Question

In: Economics

Question 2 (20 marks) question 2.1 Give an example of a situation when an economy is...

Question 2
question 2.1
Give an example of a situation when an economy is in recession according to both definitions of recession and give another example of a situation when an economy may be in recession according to one of the definitions but not the other.

You answer.

question 2.2
Consider two identical countries. The only difference between them is that in country A the marginal propensity to consume (out of disposable income) MPC=0.4 and in country B MPC=0.7. The marginal tax rate t=0.2. I=20,000, G=10,000, NX=25,000-0.2Y (where Y is total income), c0=15,000.

a)   Calculate the multiplier in both countries (round up to two decimal places)


You answer.


b)   (i) What would be the equilibrium levels of output in country A and country B?

You answer.


(ii) Show the equilibrium levels of output in country A and country B on a well labelled graph with aggregate demand on the vertical axis and output (income) on the horizontal axis.

You answer.


c)   Now assume that consumers lose their confidence and decrease autonomous consumption c0 from 15,000 to 10,000. What will happen to output in both countries? Which country will have a larger effect on its GDP? Illustrate using the graph from part b).

You answer.


question 2.3
Usually investment depends on the interest rate. Briefly explain how an increase in the interest rate r would affect aggregate investment. Use a reference to the expected rate of profit in your explanation. (Word limit: max 100 words)

You answer.

Solutions

Expert Solution

2.1 The two definitions of recession includes fall in output for two consecutive quarters and the declining inflation. During recession, output tends to fall due to various reasons like higher oil prices, investment market crash, etc., A recession is identified by a decline in total output, rise in unemployment and decline in inflation. As the demand for commodities falls during recession, firm's actual inventory of goods is higher than the planned inventory and therefore, prices of the commodities fall. Lower demand and lower economic activity leads to a fall in inflation.

Example of a recession where both output and inflation declined is the 1991 recession where the economic activity declined due to tightened monetary policy and Tax reform Act of 1986 which led to resulting in sinking property values, lowered investment incentives, and job loss. The recession led to lowered inflation rate and slower economic activity.

However, declining inflation rate is not guaranteed in recession. The period of recession where there is lower economic activity but the inflation rate is also increasing is known as Stagflation. Stagflation was observed after the oil price shock of 1974 and 2008.

2.2.

Y = C0 + MPC (Y-tY) + I + G + NX

Y = (C0 + I + G +25000) + {MPC(1-t) -0.2}Y

Y - {MPC(1-t) -0.2}Y = (C0 + I + G +25000)

Y [1- {MPC(1-t) + 0.2}] = (C0 + I + G +25000) => Y = (C0 + I + G +25000) / [1- {MPC(1-t) + 0.2}]

Multiplier = 1/ [1-{MPC(1-t)} + 0.2]

Country A = 1/[1-{0.4(1-0.2)} + 0.2] = 1/[1-{0.4 *0.8} + 0.2] = 1/(1-0.32+ 0.2) = 1/0.88 = 1.14

Country B = 1/[1-{0.7(1-0.2)} + 0.2] = 1/[1-{0.7 *0.8} + 0.2] = 1/(1-0.56+ 0.2) = 1/0.64 = 1.56


b)   (i) What would be the equilibrium levels of output in country A and country B? (2 marks)

Country A, Y* = Y = (C0 + I + G +25000) / [1- {MPC(1-t) + 0.2}] = (15000+ 20000+10000+25000) *Multiplier

Y* = 70000*1.14 = 79,800

Country B, Y** = 70000 *1.56 = 109,200


Related Solutions

Question 2 (20 Marks) 2.1. Computers provide support in making structured decisions. This is achieved through...
Question 2 2.1. Computers provide support in making structured decisions. This is achieved through the use of Decision Support Systems (DSS) and Intelligent Support Systems (ISS), explain this in detail. 2.2. Explain the four-stage planning model for Strategic Information Technology Planning.
Give an example of a situation when you should perform a paired T-test and an example...
Give an example of a situation when you should perform a paired T-test and an example of when you should do an unpaired comparison.
Give an example of a time when the physical health situation of a client was beyond...
Give an example of a time when the physical health situation of a client was beyond the scope of your own role. Why was it beyond the scope of your own role? How did you deal with it? Who did you report to? Why did you report to them?
Question 1 (20 Marks) Each of the following independent cases describes a situation with a proposed...
Question 1 Each of the following independent cases describes a situation with a proposed tax treatment. For each case indicate whether the treatment is correct, justify your conclusion. Case A: In 1980, Brenda Carter bought a 400-acre parcel of land for $ 300,000. She was going to build a home on the property. However, in 2017, she received an offer of $ 800,000 for 150 acres of the property. Because these 150 acres of land were waterfront and had better road...
QUESTION 2 [10 MARKS] 2.1 Discuss critically the challenges for a small business of calculating fixed...
QUESTION 2 [10 MARKS] 2.1 Discuss critically the challenges for a small business of calculating fixed asset depreciation. (5) 2.2 What is residual value, and how does it differ from the estimated useful life of an asset? (5)
QUESTION 2 (30 marks) 2.1 As the director of a firm's capital budgeting department, you have...
QUESTION 2 2.1 As the director of a firm's capital budgeting department, you have been asked to evaluate a project. After collecting information from various sources, you have determined the following: The firm's preference share pays a constant annual dividend of R2.25 and is currently selling for R20. The firm is expected to pay an ordinary share dividend of R3 in one year, with anticipated growth of 2% each year thereafter. Currently, the ordinary share is selling at a price...
Question 2 NB it is a 20 marks question There exist a number of strategies that...
Question 2 NB it is a 20 marks question There exist a number of strategies that can be considered for implementation. (a) Identify four (4) issues in strategy implementation. (b) Create four (4) types of strategies using the SWOT Matrix in the matching stage of strategy formulation. (c) Describe any two (2) of the SWOT Matrix strategy types.
Give an example (scenario) of a situation when a normal distribution would be used including a...
Give an example (scenario) of a situation when a normal distribution would be used including a graph representative of the results.
QUESTION 2 (25 Marks: 45 minutes) 2.1 Answer the following questions: a) Define current liabilities (2...
QUESTION 2 (25 Marks: 45 minutes) 2.1 Answer the following questions: a) Define current liabilities b) Define current assets c) In which sequence should notes to the financial statements be presented? d) Discuss the identification of financial statements as noted in IAS 1. e) Discuss consistency of presentation as a general feature of financial statements. f) Discuss materiality and aggregation as a general feature of financial statements. 2.2 You are provided with the following statement of financial position of Brabham...
Give an example of an integrative negotiation situation
Give an example of an integrative negotiation situation
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT