Please help me answer question 1 and 6 in the attached pdf. Please answer all questions in full sentence and graph all graphs on excel.
Due Date & Place: To be handed in on the day of the final exam,
just before the exam, in the exam room.
Consider this assignment as a partial step towards your preparation for the final exam. 1. Define the following concepts (maximum two sentences each):
dd. Potential Output
The price level
Real interest rate
Disposable Personal Income
Induced aggregate expenditures
Aggregate expenditure function ee.
hhh. Average propensity to consume
Marginal propensity to consume
Average propensity to save
Marginal propensity to save
Marginal propensity to spend
Aggregate demand curve
Aggregate supply curve
Unit cost of production
Aggregate supply shock
Aggregate demand shock
Opportunity cost of economic
Medium of exchange
Target reserve ratio
Bond yields Page 1 of 5 2. How does the difference between the trends in actual GDP and potential GDP help
define business cycles? In this respect, define trough, recovery, and peak. 3. The value of CPI in April 2009 was 113.9 and in April 2008 it was 113.5.
Calculate the rate of inflation during that one year expressed in percentage
How much is the CPI in the base year?
Calculate the rate of inflation during the year ending in April 2008. 4. Imagine that your friend lends you $100 and that the loan is repayable in one year.
If you are to pay her $108 in one year?s time, determine the principal, interest
payment, and the nominal interest rate.
If you are to pay 10% nominal interest on this loan, how much do you have to
pay her at maturity?
In the case of part (b), if the inflation rate is 6% per year, how much is the real
If the inflation rate is higher than that of in part (c), who is benefiting and who
is losing in terms of purchasing power? 5. What is the difference between CPI and GDP deflator? 6. Consider three economies, A, B, and C. Aggregate desired expenditure (AE) in
economy A is composed of only consumption expenditures and Investment, in economy
B is composed of consumption expenditures, investment expenditures, and government
purchases, and in economy C is composed of all those expenditures in Economy B plus
net exports expenditures.
Assume appropriate parametric functions for each component of the AE and
right down a parametric system for each economy that defines the economy.
Derive the formula for aggregate expenditure function for each economy as a
function of autonomous expenditures and induced expenditures.
What are the differences in the formula and size of the marginal propensity to
spend between the three economies?
What are the differences in the formula and size of the simple multiplier
between the three economies?
If a similar change in autonomous expenditures is introduced in the three
economies, in which one you expect a bigger change in equilibrium GDP?
Page 2 of 5 f.
g. h. i. 7. Under the same scenario as in part (d), in which economy you expect a bigger
horizontal change in the aggregate demand curve?
Adding a linear supply curve that is exactly the same for all three economies
(in terms of slope and intercepts) to the picture, under the same scenario as in
part (d), in which economy you expect a bigger increase in the price level?
How does the change in price level in any of these economies depend on the
slope of the aggregate supply curve? (i.e., assume a steeper/less steep AS
Explain and graphically show all the changes (including all the steps) in the
AE, AD, and AS curves in a 45-degree diagram (for AE) linked with a demand
and supply diagram, for an exogenous increase in the autonomous expenditures
in economy C. (See Figure 23-8 on page 581 of the text-book only after you try
to answer this part yourself for a comparison and if you find it difficult.) Consider a typical aggregate demand and supply curve of an economy operating at its
Express the condition for long-run equilibrium and graphically show the longrun equilibrium of this economy in an AD-AS diagram.
Explain and graphically show how a positive AD shock affects the short-run
equilibrium of this economy. How do the price level and rGDP change in the
short term as a result?
Does the positive AD shock result in a recessionary gap or an inflationary gap?
Explain and clearly indicate the size of the gap.
What does this short-term output gap imply in terms of the rate of usage of
factors of production compared to the normal rate indicated by potential output:
higher rate of usage or lower than the normal rate?
How does rate of usage of factors of production you indicate in part (d) impact
the price of factors of production?
What does the impact you identify in part (e) imply in terms of the unit cost of
production for firms?
What does the impact you identify in part (f) imply in terms of the profits of
firms if the price of their product, quantity of production, and amount of factors
of production they use for production remain constant?
To remain as profitable as before, firms should increase their price at all levels
of production level in response to the impact on their unit-cost of production
that you identified in part (f). What does it mean in terms of the position of the
aggregate supply curve? Page 3 of 5 i. 8. Now that you know all the steps, explain the whole process of transition to a
new long-run equilibrium after the same positive demand shock in (b). Clearly
indicate the reason why the AS curve shifts, if it does at all.
(You should be able to analyse all these steps for a negative AD shock, positive
AS shock, and negative AS shock as well. The positive or negative AD shocks
could be due to implementation of government fiscal policies. If you find
answering this question difficult, see chapter 24 (figures and the associated
explanations) in the textbook. You should also be able to compare the
composition of long-run equilibrium output between the initial long-run
equilibrium and the new long-run equilibrium. See, e.g., the same chapter
under Fiscal Policy and Growth. ) Consider a new deposit to the Canadian banking system of $1000. Suppose that all
commercial banks have a target reserve ratio of 10 percent and there is no cash drain.
The following table shows how deposits, reserves, and loans change as the new deposit
permits the banks to create money.
Round Change in Deposits Change in Reserves Change in Loans First $ 1,000 $ 100 $ 900 Second ________ ________ ________ Third ________ ________ ________ Fourth ________ ________ ________ Fifth ________ ________ ________ a. b.
d. The first round has been completed in the table. Now, recalling that the new
loans in the first round become the new deposits in the second round, complete
the second round in the table.
Complete the entire table.
After the fifth round, what is the total change in deposits so far as a result of
the single new deposit of $1,000?
This deposit-creation process will go forever. On the limit (the end of forever!),
the total change in reserves becomes equal to the value of the single new
deposit of $1,000. I.e., until the new single deposit is completely held in the
banking system as reserves. We saw in class and this infinite process money
creation has a finite sum. Essentially, we showed that the eventual total change
Page 4 of 5 e. 9. in deposits is equal to 1? times the new deposit (or total change in reserves,
as they are the same at the limit), where is the target reserve ratio. What is the
eventual total change in deposits in this case?
What is the eventual total change in reserves? What is the eventual change in
loans? Graphically show and link the long-run equilibrium in goods market and money market,
using MD-MS diagram, Investment Expenditure diagram, AE-Y diagram, and AD-AS
Clearly explain (using chain reactions) and show the short-run effect of an
increase in money supply on the equilibrium of this economy. Make sure you
clearly show the impact in all diagrams.
In the same way, explain and show the long-run effect of the increase in money
supply noting that your answer to this question picks up where you finished in
part (a) and describes the adjustment process according to the output gap.
Clearly describe based on your graphs, the long-term neutrality of money.
Is the composition of Y* any different after the new long-run equilibrium
establishes. 10. Clearly describe the importance of long-run economic growth. List and briefly explain
the costs and benefits associated with long-run economic growth? Specifically, clearly
explain why current material standard of living should be sacrificed to gain higher
future material standard of living. Page 5 of 5
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