{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Paper 2 - M 07 P2 4 Macroeconomic equilibrium does not...

Info icon This preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
M07 P2 4. “Macroeconomic equilibrium does not necessarily occur at full employment.” Explain this statement using the concepts of inflationary and deflationary gaps. - definition of macro-equilibrium: when quantity of real GDP demanded equals the quantity of real GDP supplied - full employment macro-equilibrium: where SRAS intersects AD on the LRAS curve. Diagrammatic representation - deflationary or recessionary or under full employment gap, where planned expenditure is less than the full employment level of income. Occurs where AD intersects the SRAS curve at a level of real GDP that is below LRAS - inflationary or over full employment gap, where planned expenditure is greater than the full employment level of income. Occurs where AD intersects the SRAS at a level of real GDP that is above LRAS - some students may use the Keynesian Cross 45 degree model in place of the AD/AS model. Where this is appropriately done it should be fully rewarded 6. Using the principle of comparative advantage, explain why economic theory suggests that countries should specialize and trade with each other. - countries have different endowments of resources - absolute and comparative advantage, with examples - comparative advantage and opportunity cost - diagram and/or numerical example - specialization, trade and economic growth - constraints on trade distort optimal outputs and limit growth and development N06 P2 3. Explain how an increase in government spending can lead to crowding out. [10] • increase in government spending may involve an increase in the demand for loanable funds/money • higher interest rates raise the cost of borrowing to firms and therefore investment is likely to fall • governments use of loanable funds means that there is less available for private investment (notion of crowding out) • a diagram showing the demand and supply for loanable funds (money) may be used together win an investment diagram
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
• a diagram showing AD/AS, with AD shifting to the right (due to an increase in
Image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern