Intermediate Macroeconomics

Q1.    Cost-push inflation means that the general prices have been hiked due to the increase in general costs of the factors of production, i.e., labor and capital when production companies are running at full production capacity caused by the aggregate supply curve shifts to the left while inflation is caused by an increase in the aggregate demand curve.

Q2    Real disposable income is the mathematical term used to describe the relationship between real consumption and real Gross Domestic Product for it is the income which consumers remain with after taxes have been deducted and any benefits added.

Q3    marginal propensity to invest (MPI) is the mathematical term used to describe the relationship between real saving and real Gross Domestic Product (GDP)

MPI (I) = change in investment/change in income

Q4    The value of the Average Propensity to consume decreases as Real Gross Domestic Product decreases since APC is the proportion of total disposable income consumed.

Q5    the value of the average propensity to save decreases as real GDP decreases since the current disposable income is the determinant of the level of saving.

Q6    since MPC + MPS = 1 and APC + APS = 1. Therefore; APC + APS = MPC + MPS (TRUE)

Q7    Says Law states that supply creates its own demand or desired aggregate expenditures will equal aggregate expenditure.Q8      The classical view of how the economy works dwells on the fact that there cannot be involuntary unemployment and it’s impossible to occur. It views the economy as self-regulating and maintains that the economy is always capable of achieving the natural level of real GDP when there is full employment of the economy’s resources.

Q9       The Great Depression was the historical occurrence that changed the thinking of how the economy works since it was the phase of harsh economic depression which was witnessed ten years after World War II.

Q10     Keynesian economics advocates that the economy should be that of a ‘mixed economy’ and should be dominated by the public c sector but the government should intervene during periods of recessions. Moreover, the changes in aggregate demand, whether they are anticipated or not have the grates short-run effect on the real output and employment but not on the prices.

Q11      The investment demand curve can be described as the rate of interest which usually makes a proposed investment project to be viable since at lower rates of interest then more projects appear to be financially feasible since the cost of borrowing money to finance the projects is quite low while the investment schedule for an economy can be describes as a relationship between the gross investment and capital.

Q12     The equilibrium level of real GDP is found by setting current real national income, Y, equal to current aggregate expenditure, AE whereby it can be said that: the equilibrium level of GDP is equal to the level of autonomous expenditure. Full employment according to the Keynesian theory of employment is the level of employment beyond which further increases in effective demand does not increase either employment or output levels.

REFERENCES

Mc Eachem, W.A. (2009) Econ for Macroeconomics.) Mason, OH: South-Western Pub.

Stachurski, J.D. (2009) Economic Dynamics: Theory and Computation. MIT Press (MA)