3.1 With aid of the circular flow of income and spending in the economy diagram,
describe how various participants in the economy and the government interact with
each other. Describe how this ensures the effective and efficient operating of the
country.
3.2 Government participation in the economy is essential to improve the standard of
living of the people. Critically provide a detailed analysis of the policies that the
government could use to increase the living standards of the people.

Which of the following statements is correct?

Select one:

a. An increase in government spending in a small open economy causes currency depreciation

b. An increase in domestic taxes in a small open economy causes a decrease in the real interest rate

c. An increase in taxes in a small open economy causes currency depreciation

d. An increase in domestic physical capital in a small open economy causes an increase in the real interest rate.

QUESTION 3

“If taxes and government spending are increased by the same amount, there will still be a positive effect on equilibrium GDP.” Is this statement correct? Discuss by giving appropriate examples of scenario, data and/or diagrams to justify your answer.

ANSWER FOR QUESTION 3

Assuming (initially) that there is no government spending or trade, an economy’s aggregate demand is given by its domestic consumption C and investment I, AD = C + I = c0 + c1Y + I. In the economy’s goods market equilibrium this equals its output: AD = Y. Solving for Y this yields:

Y = [1/(1  -c1 )] (c0+ I)

Given this equation, answer the following questions:

a. If the marginal propensity to consume is 0.6, how much is the multiplier in this economy?

b. Suppose that autonomous consumption is $1 bi and investment is $2 bi. How much is the total aggregate demand?

c. Now imagine that a lethal virus affects the society and firms become very pessimistic about the future of the economy. In response, they decide to cut investments by $1 bi. How much is Y after this initial reduction in investments?

d. Let's now introduce a government sector and assume and open economy. Government collect taxes T from the population and a fraction m of the total expenditure is on imports. What happens to the multiplier (increases, decreases, stays the same)?

What is the incentive of spending several years and thousands of dollars to earn a college degree? (1 pt.)

In attempt to reduce the use of fossil fuels, the government is encouraging individuals and businesses to use solar panels. However, the installation of solar panels can be extremely expensive for most people. What can the government do to encourage more people to install the solar panels? (1 pt.)

Suppose you decide to go to a Bruins hockey game instead of studying for your economics exam. Because of this, you only scored a 76% on the exam. If you had stayed home to study, you would have earned an 84%. (2 pts.)
What is your opportunity cost of going to the game?

In your opinion, was the benefit of going to the game greater than the cost? Briefly explain your answer.

For each of the following statements, identify if it’s a positive or normative statement. (4 pts.)
If more people choose to earn a higher degree, the nation’s productivity will increase.

The government should supply more subsidies or scholarships for more people to go to college.

Going to college is the wisest choice anyone could make.

Unemployment will fall if more people attend college.

Briefly explain why economists disagree on what policy to implement. (1 pt.)

List 5 of the economic principals discussed in class. For each, provide an example of when the use of that principal affected your life. (5 pts.)

Name two factors that can contribute to the growth of an economy. (1 pt.)

When can an economy increase the production of one good without reducing the output of another? (1 pt.)

Name a benefit of trade. (1 pt.)

Suppose Country A and Country B currently have identical production possibilities frontier (PPF). However, Country A is producing more capital goods than consumption goods compared to Country B. Which country will have a larger PPF in the future, ceteris paribus? Briefly explain your answer. (2 pts.)

Camp Green Lake can use its resources to produce shovels or hi-tech metal detectors. They use all of their resources to produce either 250 shovels, 175 hi-tech metal detectors, or a combination of both shovels and hi-tech metal detectors. Currently, Camp Green Lake is producing 205 shovels and 55 metal detectors. (7 pts.)
Draw the production possibilities frontier for Camp Green Lake. Label anything that requires a label, identify the intercepts for the X- and Y-axes, and identify the Camp’s currently level of production.

The Lake is debating about cutting back its production of shovels to 198 while maintaining the current level of production for hi-tech metal detectors. Is this a wise idea? Briefly explain your answer.

If the Camp wants to increase its production of shovels to 210, it will have to cut its production of hi-tech metal detectors back to 40. Calculate the opportunity cost of producing one extra shovel. Show your work.

If the Camp wants to increase its production of hi-tech metal detectors to 75, it will have to cut its production of shovels back to 200. Calculate the opportunity cost of producing one extra metal detector. Show your work.

Suppose Camp Green Lake bought a new machine that produces more hi-tech metal detectors in a day than their previous machine. Using the graph above, illustrate how this will affect their production possibilities frontier.

Ohio and Indiana can produce corn and wheat. The following table shows the maximum each state can produce if they use all of their resources towards that crop. Assume each state has a constant opportunity cost for both crops. (9 pts.)

Crop   Maximum Ohio can Produce   Maximum Indiana can Produce
Corn   255 bushels   200 bushels
Wheat   440 bushels   280 bushels

Which state has an absolute advantage of producing corn?

Which state has an absolute advantage of producing wheat?

Calculate Ohio’s opportunity cost of producing one more bushel of corn. Show your work.

Calculate Indiana’s opportunity cost of producing one more bushel of corn. Show your work.

Which state has a comparative advantage of producing corn?

Calculate Ohio’s opportunity cost of producing one more bushel of wheat. Show your work.

Calculate Indiana’s opportunity cost of producing one more bushel of wheat. Show your work.

Which state has a comparative advantage of producing wheat?

Which crop should each state specialize in producing to maximize benefits from trading?

Assume that policy makers pass a budget that calls for an increase in government spending. In an open economy, which of the following will occur as a result of this fiscal policy action? Select one: a. Private saving increases. b. Investment decreases. c. The current account worsens. d. Either A or C occurs. e. Either A, B, or C occurs.

1. The multiplier effect magnifies the effect of a decrease in spending, resulting in a bigger decrease in real GDP. True/False

2. What is the likely result from a depreciation of a nation's currency when its economy is already operating at its full-employment level of output?

A. Net exports would fall, but equilibrium GDP would rise.

B. Net exports would fall and contribute to demand-pull inflation.

C. Net exports would rise and contribute to demand-pull inflation.

D. Net exports would rise, but equilibrium GDP would fall.

3. A decrease in taxes will have a larger effect on equilibrium GDP if the marginal propensity to consume is smaller. True/False

4. A rightward shift of the investment demand curve translates into an upward shift of the investment schedule in the aggregate expenditures model. True/False

a) Identify and list the “real” values of the 4 spending components of GDP for year 2019 from Table 3 (Gross Domestic Product: Level and Change) based on the information provided in the following link: https://www.bea.gov/sites/default/files/2020-09/gdp2q20_3rd_0.pdf

b) Calculate the share/portion (%) of C, I, G and X in GDP. Please show your calculations.

A professor aims to explore and determine the importance of spending more time in understanding the data behaviour and run the exploratory data analysis. He claims that the longer the time (in hours per day) student’s spent on both aspects will produce more excellence output in terms of writings and results (in average pages). Therefore, a random sample of 11 degree students were chosen and their output produced items were recorded as in Table 1. Draw the conclusion from the result of the appropriate analysis.

Table 1