Final-SA

Final-SA - UL! J till-nil - um....-t-o............‘, ._....

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Unformatted text preview: UL! J till-nil - um....-t-o............‘, ._. Chapter 11 Aggregate Supply and Aggregate Demand . _ Quantity of real Quantity of real Price IGVEI GDP demanded GDP supplied (GDP deflator, , _ _ , - 2000 E .100) (tnlhons of 2000 (trillions 0132000 ' dollars) dollars) (I: :I .' "i, r. .1. '1} Based on the table above, a) What is the equilibrium price level and real GDP? b) If potential GDP is $11.0 trillion, what does that imply about the economy's level of employment? c) if potential GDP is $9.0 trillion, what does that imply about the economy's level of employment? Answer: a) The equilibrium price level is 105,- the equilibrium real GDP is $10.0 trillion. in) If potential GDP is $11.0 trillion, then the economy is at an equilibrium that is a below full—employment equilibrium. c) If potential GDP is $9.0 trillion, then the economy is at an equilibrium that is an aboveé full~employinent equilibrium. 'i'i-t- - ' WERE-‘- Xzé I‘mvaéfl 5 52 MS n 130 .C) C') CD '61 120 6 ; fig 110 t 8. ' w 00 if l d: i E 90 g o. l . 1 i. I o ’100 16.5 12.0 12.5 13's 13.5 Reol GDP (trillions 0F 2000 dollar-s] . t my; 2) in the above figure, what is the short—run equilibrium real GDP-and the short—run equilibrium price level? Answer: The short~run equilibrium occurs where the All curve intersects the SAS curve 50 in the figure the short run equilibrium real GDP is $10.5 trilliOn and the short—run equilibrium price level is 110. Chapter 12 Expenditure Multipliers: The Keynesian Model Consumption expenditure (trillions of 2000 ' dollars) Disposable in Com e (trilliOns of 2000 dollars) _m,-.. a...” -_Wr was“ “mu—om Mfl‘._ ,_ _,m_ nun-r- -".'!v>-- “'us . w” l) The above table has data on the consumption function in the nation of Mzojo. a] What is the amount ofautonomous consumption expenditure? 1)) What is the marginal propensity to consume? Answer: a) AutonomOus consumption expenditure equals the consumption exlraenditure when disposable income is $0, so antenomous consumption expenditure is $0.8 trillion. b)_ The marginal propensity to consume equals 0.8.0 0 trillion, consumption eXpenditure is $4.5 trillion. When disposal _ 2) When disposal income is $5. mption expenditure is $5.0 trillion. What is the marginal propensity income is $6.0 trillion, consu to consume? Answer: The marginal propensity to consume is the change in consumption expenditure divided by the change in disposable income that brought it'about. In this case, the marginal propensity to. consume equals ($0.5 trillion)f($1.0 trillion) = 0.50. 3) At-$10,0_00 ofdisposabie income, Audrey's Consumption expenditure was $11,000. At $20,000 of disposable incorne, Audrey's consumption expenditure was $19,000. What is Audrey's marginal propensity to consume? penditure divided Answer: The marginal propensity to consume is the change in consumption ex by the change in disposable income that brought it about. In this case, the marginal propensity to consume equals ($8,000)[($10.000) = 0.80. Real GDP (3 l G (billions of 2000 (billions of (billions of (billiOns of dollars) 2000 dollars) 2000 dollars) 2000 dollars) \DCQ EDD DC) 4) The above table gives information for the nation of North Hampton. There are no imports to or exports [Tom North Hampton. a) Find aggregate planned expenditure for each level of real GDP. i b) What is the equilibrium level of real GDP? 1, l l l 1 Answer: Aggregate Real GDP (trillions expenditure of 2000 dollars) {trillions of 2000 ' dollars) a) To calculate aggregate expenditure, for each level of real GDP sum consumption expenditure plus investment plus government purchases. The above table has the answers for each level of real GDP. b) Equilibrium real GDP is $800 billion because that is the level of real GDP that equals aggregate planned expenditure. fifi mfi'fifiwtmfifi Wit mamw N Ln *0 D (J C3 3 6 9 l2 Reel GDP- {trillions of 2000 dollars] Aggregate expenditure {trillions of 2000 dollars} 'Eifiéwtfii’m 5) The above figure shows the AE curve and 45'“ line for an economy. a) If real GDP equals $6 trillion, how‘ do firms‘ inventories compare to their planned _- -‘l inventories? £3 b) If real GDP equals $12 trillion, how do firnis' inventories compare to their planned inventories? c) What is the equilibrium level of expenditure? Why is this amount the equilibrium? Answer: a) it real GDP equals $6. trillion, aggregate expenditure exceeds GDP and so firm-s' inventories are less than planned. b.) if real GDP equals $12-trillion, aggregate expenditure is less than GDP and so firms‘ inventories are more than planned. c) The equilibrium level of expenditure is'$9 trillion because at this level of GDP, aggregate expenditure equals GDP. As a result, firms' inventories equal planned inventories so firms have no incentive to either increase or decreaseproduction. 6) The slope of the AE curve is .80. What is the multiplier? Everything else the same, by how much does equilibrium aggregate expenditure increase if a) exports increase from $1.75 trillion to $2.25 trillion. b.) government expenditure on goods and services decrease from $2.0 trillion to $1.8 trillion. (1) investment increases from $1.2 trillion to $2.3 trillion. Answer: a) The change in equilibrium aggregate expenditure equals the multiplier times the change in autonomous expenditure, which is.$0.5 trillion. So the change in equilibrium expenditure is 5 x ($0.5 trillion) = $2.5 trillion. b) The change in equilibrium aggregate expenditure equals the multiplier times the change in autonomous expenditure, which is —$0.2 trillion, that is, gOvei-nment expenditure decreases by $0.2 trillion. So the change in equilibrium expenditure is 5 x (—$0.2 trillion) = 451.0 billion. _ c) The cl'lange in equilibrium aggregate expenditure equals the multiplier times the change in autonomous exPenditure, which is $1.1 trillion. So the change in equilibrium expenditure is 5 at ($1.1 trillion) = $5.5 trillion. 7) Suppose an economy has no income taxes or imports. if the MPC is 0.75,- what does-the" multiplier equal? 1 , so in this case it equals 1 = ~1—~ = 4.0. : Tl lt' ‘ . —— —-—-—-—— Answer 1e mu iplier equals (1 _ MPG) (1 _ 0.75} 0-25- 8) Suppose the economy has no income taxes or imports. The MPC‘ equals 0.8. What does the expenditure model predict will be the change in real GDP if investment increases by $200 billion? Answer: The multiplier equals m, so for the case in the question, the multiplier equals fl = 61-2- : 5.0. The change in real GDP equals the multiplier times the change in investment, or 5.0 x $200 billion 2 $1,000 billion. 9') Suppose the economy has no income taxes or imports. How is the size of the expenditure multiplier related to the marginal propensity to consume? What is the multiplier if the MPG equals 0.25? If the MPC equals 0.50? If the MPC equals 0.90? Answer: The multiplier equals , so the larger the MPC, the larger the multiplier. If the u—MPQ MP5 is 0:25, the multiplim ism 2% = 1.3-. If the MPC is 0.50, the multiplier equals 1 1 = 2.0. And if the MPC'is 0.90, the multiplier equals w1—- = u—Dsm 2636 u—nsm —-~0 1m = 10.0.. 30, the larger the MPC, the larger the multiplier. Chapter 13 US. Inflation, Unemployment, and Business Cycles a $£sza§3§§fiSi W -. 53.- 0~ on. | | {3 t inflation rate {percent per year] LH._|__H___.L...,__.L____t___._.L_ 2 A. ' 6 8 10 Unemployment rote {percentage} arm-465Nam»?smitemfiwfiiéfiwfiwltwwmefiwmemifiwxfiwg HrW-‘Hfl' 1) Suppose the natural unemployment rate is 4 percent and the expected inflation rate is 6 percent. In the above figure, illustrate the long~run Phillips curve. What does the long~run Phillips curve reveal abut the tang—run tradeoff between inflation and unemployment? Answer: mxfii>=.fiww.m:m?ms¥mmiu www' ._{-;;4;w2'-gg-*;fi§w§ug CO LRPC .a 0 4s. Inflation rote {percent per year} | | _J.___L_. 2 4 6 8 l 0 Unemployment rote (percentagel wmlmmwwmmflfifim '33 < The l'ong—run'Phillips curve is illustrated in the above’figure. It is Vertical at the natural unemployment rate. The fact that the long—Ton Phillips curve is vertical means that in the long run there is no tradeoft between inflation and unemployment. In other words, in the long run higher inflation does not decrease unemployment nor does low inflation ' increase unemployment. - . 3 8- LRPC e a '0. E 6 a .9; 92 E r: 4 .9 3 E smoc2 2 SRPCI l I l 2 4 6 8 1'0. Unemployment rote percentage} . .k‘zn‘e ... 2) In the above figure, what factor might have lead to the shift in the. short-run Phillips curve from SRPC1 to SRPCZ? Answer; The long~run Phillips curve did not shift; Therefore the factor that shifted the short—run — I Phillips Curve was an increase in the espeeted inflation rate. “Lies-7| 2am w,--.W5-.w> smnertstMm-Mtksansmma ma: Inflation rote (percent per yeor} 0 ' 2 4 6 a Unemployment role {percentage} t“; 9”. six at 3; iii-.3 'wv'a M sews? § 5“ www- $2 mafia 5 ii-QéQ we»: mswév’xmwm 3) In the figure above, draw a short—run Phillips curve and a long—run Phillips curve if the 1 expected inflation rate is 4 percent and the natural unemployment rate is 6 percent. Explain how Rb the two change in the short run if: a) slower growth in aggregate demand causes a recession. 1)) the inflation rate increases. (2) the natural unemployment rate increases. ...
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This note was uploaded on 07/30/2008 for the course ECON 3 taught by Professor Peters during the Spring '07 term at UCSD.

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Final-SA - UL! J till-nil - um....-t-o............‘, ._....

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