national, regional, and global economies. Question 3. Depreciation + Net enthronisation = Gross Investmentif I rearrange it, it leave behind 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 less than depreciation. In 1933 net private domestic investment was minus $6 billion. This does NOT mean the surface area 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 mo st cases flowerpotnot 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. Energy producers have increase the percentage of household budgets for force out and electricity. According to economics, it shows minimal growth since 2001. Question 5. The IS function is the investment-saving function.A shift to the right implies that for any given level of output the interest rate has bypast up, and vice versa. Now for the examples (a) A change in lump-sum taxation A lump-sum reducing in the tax rate has the same effect as increased government deficit with people and firms increasing their spending, pushing out the IS curve. (b) A change in government spending Increased government spending will have the same impact as lower savings , and will push the IS curve to the right Question 6. The LM function is liquidity preference minus the money supply.It tells that real money balances are a primary function of the interest rate and real income. This is usually represented 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 falls the LM curve will shift to the right since real money balances will increase in such a case. The Fed has control over the nominal money supply but not on money demand and price level. Money demand depends on the transaction demand of money and the Fed cannot influence the prices (they are determined by the marke t 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 thencece the monetary policy will be more effective in determine the movement of real output. This is due to the fact that a small rise in interest rates then a small reduction in money supply will quell any demand-pull inflation and therefor bringing 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 impact in such a scenario. Question 9. MPC = 0. 8, we can say that t he 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 sign spending by at least $5 billion.Suppose 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. The government has two options when it wants to influence the macroeconom ic A. it can change taxes or B. It can change its spending patterns. If economics is facing a demand-pull inflation it means AD is rising quicker than expected. The four 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 work on somehow curtailing consumption (C) and imports (M), or we can also cut down 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 bring down the disposable income and will then also bring down both(prenominal) C and M. For a person who wants to preserve the size of the government the second option I think would be a better choice, since the government is retaining its size and is still able to bring the re quisite change in AD.A person who thinks public sector is too large will opt for the archetypal 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 steep 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 left of the LAS curve will not be using any resources, and companies will have an incentive to increa se production without putting too much pressure on the costs, while an intersection to the right will put too much inflationary pressure therefor making it unsustainable.Question 13. Inflation- Nominal Wage consecrate = Real Wage Rate So therefor, Expected 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, meanwhile 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 order 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.