Mgt606 Final Exam Answers

1. a. GDP = C+I+G+(Ex-Im)

GDP = 3,000 Billion

C = (0.65)3,000 Billion = 1,950 Billion

I = (0.2)3,000 Billion = 600 Billion

(Ex-Im) = -400 Billion

G = GDP – C – I – (Ex-Im) = 3000B – 1950B – 600B – (-400) = 850 Billion

GDP = 1,950B + 600B + 850B + (-400B)

b. It is important to construct real GDP because it accounts for price changes such as inflation and deflation versus nominal GCP which only accounts for current dollars.

1. a. Frictional unemployment is the portion of unemployment that is due to the normal turnover in the labor market.

Structural unemployment is the portion of unemployment that is due to changes in the structure of the economy that result in a significant loss of jobs in certain industries.

b. Cyclical unemployment is the portion of unemployment that is caused when there is not enough aggregate demand for the workforce. Since the government’s fiscal and monetary policies can directly affect aggregate demand depending on what policies are enforced it can greatly affect cyclical employment rates.

1. Inflation is the rate at which general level of prices for goods and services rise at the same time reducing the currencies purchasing power. Unanticipated inflations greatly affects bank’s willingness to provide long term loans since their nominal interest profits will be consumed by unanticipated inflation cutting into their profits and in cases of extreme inflation even lose profits.

1. a. Y = C + I        where Y = AE

C = 510 + 0.8Y

I = 90

Y = 510 + 0.8Y + 90

0.2Y = 600

Y = 3,000

b. MPC = 0.8

MPS = 1 – MPC = 0.2

Multiplier = (1/MPS) = (1/0.2) = 5

1. a.  Y = C + I + G        where Y = AE

C = 510 + 0.8(Y – (40 + 0.2Y))

I = 90

G = 162

Y = 510 + 0.8(Y - (40 + 0.2Y)) + 90 + 162

Y = 762 + 0.8Y – 32 – 0.16Y  

0.36Y = 730

Y = 2027.78

b. Tax multiplier = -(MPC/MPS)

Tax multiplier = -(0.8/0.2)

Tax multiplier = -4

1. GDP is the value of all goods and services produced in an economy in a period of time (GDP = C + I + G). A decrease of 300 billion in government spending will decrease GDP while a 300 billion decrease in taxes will increase GDP. Though the values are identical, the 300 billion decrease in taxes will not translate to 300 billion increase in spending power because people are likely to save a portion. Overall these changes will create a net decrease in GDP.

1. a. The downward slope of the money demand curve according to transaction motive is that as the interest rate goes down the opportunity cost of holding money goes down as well. This means that people are more like to keep their money in bonds if the interest rates are high and hold onto liquid money if the interest rates are low.

b. The downward slope of the money demand curve according to speculative motive is that if market interest rates are higher than normal, you may expect them to come down in the future making bonds that were bought increase in price. This means at higher interest rates people will buy bonds in anticipation for increase in prices once the interest rates go down and vice versa. This creates a downward slope effect for money demand.