Answer to Question #97415 in Macroeconomics for Amanjot

Question

In Goa, India, the multiplier effect of iron ore exports is calculated to be 1.62 (Ta, 2003). Calculate the impact of an additional 1,000 rupees of iron ore exports on the economy of Goa.

2. Use the model of aggregate demand and short-run aggregate supply to explain how each of the following would affect real GDP and the price level in the short run.

an increase in government purchases
a reduction in nominal wages
a major improvement in technology
a reduction in net exports

3. The United Kingdom (UK) held a national referendum (vote) on whether the UK should remain in the European Union (EU), or should exit the EU. Exiting the EU is likely to have several consequences: (1) increased barriers to trade between the UK and the remaining EU countries; (2) Reduced refugee flows.

Use the AS/AD model to describe the short run and long run effect of the UK exit from the EU.

Answer 1

1. If Given that the tax multiplier TM is 1.62 and the component additional aggregate demand (AD) of iron ore, Fe as 1000 rupees the impact (real GDP at each price level) of the AD is calculated as;

Impact =1.62*1000

Impact =1620 rupees

2.(a) An increase in government purchases shifts the AD curves to the right causing an   increase in real income and the price level in the short-run.

(b) A reduction in nominal wages shifts the SAS curve downward, causing an increase in real income and a lower price level.

(c) A major improvement in technology shifts the SAS curve downward and the LAS curve outward, resulting in higher real income and a lower price level.

(d) A reduction in net exports shifts the AD curve to the left, lowering real income and              the price level.

  3. If the UK exits from the European Union in the short-run, the aggregate supply and demand   curve shift to the left hence the resulting in decrease real output and also low prices of good and services.  In the long run the aggregate supply and demand curve are vertical lines at the potential level of output. Therefore, the UK will be negatively affected by its exit from the European Union.