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[answered] Assignment 3 Due Date & Place: To be handed in


Please help me answer question?7 and 8 in the attached pdf. Please answer all questions in full sentence and graph all graphs on excel.


Assignment 3

 

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):

 

a.

 

b.

 

c.

 

d.

 

e.

 

f.

 

g.

 

h.

 

i.

 

j.

 

k.

 

l.

 

m.

 

n.

 

o.

 

p.

 

q.

 

r.

 

s.

 

t.

 

u.

 

v.

 

w.

 

x.

 

y.

 

z.

 

aa.

 

bb.

 

cc.

 

dd. Potential Output

 

Recessionary Gap

 

Inflationary Gap

 

Recession

 

Employment

 

Labour force

 

Unemployment rate

 

Frictional Unemployment

 

Structural Unemployment

 

Cyclical Unemployment

 

Labour productivity

 

CPI

 

The price level

 

Inflation

 

Interest rate

 

Real interest rate

 

Exchange rate

 

Depreciation

 

Appreciation

 

Value added

 

GDP

 

Capital stock

 

Investment Expenditures

 

GNP

 

Disposable Personal Income

 

GDP deflator

 

Autonomous aggregate

 

expenditures

 

Induced aggregate expenditures

 

Consumption function

 

Aggregate expenditure function ee.

 

ff.

 

gg.

 

hh.

 

ii.

 

jj.

 

kk.

 

ll.

 

mm.

 

nn.

 

oo.

 

pp.

 

qq.

 

rr.

 

ss.

 

tt.

 

uu.

 

vv.

 

ww.

 

xx.

 

yy.

 

zz.

 

aaa.

 

bbb.

 

ccc.

 

ddd.

 

eee.

 

fff.

 

ggg.

 

hhh. Average propensity to consume

 

Marginal propensity to consume

 

Average propensity to save

 

Marginal propensity to save

 

Marginal propensity to spend

 

Simple multiplier

 

Fiscal policy

 

Budget surplus

 

Stabilization policy

 

Aggregate demand curve

 

Aggregate supply curve

 

Unit cost of production

 

Aggregate supply shock

 

Aggregate demand shock

 

Phillips curve

 

Economic growth

 

Opportunity cost of economic

 

growth

 

Medium of exchange

 

Gresham?s Law

 

Fiat money

 

Deposit money

 

Reserve ratio

 

Target reserve ratio

 

Excess reserves

 

Money supply

 

M2

 

IOUs

 

Present value

 

Bond price

 

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.

 

a.

 

Calculate the rate of inflation during that one year expressed in percentage

 

terms.

 

b.

 

How much is the CPI in the base year?

 

c.

 

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.

 

a.

 

If you are to pay her $108 in one year?s time, determine the principal, interest

 

payment, and the nominal interest rate.

 

b.

 

If you are to pay 10% nominal interest on this loan, how much do you have to

 

pay her at maturity?

 

c.

 

In the case of part (b), if the inflation rate is 6% per year, how much is the real

 

interest rate?

 

d.

 

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.

 

a.

 

Assume appropriate parametric functions for each component of the AE and

 

right down a parametric system for each economy that defines the economy.

 

b.

 

Derive the formula for aggregate expenditure function for each economy as a

 

function of autonomous expenditures and induced expenditures.

 

c.

 

What are the differences in the formula and size of the marginal propensity to

 

spend between the three economies?

 

d.

 

What are the differences in the formula and size of the simple multiplier

 

between the three economies?

 

e.

 

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

 

curve.)

 

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

 

long-run equilibrium.

 

a.

 

Express the condition for long-run equilibrium and graphically show the longrun equilibrium of this economy in an AD-AS diagram.

 

b.

 

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?

 

c.

 

Does the positive AD shock result in a recessionary gap or an inflationary gap?

 

Explain and clearly indicate the size of the gap.

 

d.

 

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?

 

e.

 

How does rate of usage of factors of production you indicate in part (d) impact

 

the price of factors of production?

 

f.

 

What does the impact you identify in part (e) imply in terms of the unit cost of

 

production for firms?

 

g.

 

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?

 

h.

 

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.

 

c.

 

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

 

diagram.

 

a.

 

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.

 

b.

 

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.

 

c.

 

Clearly describe based on your graphs, the long-term neutrality of money.

 

d.

 

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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