Question

 

Explain why each of the following statements is True, False, or Uncertain according to economic principles. Use diagrams where appropriate. Unsupported answers will receive no marks. It is the explanation that is important.

A6-1. An economy with a recessionary gap will never return to long run equilibrium without policy intervention.

A6-2. In a closed economy, investment will equal the sum of private saving and government saving.

A6-3. An increase in private saving for a closed economy implies lower consumption in long-run equilibrium and also leads to lower GDP growth.

A6-4. You have two Canadian dimes. One is from 1962 and contains 25 cents worth of silver; the other is from 2013 and contains no silver. You would clearly use the later coin when paying for a coffee rather than the earlier one.

Answer 1

a) "False"

If the economy is in a recessionary gap the demand will be less and due to less aggregate demand in the economy, the unemployment will be high. In the long run, the wages will fall and supply will experience a positive supply shock. this will allow the suppliers to supply more at a lower cost and demand will increase at a lower price. This will bring the economy above recession.

b) "True"

The total output in the economy is equal to saving + consumption. That means whatever income the people have they will spend consuming or saving. In a closed economy where there are no leakage i.e. imports from other countries, people will consume only local goods. It will lead to Y = C + S. We also know that Y or output is equal to COnsumption and investment that means Y = C + I

Putting both equations together we get C + I = C + S

I = S.

c) "False"

This is called the paradox of thrift that means as the people save more they demand less which lead to fall in the GDP and aggregate demand but this happens only in the short run and things remain same in the long run.

d) "False"

The Old Canadian currency is not the monetary value anymore. In the modern times, we use Fiat currency which gets its value for the monetary authority and not from any asset backing it. So, the current currency has much more value than the old currency. As the old currency is not the Fial currency anymore i.e. its value is zero now.