Midterm Intermediate Macroeconomics
1. How are presidential election outcomes related to the performance of the economy? Presidential elections and the economy have a very close relationship and they go together hand and hand. Usually when the economy is good and opinion of the government is positive, the incumbent or the party of the last president wins the election. People tend the lean towards why change a good thing. A couple of theories exist in the relationship of the economy and presidents. The first one is that voters will vote for whichever president they feel shares the same economic vales that they have. Usually the poor vote liberal or for bigger government because they think they will provide more economic relief them and their families. The second theory is that the president currently in power will attempt to pass policies that will allow their party to stay in power. So, presidents on their first term will make monetary and fiscal policies close to the election year to stimulate the economy to sway voters. Two examples of how the economy can sway the presidential election against an incumbent are Hoover and George H.W. Bush. Both presidents had economic downturns during their first term in office and were not reelected. Other factors play key roles in presidential elections, but none are bigger than economics. 2. Discuss the difference between Microeconomics and Macroeconomics.
Microeconomics is the study of decision making undertaken by individuals (households) and by business firms. Micro looks at the decisions of individual’s actions, like deciding to work overtime or not. Another example is a small business decision on how much to spend of advertising cost. Micro focuses on the supply and demand in an economy, and how businesses can maximize profits. Macroeconomics is the study of the behavior of the economy as a whole. Macro deals with national items like the unemployment rate, government budget deficit, and money supplied by the FED. Macro deals with aggregates, such as the total output as in the economy. For example, Macro would explore how net exports could affect a nation’s capital. 3. Use the concepts of gross and net investment to distinguish between an economy that has a rising stock of capital and one that has a falling stock of capital. “In 1933 net private domestic investment was minus $6 billion. This means that in that particular year the economy produced no capital goods at all.” Do you agree? Why or why not? Explain: “Though net investment can be positive, negative, or zero, it is quite impossible for gross investment to be less than zero.” Gross Investment = Net Investment + Depreciation
We can rearrange this to say:
Net Investment = Gross Investment – Depreciation
The capital stock of an economy rises when net investment is positive, that is when gross investment exceeds depreciation. The capital stock falls 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 country 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 most cases cannot 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. The only possible case I can think of, and many will disagree with this, is when China under Mao went for what is now called the “Great Leap Forward.” Farmers started melting their ploughs and other equipment to provide steel to the government, thus destroying the existing capital, without investing in the new one. Thus you are using your effort to destroy what is there: negative gross investment. 4. What are the major factors that have affected U.S. household consumption since the recession in 2001? Many...
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