Question

Essay Questions:

45.   First, write out the equilibrium conditions in the Goods and Services market and the Loanable Funds Market for a closed economy (i.e. the “supply equals demand” equations for each).

46.    As we’ve learned, a third market – the Labor Market – typically does not reach an equilibrium where supply of labor equals demand for labor. What do we call the “normal” unemployment rate that persists even when wages have [incompletely] adjusted

47.   Say that businesses in the economy collectively think that the markets in which they sell their goods will soon experience increasing demand. In the loanable funds market, (a) which curve(s) do you expect to be affected, and (b) which direction(s) would those curves shift?

48.   Say that the government reduces the taxes it collects as a percent of interest income.   In the loanable funds market, (a) which curve(s) do you expect to be affected, and (b) which direction(s) would those curves shift?

49.    Say that businesses and households suspect that the rate of inflation in the economy will be higher in the future. In the loanable funds market, (a) which curve(s) do you expect to be affected, and (b) which direction(s) would those curves shift?

50.   Name and briefly describe at least three determinants of an economy’s long-run level of output.

51.    What do we call this specific long run level of output?

52.   Say we have two economies with similar levels of technology, institutional quality, natural resources, physical capital stock, and human capital. Country A has a lower savings rate than Country B. Which country do you expect to grow (in terms of GDP per capita) faster?

53.   Say we have two economies with similar levels of technology, institutional quality, natural resources, human capital, and savings rates. Country A has a lower physical capital stock than Country B. Which country do you expect to grow (in terms of GDP per capita) faster?

Answer 1

45.

According to Keynes the amount of spending determines the equilibrium rate of output in the economy. The equilibrium in the economy will be achieved when total spending in the economy equals to the total supply of goods and services in the economy. In this case, the inventories of the business firms will be constant and they will have no incentive to change their level of output. When the expectation of the people about the future state of the economy is pessimistic, they will cut back their spending and producers will cut back their level of production.

That is at equilibrium AD=SRAS-LRAS

The supply of loanable fund curve is a positively sloped curve marked as the S in the figure above. This indicates the amount people want to save at each given level of interest rate. The slope of the curve indicates that as interest rate increases the amounts people want to save increases, and vice versa.

The demand for loanable fund curve is a negatively sloped curve marked as the D in the figure above. This indicates the amount of fund the government and the firm demands at each given level of interest rate. This curve is horizontal summation of planned investment and budget deficit curve.

The equilibrium in lonanble funds market is given as

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46.

Unemployment is one of the key determinants of economic activity. The number of people in the civilian labor force who are either looking for a job for past four weeks or waiting to start or return to a job is called the unemployed. The civilian labor force is consists of all those persons who are either actively working or looking for a job. The job of a homemaker or the work done for the improvement and betterment of one’s own home is mostly unpaid for and not considered as employment.

There are three types of unemployment: frictional unemployment, structural unemployment and cyclical unemployment. The frictional unemployment arises due to imperfect information between worker and employer and due to transition of workers between jobs. The structural unemployment occurs due to structural changes in the firm or company. This arises due to the fact that the available workers are not fit for the current job openings. The cyclical unemployment arises due to cyclical changes in the economy or recession and lack of labor demand.

The frictional and structural unemployment remains always present in the economy, these two combining give us the natural rate of unemployment. Unemployment that is ‘natural’ to the economy due to lack of information and structural changes. This is an unemployment rate that sustain in the long run and the output that is produced at this level of unemployment is called full employment output or potential output in the economy. The economy reaches the full employment when the current unemployment reaches the natural rate. Because, the natural rate of unemployment denotes the efficient use resources and the economy produces its potential output.

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47.

If all the firm thinks that there will be icre in demand this is business pessimism. Business pessimism will increase the demand for loan in the economy. This is because the firm will need more fuunds for investmment now. The demand for loan curve will shift to the right.

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48.

Suppose that the government decreases the tax collection. This increases the deficit of the government. The rise in deficit decreases the supply of ppublic loan in the economy. This in turn will decrease the supply of loanable funds in the economy. The supply of loanable funds curve will shift to the left.