Business Economics Exam

Topics: Macroeconomics, Inflation, Economics Pages: 7 (2222 words) Published: October 20, 2013

Question 1
Q: If you are the chief economist of a country experiencing high unemployment and flat GDP, what macroeconomic policies might you enact in response to these economic conditions? How would you expect these policy changes to impact the economy? A: The primary idea to address is to create employment for this country, which would increase the output of the country and therefore increase GDP. I would both enact an expansionary fiscal policy and monetary policy, which would raise government spending and the country’s money supply. In turn, this would stimulate businesses to start employing more people and produce, which would increase GDP. The government’s spending can also be focused on creating jobs. The increase in money supply would in turn encourage banks to give more business loans, which would stimulate employment and productivity as well. Question 2

Q: How does an economy achieve macroeconomic equilibrium? What affect does a high level of inflation have on macroeconomic equilibrium? A: Macroeconomic equilibrium is achieved in the Keynesian model using a balance of aggregate production as well as aggregate expenditures. This is a state that forms when 2 opposing forces offset one another just so, so that nothing changes among them, or until another outside force comes between them. An unexpected decrease in aggregate demand means an excess supply of resources. This means there will be a decrease in the prices of these resources. Therefore, the rate of unemployment will increase, prices will decrease and output will decrease. In the long run, lower costs of resources will mean the economy will product a level of output that’s consistent with full employment, but with lower prices. An unexpected increase in aggregate demand will mean an output level that is higher than full employment. That means there will be less unemployment, an increased pressure on resource prices and interest rates, which will mean a decrease in aggregate demand. The resource providers will adjust to the new price levels and output will decline. Therefore, a new market equilibrium will occur at a higher price level. In the long run, inflation is the major effect of increased aggregate demand. An unexpected decrease in SAS will decrease the availability of resources. This means an increase in resource prices, which will cause the aggregate supply curve of goods and services to shift up and left. That means there is a reduced level of output at higher prices. If the unexpected decrease in SAS is temporary, there won’t be any changes in prices or output in the long run. If it’s not temporary, the economy will produce a lower level output at higher prices. An unexpected increase in aggregate supple will mean output and income will expand past what is consistent with full employment, and at a lower price level. If its cause is temporary, the SAS curve will return to normal levels and prices and output will be the same. If what produced the change is more permanent, there will be a greater amount of output and at lower prices. Question 3

Q: Joe Producer makes a product that sells for $1,000. In the production process, he pays $750 for wages, $125 for materials, and $ 75 for rent. Three-fourths of Joe’s output is consumed and the rest is invested. Explain how both the flow-of-product approach and the earnings approach can be used to measure GDP and the role profit plays in these calculations. Calculate GDP for Joe using both the product and income approaches and show how they must agree. A: Product Approach: GDP is the market value of all goods = 1000 Profits=1000-750-125-75 = 50

The market value of all goods must equal the return to all factors of production used in the production process. Earnings Approach: GDP= sum of earnings of all factors = 750(to labor) +75(to land) +50 (to entrepreneurship) +125 (to inputs) =1000 Profit is the renumeration/costs of Joe’s skills as a businessman for the entrepreneurial services that he provies....
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