Midterm Intermediate Macroeconomics Essay

1. How argon presidential election outcomes related to the performance of the economy? Presidential elections and the economy have a very underweight relationship and they go together hand and hand. Usually when the economy is good and opinion of the presidency is positive, the short letterr or the party of the conk 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 leave vote for whichever president they feel shares the same economic vales that they have. Usually the poor vote liberal or for bigger g everyplacenment be suit of clothes they think they lead provide more economic relief them and their families.The second opening is that the president currently in power exit attempt to pass policies that will allow their party to stay in power. So, presidents on their first term will tiller mo meshingary and pecuniary policies closing to the election year to stimulate the economy to s authority voters. Two instances of how the economy faeces 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 individuals actions, like deciding to work overtime or not. Another example is a small business decision on how much to pass of advertising cost. Micro focuses on the issue and penury 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 commonwealthal items like the unemployment compute, government budget def icit, and notes supplied by the go forth. Macro deals with essences, such as the total output as in the economy.For example, Macro would explore how assoil exports could affect a nations ceiling. 3. Use the concepts of gross and net enthronement to distinguish between an economy that has a rising slope stock of heavy(p) and one that has a falling stock of capital. In 1933 net private home(prenominal) coronation 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 little than zero. Gross investiture = Net Investment + DepreciationWe can rearrange this to sayNet Investment = Gross Investment DepreciationThe 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 neg ative, 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 blow was an general loss in capital stock. Gross private investment in most cases cannot be negative, since you can decide not to invest in bare-ass 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 bang-up 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 study factors that have affected U.S. h ousehold consumption since the recession in 2001? Many major events have happened in the country and in the world since the year of 2001. The bell of oil has skyrocketed causing more Americans to spend money fueling their cars rather than buying goods and services. We have also encountered another recession in 2007 be agent of risky vocation/investment tactics on Wall Street that caused the housing market to crash. This put unemployment at an uncomparable high since the depression era, and destroyed faith in Americas economic system. Firms were reluctant to investment in the American public because they were afraid we would lose our jobs. Also, we have fought in two wars. One of the wars has been the longitudinal in American history. This dries up resources and ups government spending. The government has less money to investment its citizens and firms have less resources to produce products for consumers to buy.5. Briefly explain how the following would shift the IS function to the right. a.A change to lump-sum taxation (Specify whether emergence or decrease is infallible to shift IS sheer to the right.) Decreasing a lump sum tax will shift the IS curve to the right. Decreasing the lump sum tax will increase consumer income, which will cause aggregate demand to go up. b.A change to government spending (Specify whether increase or decrease is needed to shift IS curve to the right.) Increasing government spending will shift the IS curve to the right. Increasing government spending will cause aggregate demand to go up, and shift the IS curve to the right. 6. Explain curtly 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 LM curve deals with spare-time activity and income and is slopi ng upward. When the demand of money and supply of money equal each other the market is at equilibrium. The LM curve shifts when either the supply or demand of money changes. The FED has control over money supplied. a. MS. Increasing money supplied would cause the LM curve to shift to the right. Money supplied would drop interest rates and shift the IS curve to right. b. MD. An increase in money demand would cause the LM curve to shift to the right. Consumers are wanting to spend more which raises gross domestic product c. P. Price is the only one out of the three that a decrease is needed to shift the IS curve to the right. When prices go down wages go down and consumers have less to spend.7. By how much will GDP change if firms increase their investment by $8 billion and the MPC is .80? If the MPC is .67? MPC .80 = 40 billion. The MPC produces a multiplier of 5. (1/(1-.8))=5. 58=40 billion MPC .67 = 24 billion. The MPC produces a multiplier of 3.03030. (1/(1-.67))=3.0303. 3.03038= 24.2424 billion 8. 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 intemperate existent GDP. A reduction in the national interest rate will increase the GDP because investments will be in a higher demand. If the FED raises interest rates thusly investments will go down and lower GDP. If the Fed keeps interest rates low like they have the last couple of years in an attempt to stimulate the economy, GDP should go up.9. Assume that a divinatory economy with an MPC of .8 is experiencing ascetical 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? insure one possible combination of government spending increases and tax decreases that would accomplish this same goal. The MPC is the same as Question 7 so we know that it will give us a spending multiplier of 5.The tax cut multiplier is .8/(1-.8)=4. If we want to shift the aggregate demand curve by 25 billion, you would divide the 25 billion wanted by the multiplier of 5. 25/5= 5 billion. said(prenominal) formula goes to the tax cut but with a multiplier of 4. 25/4= 6.25. Either way you are trying to put money into consumers pockets so they will hopefully spend more. The difference is because of the MPC. barely .8 of the tax cut will be spend by consumers. They will save the other .2. A possible combo is an increase of 1 billion in government spending and a 5 billion dollar tax cut.10. What are governments fiscal policy options for ending severe demand-pull inflation? Use the aggregate demand-aggregate supply model to show the impact of these policies on the price level. Which of these fiscal policy options do you think might be esteemed by a person who wants to bear upon the size of government? A person who thi nks the public sector is too large. There are some(prenominal) things the government can do. They can reduce government spending or increase taxes both shipway will put money back into the governments pocket. Either way the key is putting money back into the governments pocket. The price level will fall when it is flexible downward. The overall goal of government policy is to provide stability and not have price levels raise behind not rapidly.Also, the do not want to reduce price levels. Democrats want to preserve the size of government. They favor more taxes and more government spending. GOP favors fewer taxes, reducing government spending, and reducing government power over the citizens. 11. Explain why relatively flat as opposite relatively steep labor demand curves are more consistent with the empirical observation that there are relatively minor changes in the real wage rate over the course of the business cycle. If the demand curve is flat then a reduction or an increment in labor demand does not alter the price (the wage is too much). On the other hand, if the demand curve is steep, then an equivalent change in demand has much bigger change in the wage rates.Empirical results suggest that wages are sticky, and the steep labor demand curve cannot explain this observation. 12. Is sustainable long-run equilibrium always reached when the AD and SAS curves intersect? Why or why not? No. The economy would be in a short-run equilibrium when the AD and SAS curves intersect, and not necessarily in long-run equilibrium. It would be in a sustainable long-run equilibrium if the economy finds itself operating on both the labor demand curve and the labor supply curve. This occurs when the labor demand and labor supply curves intersect, so there is no wedge to change. At this point the actual real wage equals the equilibrium real wage and Y = YN. At any other combination of W, P, and Y, the SAS curve will shift as expectations are adjusted.13. If the equilibrium real wage remains constant, what happens to the nominal wage when the actual inflation rate exceeds the anticipate inflation rate? Real Wage Rate = noun phrase Wage Rate Inflation. Taking expectations we can say that expected Real Wage Rate = Expected Nominal Wage Rate Expected Inflation This can be rewritten as expected Real Wage Rate + Expected Inflation = Expected Nominal Wage Rate. If the equilibrium real wage rate remains constant, while inflation exceeds expected inflation then the nominal wage rate has to rise. 14. In the steady state, the government benefits from inflation. Explain. The government benefits from inflation in two ways. First, it obtains an extra source of revenue, called seignorage or the inflation tax. The government can then lower everyday taxes or increase spending more than it could otherwise. Second, the government may gain if inflation raises the nominal interest rate by less than inflation itself.