Assignment -1:
Part -1:
1. Explain the concept of aggregate demand management and give a description of how it is used.
2. There are a few real world problems with using aggregate demand management to help close gaps in the economy. Pick two real world problems discussed in class and explain why you feel these problems may result in poor policy decisions.
Part -2:
1. When the price level falls, the amount of domestic goods demanded increases because domestic goods become relatively cheaper than foreign goods. This behavior is called the _____________________________
2. The ________________________ is a relationship between the total amount of goods and services produced at different price levels.
3. The ____________________ of the short-run aggregate supply curve represents sticky prices.
4. Because people demand less credit when prices fall, causing interest rates to fall which in turn allows more borrowing and spending on domestic goods and services. This relationship between falling prices and increasing demand for goods and services is called the _______________________________
5, The ___________________ is the part of the short-run aggregate supply cure where it becomes nearly vertical.
6. The total amount of domestic goods and services consumed at various price levels is represented by the ___.
7. The ________________________ illustrates the level of potential output in the AD/AS model
8. As prices become lower, people can demand more goods and services with their existing incomes. This is called the ___________________________ and contributes to the downward sloping AD curve.
9. The ______________________ of the short-run aggregate supply curve is the region where prices will rise as real GDP rises.
Assignment -2:
Part -1:
1. Explain what happens to the government's ability to influence the government through changes in spending as people decide to save more money?
2. Explain how the MPC is related to the spending multiplier.
Part -2:
The Spending Multiplier: Our economy has the ability to multiply initial spending through the circular flow. Complete the exercises below to better understand the multiplier process.
1. Calculate the spending multiplier for the following.
a. MPC = .5 → Spending Multiplier = ____________________
b. MPC = .75 → Spending Multiplier = ____________________
c. MPC = .9 → Spending Multiplier = ____________________
d. MPC = .95 → Spending Multiplier = ____________________
e. MPS = .2 → Spending Multiplier = ____________________
2. Suppose the government decides to spend $5,000 on a new public works project. Given the MPC in the economy is .75, complete the table below and answer the corresponding questions.
a. What is the spending multiplier for the economy describd above?______________
b. What is the total amount of spending created by the public works project? ______________
c. What is the total amount of savings created by the public works project? ______________
3. Suppose you are facing a recessionary gap of $10,000,000 currently in your economy. How much would you increase/decrease government spending to close the gap completely if the MPC in your economy is .9? ___________________
4. Suppose your economy is currently producing $10,000,000 above its long-run potential. As an economic advisor, you are concerned about inflation so you decide to slow down the economy. How much would you increase/decrease government spending to return the economy to equilibrium if the MPC in your economy is .9? ___________________
Part -3:
Using Keynesian Economics and the Expenditure Model: In this section are examples of how Keynesian economics is applied. Complete the exercises below to reinforce your knowledge on this subject.
1. Use the graph below to answer the following questions. (Hint: You must calculate the MPC first from the slope of the aggregate expenditure line)
a. What is the MPC for this economy? _____________
b. Is the economy facing an expansionary or recessionary gap? _____________
c. How much is the gap? _____________
d. What is the multiplier in this economy? _____________
e. What is the change in government spending needed to return to equilibrium?
2. Use the graph below to answer the following questions. (Hint: You must calculate the MPC first from the slope of the aggregate expenditure line)
What is the MPC for this economy? _____________
b. Is the economy facing an expansionary or recessionary gap? _____________
c. How much is the gap? _____________
d. What is the multiplier in this economy? _____________
e. What is the change in government spending needed to return to equilibrium? __
Assignment -3:
Part -1:
1. What are the two ways governments can use "Fiscal Policy" to stimulate the economy?
2. What are the two ways governments can use "Fiscal Policy" to control inflation in the economy?
3. How would a supply-side economist use "Fiscal Policy" to stimulate the economy?
4. What is an automatic stabilizer? Give two examples of how automatic stabilizers would automatically help stabilize the economy during a recessionary period.
5. What is crowding out and how does it effect the results of fiscal policy?
6. Suppose the mpc is currently .8 and government is trying to stimulate the economy. How much would each of the following situations increase aggregate incomes?
a. Increase government spending by $200,000,000,000
b. Decrease taxes by $200,000,000,000
c. Increase government spending by $1billion and decrease taxes by $1 billion
Part - 2: The Paradox of Thrift
1. Keynesian economists argue that savings can actually be bad for the economy. Explain their argument.
2. Classical Economists argue that saving actually leads to long-run economic growth. Explain their reasoning.
Part -3: The Laffer Curve:
To understand the idea behind the Laffer Curve, suppose at the current income tax rate of 10%, taxable income amounts to $500,000,000.
1. Tax Revenue = Tax Rate x Taxable income Tax revenue collected at a 10% income tax rate is
Now, suppose the tax rate was raised to 40%, this reduced taxable income to $100,000,000
2. Tax revenue collected at a 40% income tax rate is
3. Why would increasing the income tax rate reduce taxable income?
Part -4: The Phillips Curve:
1. What relationship does the Phillips curve represent?
2. Why is it impossible to solve all three macroeconomic goals with aggregate demand management?