CLASS / COURSE: Macroeconomics
1. All other factors held constant, what would be the effect on the demand for money (M1) of each of the following situations. Explain the rationale behind your responses.
1. An increase in real GDP
2. An increase in general price levels
3. A rise in the interest rate on savings accounts and Treasury securities
4. A doubling of all prices, wages, and incomes
2. Three months ago you purchased, at par, a $100,000 bond with a stated interest rate of 5%. Today, the Federal Reserve announced that it is reducing the discount rate by 0.5%. How would you expect this announcement to affect the value of your bond? Explain your response.
3. Explain the following statement: Any deviation from planned output or planned expenditures (Consumption + Investment) will throw the economy into disequilibrium. To illustrate your explanation, provide an example of how actual output might deviate from planned output and how actual expenditures might deviate from planned expenditures. List any economic reactions might you expect in the examples you provide.
4. What impact would you expect each of the following events to have on business cycles? Label each as a demand-side or supply-side shock.
Defense production increases due to the imminent threat of war
Net exports decline due to a deep recession in Europe
A sharp increase in technology innovation leads to significant productivity growth
What economic policy changes might you expect in response to each of these events?
5. 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 both 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.
6. Are all expenditures of a government included in the calculation of GDP for that nation? Why or why not? If not, what government expenditures should be excluded from GDP? Are income taxes collected by the government from consumers included in GDP and, if so, how?
7. Explain the Consumer Price Index (CPI), the GDP Price Index, and the Producer Price Index (PPI). What does each measure? Which is most important to measuring changing price levels in an economy and why?
8. Explain the relationship among household disposable income, consumption and savings. What is Marginal Propensity to Consume (MPC) and what does an MPC of 0.9 tell us about consumption and saving? Use an example to explain MPC.
9. Explain the following statement: “Changes in disposable income lead to movements along the consumption function while changes in wealth lead to a shift of the consumption function”. Use examples to illustrate your response.
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SUBJECTS / CATEGORIES:
1. Business Economics