Managerial Economics Final Exam
1. Using language from the Aggregate Demand/Aggregate Supply framework, define and explain the five the issues every macroeconomic model must explain.
The business cycle shows that when determinants of AD change (consumption, investment, government spending or net exports) it causes AD to change, and AS will respond to these changes. Determinants of AD have a multiplier effect on AD, so they will cause AD to change more than these determinants do. Without a major economic event, the business cycle will move because of consumers and producers’ optimism and pessimism. For example, when people say one stock is very good, everyone may start to buy it, but it is not because the company is good, just because they think it is good. Involuntary (cyclical) unemployment explains that when there is a decrease in AD, it will bring down the quantity of output, which is followed by a reduction in employment. When the economy expands, AD will shift to the right, along with this the price will increase accordingly. At this point, if AD shifts back, the price will not return to the original state without debt deflation and a certain reduction in worker productivity. This is called persistent inflation, which is like a ratchet, price rise but do not fall. When investment comes in (due to the high price level and opportunity for positive returns on investment) the output capacity increases and AS will shift to the right. This is how the economy grows. But if AS and AD can shift forward together, the economic can grows in a non-inflationary and low unemployment way. Upon until output capacity is met, AS mimics the principles of the Real Bills Doctrine. After output capacity is met, then our AS curve abides by the Quantity Theory of Money.
2. List and describe in detail the fundamental issues in international trade. Factor endowments
Distance between regions or countries
Size of economy or GDP
Domestic and World...
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