Question

Q1) In addition to capital accumulation and technological progress, what are some of the other possible explanations for recent output growth in China?

Q2) Will the CPI and GDP deflator always move together? Explain.

Q3) First, explain why the money demand curve is downward sloping. Second, explain what factor(s) will cause shifts in the money demand curve.

Q4) Based on your understanding of the IS-LM model, graphically illustrate and explain what effect a reduction in consumer confidence will have on output, the interest rate, and investment

Q5) Graphically illustrate (using the WS and PS relations) and explain the effects of an increase in the markup on the equilibrium real wage, the natural rate of unemployment, the natural level of employment, and the natural level of output.

Q6) Based on your understanding of the aggregate supply and aggregate demand model and the IS-LM model, graphically illustrate and explain what effect a tax increase will have on the economy. In your graphs, clearly illustrate the short-run and medium-run equilibrium.

Q7) Based on your understanding of the Phillips curve, is it possible for the unemployment rate to increase while inflation increases? Explain.

Answer 1

Answer :

Q1) In addition to capital accumulation and technological progress, what are some of the other possible explanations for recent output growth in China?

1) :- The most recent four decades has seen a rise of an economic monster in type of china which is known as the assembling center point of the world. It is likewise the second greatest economy in the world at this point. The helpless communist country began with low talented labor yet expanded capital investment and innovative expertise has empowered it to develop as pioneer in the world for automobile and electronics.

Be that as it may, another factor is its currency which China has pegged with USD. China has kept it falsely underestimated and utilizes a cast forex save of $4 trillion to keep up that peg. An underestimated currency stifles wage in the economy and that implies outside organizations advantage by paying lower wages. Their cost decreases and they lean toward large scale manufacturing in the country. This has helped China to pull in gigantic FDI over the period yet it likewise assisted with raising the output in the economy.

Q2) Will the CPI and GDP deflator always move together? Explain.

2) :- The GDP deflator and CPI quantifies the inflation impact yet it is a bit much that they will consistently be in unison. The GDP deflator considers the all out estimation of the goods and services created in the economy. Further, it quantifies the estimation of goods and services created inside as far as possible.

CPI is the proportion of inflation which is worried about a bushel of goods and services purchased by the consumer so it does exclude all the items or services. The bin of consumer goods likewise incorporates imported goods and it might influence the estimation of CPI than GDP Deflator.

On the off chance that the country is bringing in raw petroleum and its price rises abruptly, at that point it will influence CPI to the more prominent degree.

Q3) First, explain why the money demand curve is downward sloping. Second, explain what factor(s) will cause shifts in the money demand curve.

3):- The money or capital is a significant factor of production and interest is paid for the use of that asset. This is otherwise called the expense of capital. A greater expense of capital builds input cost just as required rate of return for age of benefit. So it is very clear that at a higher rate of interest, individuals or firms will have a lower demand for the money.

The demand for money relies on various variables. In the event that there is a blast period in the economy, at that point firms and consumers will have a more appeal for money as the economic expansion implies higher aggregate demand so the organizations could build the investments. The vulnerability about the future decreases the demand for money as individuals will be reluctant to face the challenge. In any case, the expansion in generally pay and affinity to expend raises the demand for money.

Another factor is the interest rate. On the off chance that the real interest rate is lower, at that point it will expand the demand for money.

Q4) Based on your understanding of the IS-LM model, graphically illustrate and explain what effect a reduction in consumer confidence will have on output, the interest rate, and investment

4) :- When there is reduction in consumer certainty, they demand less goods and services. Because of that aggregate demand in an economy decreases. Because of decrease in aggregate demand IS curve shifts in reverse. It will move IS curve as IS curve is a curve that speak to equilibrium in goods advertise. These decrease force sway on output, interest rate and investment.

Because of fall in IS curve , there is decrease in interest rate from R to R1 and decrease in output and real GDP from O to O1.

Q5) Graphically illustrate (using the WS and PS relations) and explain the effects of an increase in the markup on the equilibrium real wage, the natural rate of unemployment, the natural level of employment, and the natural level of output.

Effect of reduction of markup price on equilibrium wage rate: A reduction in the markup price will make organizations lessen the prices given the nominal wage rate. This will prompt increse in the real wage rate dependent on price setting conduct; this will cause an upward move in the PS curve. This expansion in the real wage rate would likewise occur with a reduction in the rate of unemployment. In this way, there is decrease in the common rate of unemployment and increment in the normal level of employment and output. The equilibrium level of real wage rate would likewise be higher.

Q6) Based on your understanding of the aggregate supply and aggregate demand model and the IS-LM model, graphically illustrate and explain what effect a tax increase will have on the economy. In your graphs, clearly illustrate the short-run and medium-run equilibrium.

Short Run :

The intial equilibrium happens at point E where SRAS and AD1 curves meet. Output level is Y1 and Price is P1. Increment in taxes is a contractionary Fiscal policy. Higher taxes discourages investment and spending. In this way, the demand decreases. Promotion shifts left from AD1 to AD2. There is a downward development along the SRAS curve. New Equilibrium is at point E1 with lower level of output and lower price P2

Long Run :

Beginning Equilibrium at point E1. Higher taxes will move the demand curve to left work the point where it meets the long run aggregate supply curve at point E2. Economy ranges to maximum capacity output Y* with lower price level P2.

Q7) Based on your understanding of the Phillips curve, is it possible for the unemployment rate to increase while inflation increases? Explain.

In short run, Philips curve shows a negative connection among inflation and unemployment rate. Rise in inflation will diminish unemployment rate and the other way around while in long run, Philips curve is vertical which shows that employment is at its normal level while inflation continues changing when there is variances in business cycle.

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