Macroeconomics Free Essays

Explain the concept of potential output and why actual output can differ from potential output? (2 marks) Potential output is the amount of output that an economy can produce when using its resources such as capital and labour, at normal rates. Potential output is not a fixed number but grows over time, reflecting increases in both the amounts of available capital and labour and their productivity. As capital and labour can be utilised at greater than normal rates, at least for a time, a country’s actual output can exceed its potential output. We will write a custom essay sample on Macroeconomics or any similar topic only for you Order Now Identify two factors that might cause a change in the level of potential output. For each factor briefly explain why they can affect potential output. (2 marks) Unfavourable weather conditions, such as severe drought, could reduce potential output growth in an economy such as Australia’s, or a decline in technological innovation might also reduce potential output. This would affect potential output as it reduces the availability of resources such as capital and labour. Under the assumption that the country is using its resources at normal rates, so that actual output equals potential output, a significant fall in potential output growth would tend to result in recession. Similarly, new technologies, increased capital investment, or a surge in immigration that swells the labour force could produce unusually brisk growth in potential output, and hence an economic expansion or even a boom. This is so as availability of resources has increased. – Growth in potential output itself may slow down or speed up, reflecting changes in the growth rates of available capital and labour and in the pace of technological progress. Identify and briefly explain the main features of the business cycle. (2 marks) usiness cycles are usually thought of as being characterised by periods of transition from peak to trough (a contraction) and then from trough to peak (an expansion) draw diagram peak: the beginning of a contraction, the high point of economic activity prior to downturn trough: the end of a contraction, the low point of economic activity prior to a recovery Explain the concepts of (a) potential output and (b) the output gap. (3 marks) a) Potential output: the amount of output (real GDP) that an economy can produce when using its resources such as capital and labour, at normal rates. Potential output is not a fixed number but grows over time, reflecting increases in both the amounts of available capital and labour and their productivity. b) Output gap: the difference between the economy’s potential output and its actual output at a point in time. Positive output gap, when actual output is above potential and resources are being utilised at above normal rates is called an expansionary gap. A negative output gap, when actual output is below potential, and resources are not being utilised is referred to as a contractionary gap. Whenever an output gap exists, whether it is contractionary or expansionary, policy-makers have an incentive to try to eliminate the gap by returning actual output to potential. Explain the concept of Okun’s law. Discuss the implications of Okun’s law for policymakers? (5 marks) Okun’s law describes a systematic relationship between cyclical unemployment and the output gap. According to this law, an additional percentage point of cyclical unemployment is associated with some constant (noted by B) percentage point decline in the output gap. For Australia B is estimated to be about 1. 5. IMPLICATIONS Explain the concept of Planned Aggregate Expenditure (PAE). How does PAE differ from Actual Expenditure? (2 marks) Planned aggregate expenditure is the total planned spending on final goods and services. This involves consumer expenditure, investment, government purchases and net exports. PAE and AE differ when a firm sells either less or more of its product than expected. As a result the planned investment I(p) and actual investment I values vary, resulting in different PAE and AE. ADD EXAMPLE Explain why the following two conditions are equivalent ways of describing equilibrium in the Keynesian aggregate expenditure model. †¢ Y =PAE †¢ INJ(p)=WD (3 marks) For the keynesian model, it was assumed that in the short run, producers leave prices at preset levels and simply meet the demand that is forthcoming at those prices, and thus in the short run, firms produce an amount that is equal to planned aggregate expenditure, i. e. when Y=PAE. Equilibrium can also be defined as a situation in which planned injections of expenditure are enough to exactly offset any withdrawals, i. . INJ(p)=WD. Using the two-sector model, this description of equilibrium is the same as Y=PAE. PAE can also be written as C + I(p). In equilibrium, it must therefore be the case that Y=C+I(p) and hence Y-C=I(p). Also, as aggregate output, is equivalent to aggregate income. Savings is equal to investments. As savings are the only withdrawals while investment expenditure the only injection in this model it can be seen that the two conditions are indeed equivalent in describing equilibrium in the Keynesian aggregate expenditure model. Discuss the role played by fixed (or sticky) prices in the Keynesian model of income determination. Briefly explain what would happen if prices were fully flexible in the short-run. (2 marks) Use the Keynesian aggregate expenditure model and appropriate diagrams to explain the following: †¢ The paradox of thrift †¢ The effect on equilibrium GDP of an exogenous increase in exports. (4 marks) The paradox of thrift: an attempt by the community to increase its savings will fail and the economy, overall, will be worse off as a result of that attempt. (Price level and the interest rate, are held constant). Increased saving, decreases consumption hence drops Y=PAE (C+I(p)) and increases withdrawals and hence saving curve increased. Equilibrium GDP would increase if there were an increase in exports (raises PAE, raising whole line therefore equilibrium point is higher) PAE=C+I(p) +G+X-M Explain what is meant by the multiplier? Why, in general, does a one dollar change in exogenous expenditure produce a larger change in short-run output? (4 marks) EXAMPLE The multiplier, otherwise known as the income-expenditure multiplier, is the effect of a one-unit increase in exogenous expenditure on short-run equilibrium output. The multiplier arises because a given initial change in spending changes the incomes of producers, which leads them to adjust their spending, changing the incomes and spending of other producers, and so on. Ultimately, these successive rounds of declines in spending and income may lead to a decrease in planned aggregate expenditure, and output that is significantly greater than the change in spending that started the process. Explain the role played by the marginal tax rate in determining the size of the multiplier. Other things equal, how does a cut in the marginal tax rate affect the size of the multiplier? (2 marks) PAGE 214 If the government sets a high tax rate, a change in domestic income will not flow through the expenditure on domestically produced goods and services to as great an extaent as when the tax is low Use a diagram to illustrate the concept of short-run equilibrium in the Keynesian aggregate expenditure model. Suppose the economy is initially not in equilibrium, explain the process by which the economy adjusts to equilibrium. (4 marks) PAGE 204, 205 Explain the role played by the marginal propensity to import in determining the size of the multiplier. Other things equal, how does an increase in the marginal propensity to import affect the size of the multiplier? (2 marks) The size of the multiplier is largely determined by the coefficient in front of GDP in the economy’s planned aggregate expenditure equation, write equation, representing the proportion of any increase in aggregate income that is spent on domestic goods and services and thus useful in representing the change in equilibrium output. As this coefficient is (c-m)(1-t), and the multiplier 1/(1-k) an increase in the marginal propensity to import would reduce the size of the multiplier. This is so as, if a significantly large proportion of income is spent on imports, then any change in income earned domestically will have a smaller effect on domestic expenditure compared to the situation in which the marginal propensity to import is small. Explain what is meant by the government budget constraint. Indicate how it can provide a link between fiscal policy and public debt? 3 marks) The government budget constraint is the term given to the concept that government spending in any period has to be financed either by raising taxes or by government borrowing. Briefly explain the main implications of demographic changes (over the next 50 years) for fiscal policy (3 marks) What are the main instruments of fiscal policy? Explain how each might be used to close an expansionary output gap. (4 marks) Explain the difference between discretionary fiscal policy and automatic stabilisers. Which one of these will be the main influence on the size of the structural budget deficit? Explain. (3 marks) A government is considering its fiscal policy response to a decline in exogenous desired expenditure by households and firms which has produced a large contractionary output gap. Two alternative policies are under consideration: An increase in government spending of $20 billion, or A one-time cash payment to all households, which also has a total value of $20 billion Use the 4-sector Keynesian aggregate expenditure model to explain which of these policies will have the largest effect on planned aggregate expenditure and on the level of output. (4 marks) Suppose a government is concerned about the size of the budget deficit. It decides to increase government spending by $20 billion, but at the same time to increase exogenous taxes by $20 billion. Will this policy have any effect on the level of output? Explain your answer. (3 marks) Briefly discuss any complications or issues with fiscal policy that are not accounted for by the Keynesian aggregate expenditure model. 3 marks) Money can be defined by its functions. In the following cases explain whether or not something is money, and which of the functions of money that it satisfies. – Credit-card account with a $5,000 limit – A BHP-Billiton share – A Transaction Account with the Commonwealth Bank with a $2000 balance (3 marks) Explain the assumptions and implications of the qua ntity theory of money. (3 marks) Explain what is meant by open-market-operations. Briefly outline how the RBA uses open-market-operations to influence the cash rate. (4 marks) How to cite Macroeconomics, Papers Macroeconomics Free Essays Technological advancement has been realized in almost all areas of production.   In the US the increased use of computers has led to solid growth of productivity.   Productivity is the most valuable statistic used to determine the overall economic welfare of a country. We will write a custom essay sample on Macroeconomics or any similar topic only for you Order Now    Growth in productivity indicates that there is improvement in the living standards of the citizens and also more job opportunities in the job market. Due to this effect, the contribution of computers in the US productivity is expected to increase in the near future.   This is due to the fact that most citizens and especially those living below the poverty line would like to enjoy equal health standards as well as living standards with the rich. (Chiarella Flaschel, 2000). In the circular flow diagram, economy is divided into two parts.   The first one deals with production of goods as well as services while the second part deals with their consumption.   Circular flow diagram is used by the economics to determine economic growth.   Leakages from the circular flow diagram is the income not spend on goods that are domestically produced. Examples of leakages include savings, imports and taxes. Injections into the circular flow diagram are the expenditures that are added to the expenditure on the circular flow. Examples of injections include investment, exports and government exports. When the circular flow is at equilibrium, the leakages from the circular flow equal the injections into the circular flow (Chiarella Flaschel, 2000).   The circular flow therefore remains the same in size.   However, if the injections into the circular flow exceed the leakages from the circular flow, then economic prosperity is witnessed while if the leakages exceed the injections then there is a recession in the economy growth. Technological change in certain industries can lead to unemployment. For instance, introduction of computers and networking in banking industry can lead to loss of jobs by many tellers and cashiers.   Change in technology can cause reduction in the number of workers needed with specific skills.   Another example is of car industry where car workers can loss jobs with introduction of robots. This leads to unemployment which is specifically know as technological unemployment. (Chiarella Flaschel, 2000).   Change in technology can lead to increase in the rate of employment through increasing productivity. Increase in productivity creates a stable economy and more job opportunities where people can secure jobs. China is ranked in the fourth position in the world’s economy while US takes the lead. Japan and German follow in the second and third positions respectively. (http://www.chinadaily.com). However, due to China’s changes in exchange rates, it is believed that China is likely to become the world’s third economy, hence surpassing German.   Technological advances have contributed to an increase of about 11.4% of china’s GDP and about 18.5% industrial output rate. Increased productivity has however led to a slight rise in the degree of unemployment in China since it has contributed to fast technology advancement.   Most industries do not need human labor but use only skilled labor.   There are fears that the US economy may undergo recession due to numerous crisis and house slump that it is experiencing.   If this trend of economic growth continues in China, then the China’s economy may even surpass the US economy in the near future (http://www.chinadaily.com). References. Chiarella C. Flaschel P. (2000). The Dynamics of Keynesian Monetary Growth: Macro Foundations. Cambridge University Press. How to cite Macroeconomics, Essay examples Macroeconomics Free Essays Macroeconomics refers to issues which influence a countries growth in terms of effecting positive impact. Microeconomic stability refers to the situation where by a country’s economic conditions are favorable and therefore conditions are conducive for growth. Population growth is often portrayed as causing poverty and environmental degradation, and thus population control is seen as a means of improving living standards. We will write a custom essay sample on Macroeconomics or any similar topic only for you Order Now There is a growing concern amongst governments that the rate of population growth in most developing countries if not checked could continue jeopardizing the development in those countries by straining the budgets of those already struggling economies. Introduction. Population growth has been a subject of research for many decades as governments and other stakeholders seek means to bring population under check for it is widely assumed that it is related to poverty and environmental degradation. This paper explores the interrelatedness of population growth, poverty, and environment from a general perspective. Population growth implies the increase in the number of human beings in a given population per unit time (Lia Jesse, 1998). Even though population growth can refer to increases of number of members in any given species, this paper shall limit itself to the discussion of human population. Population growth can be attributed to several aspects such as immigration and due to births which is viewed as a natural process. According to estimates from expert, the population growth in the world is currently at 200,000 people per day. Out of the current growth estimates, over 70 % of the increase is taking place in the developing countries. It is further estimated that, in the next 30 – 40 years, 2. 6 billion people will be added to today’s world estimate population of 6billion people. Currently, 65 percent of all worlds’ population lives on less than a dollar a day, in other words, in abject poverty. This indicates a positive relationship between and population growth and poverty in some areas. The relationship between the two variables lies in the fact that, human population depends on the environment for survival. If production remains constant over along period of time but in turn the population keeps on increasing, it gets to a point where the land can support no more people therefore any additional population is bound to suffer from want. This is especially so in the developing world where the main economic activity is dependent on land resources such agriculture. It is worthy noting that, population can also affect environment in other ways like the sprouting up of slums as a result of disproportionate population growth. This in turn causes people to turn into environmentally unsustainable practices to earn income. On the other side this poses a threat to health since in some cases it strains urban infrastructure for instance the city of Nairobi, the city was designed to cater for a population of 1. million people, the current population is 3 times more. The resulting effect is that, the infrastructures as well as social amenities are overstretched and unless expanded proportionally, such pose negative challenges to the environment. It is not fair to link all population growth to poverty and environmental degradation. Taking the case of some Asian countries, they have experienced a population growth and at the same t ime, improved living standards attributed to booming economies. On the other hand, a country may experience population growth without the growth impacting negatively on the environment as long as corrective measures are taken to prevent environmental degradation. Effects of population in rural areas. Clearing forest or virgin land to pave way for cultivation to support the excess population is the commonest effect of population growth on environment. This becomes an environmental concern in that it may touch on water catchment areas as well as steep lands therefore catalyzing soil erosion. The other effect could be ecological displacement of animal and plant species from their natural habitats. On the other hand population growth may result to poverty in that if the population depends on the land for income, population growth may mean over sharing of resources meaning that productivity of the land is affected ( Silanga, 2003p. 565). This scenario is especially common in sub Saharan Africa where a big percentage of the population live in rural areas. However, not all such environment woes should be associated with population growth. Effects of population in urban areas. This is of relevance since over half of the world population live in urban settlements and it is in the urban setting whereby population growth rate is high something occasioned by immigration as well as natural process. An exponential population growth may not reflect in jobs creation something which means that more and more people fall into the population trap since they do not have meaning full employment and are forced to live in semi permanent houses in slum areas . Environment may be affected by pollution resulting from economic and industrial processes. Role of population control and population growth. Population control refers to the methods applied to populations to reduce the rate of increase of individuals in a population. Family planning is the commonest method. It involves use of biological methods such as pills, hormone injection as well as tubal ligation. It controls population growth in that, individuals can control their reproduction patterns and avoid giving births to unwanted and unplanned babies. This has proved successful almost every where in the world with some countries reporting negative population growths. If proper population control measures are effected, the problems associated with population growth are solved hence the relevance of population control to population growth. Conclusion. The population – environment – poverty axis is a complex microeconomic issue phenomena which requires further research especially due to the fact that other factors affect the situation and any objective study must look into other factors in play as well. Meanwhile there s need for controlled population growth to check on population growth whose effect in most cases is negative. How to cite Macroeconomics, Papers Macroeconomics Free Essays