Answer to Question #149435 in Macroeconomics for qianhe

Question

Assume that millennials, who spend an average of RM100 a day, are expected to spend at a higher rate in the next ten to fifteen years. 37 percent of millennials report higher spending today than a year ago, while 42 percent of millennials say they are spending more. Furthermore, millennials are spending more on rent or mortgages and leisure activities than they were spending a year ago. Graphically illustrate the macroeconomic equilibrium after the change in spending by millennials:

a) If Malaysia’s economy operate below full employment equilibrium before the change in spending.
b) If Malaysia’s economy operate at a full employment equilibrium before the change in spending.

Answer 1

a)

The graph shows three variants of macroeconomic equilibrium, that is, the state of the economy when the entire national product produced is fully purchased. The E1 point is the equilibrium of underemployment without an increase in the price level. Point E2-equilibrium with a small increase in the price level. The E3 point is an equilibrium in full employment, but with inflation.

They were before the increase in t. E2, after the increase, they will be at the point E3

b)if the actual equilibrium level of output is greater than the potential level, then this means that the total expenditure is excessive. the excess of aggregate demand causes an inflationary boom in the economy: the price level increases because enterprises cannot expand production adequately to the growing aggregate demand, since all resources are already occupied.

This is the inflation gap, shown by an arrow on the chart.