Using the IS curve Fed rule model, explain what happens to the equilibrium values of the interest rate and output if:

a) There is an increase in T with the money supply held constant

b) A decline in G with the Fed changing the money supply enough to keep output constant

c) An increase in P with no change in government spending or taxes

5. Microeconomics and macroeconomics

Determine whether each of the following topics would more likely be studied in microeconomics or macroeconomics.

1) In the long run, the short-run aggregate supply curve shifts to eliminate any existing output gaps. Depict the parallel shift of the short-run aggregate supply curve that occurs in the long run.

2) Following a reduction in consumer spending, in the long run, what is the value of real GDP in this economy?

use the following information and the cash flow formula from chapter two To calculate interest paid.

Change in net working capital 13,000

operating cash flow 105,000

dividends paid 41,000

net capital spending 35,000

net new borrowing 17,000

net new equity issued 13,000

1. In your view, should the US aim to reduce government debt at the expense of social programs like Social Security, Medicare and Medicaid. What is the argument for reducing deficit spending and what is the argument for maintaining (or expanding) social programs? What are the limits on government debt, both in general and in the US specifically? Explain.

The difference between the actual variable overhead cost and the standard variable overhead cost for the actual volume of the overhead activity base is known as the

Select one:

A. variable overhead efficiency variance.

B. fixed overhead budget variance.

C. variable overhead spending variance.

D. fixed overhead volume variance.

In macroeconomics there are two key questions: first, how to measure (real) output growth? and second, how is growth connected to wellbeing?

As for the first question, there are three ways to measure real GDP growth. It starts with the definition of a percentage difference between two numbers, say x1 compared to x0. When there is only one good (e.g. apples) there are no prices to worry about for the calculation. But for the economy as a whole, we need prices to be able to add up quantities (of apples, bananas, and everything else) in dollar terms. So for real GDP growth, which holds prices constant on a given base year to control for inflation, then the trick is to apply those prices before, during, and after that base year in order to calculate the total dollar value of all goods and services produced and track growth that is not affected by inflation.

In this exercise you will work out the connection between the three ways to measure GDP growth: A) As a percentage change holding prices constant. B) Expressing growth in terms of a common item (converting everything into a particular good (e.g. apples). And C) as the weighted average of the growth in each of the goods weighted by their corresponding expenditure shares.

The second question in macroeconomics refers to a mapping from goods and services to subjective well-being. That is, why do we care about economic growth, after all?

Instructions

Work out the algebraic steps that:

1. take you from the first to the second equation below
2. take you from that same top equation below; and

   . Fix a base year price

   ???? ????+????? ????−?=??,?∗??+?+??,?∗??+???,?∗??+??,?∗??−?〖real GDP〗_(t+1)/〖real GDP〗_t -1=(p_(a,t)∗a_(t+1)+p_(b,t)∗b_(t+1))/(p_(a,t)∗a_t+p_(b,t)∗b_t )-1

   2. Or in terms of one good, say, apples (divide numerator and denominator by ??,?p_(a,t))

   ???? ????+????? ????−?=??+?+??,???,?∗??+???+??,???,?∗??−?〖real GDP〗_(t+1)/〖real GDP〗_t -1=(a_(t+1)+(p_(b,t)/p_(a,t) )∗b_(t+1))/(a_t+(p_(b,t)/p_(a,t) )∗b_t )-1

   In the first, real GDP is in constant year t dollars, in the second, real GDP is measured in units of apples.

   An equivalent representation is a weighted average of the growth in each of the goods based on their expenditure shares.

   ???? ????+????? ????−?=????+???+?−????+???−?〖real GDP〗_(t+1)/〖real GDP〗_t -1=(θ_t ) ̂(a_(t+1)/a_t )+(1-(θ_t ) ̂ )(b_(t+1)/b_t )-1

   where ??(θ_t ) ̂ is the fraction of nominal GDP accounted for by purchases of apples, and ?−??(1-(θ_t ) ̂ ) the share accounted for by purchases of bananas

3. prove the relationship Why does real GDP growth matter? Well, suppose that households get utility from apples and bananas every period t:

   ??=?????+?−?????u_t=θln(a_t )+(1-θ)ln(b_t )

   ??+?=?????+?+?−?????+?u_(t+1)=θln(a_(t+1) )+(1-θ)ln(b_(t+1) )

   Then,

   ??+?−??=???+???+?−???+???−?u_(t+1)-u_t=θ(a_(t+1)/a_t )+(1-θ)(b_(t+1)/b_t )-1

   So, if ?θ ̂ = ?θ, then utility increases whenever real GDP growth is positive.

You will find all the algebraic steps within the body of Chapter 1. Your task is to write up a two page ‘study guide’ that compiles the derivations of points (1)-(3) above. Given that the answers are in the book, this exercise will be graded as either submitted (100) or not (zero).

Define production possibility frontier stating clearly the assumptions underlying its
construction.

Briefly explain the following :

i) Giffen goods
ii) Necessity goods
iii) Inferior goods
iv) Substituted goods
v) Complementary goods
vi) Normal goods