Ec 301 midterm

Topics: Inflation, Macroeconomics, Supply and demand Pages: 5 (1182 words) Published: September 29, 2013
1.(7 points) How are presidential election outcomes related to the performance of the economy?

The re-election of the incumbent has been synonymous with low inflation and low un-employment. There has been only a few occasions where the results did not follow this norm

2.(7 points) Discuss the difference between Microeconomics and Macroeconomics.

Microeconomics deals with the individual parts in the economy and how they relate to each other. Macroeconomics deals with the totals of these parts in our economy

3.(10 points) 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.”

No I do not agree, If there was minus $6 billion does not mean there was no new goods produced that year. It just means the in that there was $6 billion less spent on private domestic investment from the previous year. Yes it is impossible for gross investment to be negative in any year

4.(7 points) What are the major factors that have affected U.S. household consumption since the recession in 2001?

5.(7 points) Briefly explain how the following would shift the IS function to the right.

a.A change to lump-sum taxation (Specify whether increase or decrease is needed to shift IS curve to the right.) b.A change to government spending (Specify whether increase or decrease is needed to shift IS curve to the right.)

6.(7 points) Explain briefly how a change to the following MS, MD, or P (ceteris paribus) would shift the LM function to the right. Include in your discussion whether the variable would have to increase or decrease to cause the rightward LM shift. Discuss which of these the FED exercises control over.

a. MS.
b. MD (money demand).
c. P (price index).

The fed exercises control over the MS and the increase of money in the system can shift the LM to the right. The same can be said of the money demand, a reduced demand will push the LM to the right. A higher price index means that every interest rate the nominal output will be higher and shift the curve to the right

7.(7 points) By how much will GDP change if firms increase their investment by $8 billion and the MPC is .80? If the MPC is .67?

If MPC is .80, change in GDP is $40 billion (5 x $8 = $40)
If MPC is .67, change in GDP is $24 billion (approximately) (3 x $8 = $24)

8.(10 points) Suppose that private sector spending is highly sensitive to a change in interest rate. Compare the effectiveness of monetary and fiscal policy in terms of rising and lowering real GDP

Fiscal expansion will result in a higher interest rate that reduces private sector spending almost as much as the fiscal expansion increases autonomous spending. As a result, the fiscal expansion causes very little increase in output. During a fiscal contraction, the effect of the lower interest rate on private sector spending almost offsets the effect of the fiscal contraction so fiscal policy is unable to have much of an impact on output. Monetary policy can result in lower interest will result in increased private spending.

9.(10 points) Assume that a hypothetical economy with an MPC of .8 is experiencing severe recession. By how much would government spending have to increase to shift the aggregate demand curve rightward by $25 billion? How large a tax cut would be needed to achieve this same increase in aggregate demand? Why the difference? Determine one possible combination of government spending increases and tax decreases that would accomplish this same goal.

In this problem, the multiplier is 1/.2 or 5 so, the increase...
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