Macroeconomics Answers

Consider two alternative programs for contraction.One is the removal of an investment subsidy;the other is a rise in income tax rates. Use the IS-LM model and the investment schedule ,as shown in Figure 11-9 ( Dornbusch Fischer ) , to discuss the impact of these alternative policies on income , interest rates ,and investment.

Suppose the government cuts income taxes.Show in the IS-LM model the impact of the tax cut under two assumptions:a)The government keeps interest rates constant through an accomodating monetary policy.b) The money stock remains unchanged .Explain the difference in results.

“We can have the GDP path we want equally well with a tight fiscal policy and an easier monetary policy , or the reverse , within fairly broad limits . The real basis for choice lies in many subsidiary targets , besides real GDP and inflation, that are differently affected by fiscal and monetary policies.” What are some of the subsidiary targets referred to in the quote ? How would they be affected by alternate policy combinations?

Which of the following factors will increase the size of the multiplier?

Two separate capacity constraints are discussed in this chapter: (1) the actual physical capacity of existing plants and equipment, shown as the vertical portion of the short-run AS curve, and (2) potential GDP, leading to a vertical long-run AS curve. Explain the difference between the two. Which is greater, full-capacity GDP or potential GDP? Why?

Calculate 1) GDP at MP

(Rs. '000)

2,000

40

560

500

100

60

200

60

2) NNP at FC

1. Consumption of fixed capital

2. Employer's contribution to social security schemes

3. Rent

4. Interest

5. Profits

6. Royalty

7. Wages and salaries

8. Net indirect taxes

9. Net factor income from abroad

(Crores)

34

30

10

20

25

5

170

38

(-) 3

Estimate National Income using Expenditure method from the

following data:

Particulars. (Crores)

1. Opening stock.

2. Closing stock.

3. Consumption of fixed capital

4. Private final consumption expenditure

5. Net exports

6. Net factor income from abroad

7. Compensation of employees paid by general government

8. Direct purchases of non - durable goods from abroad

by general government

9. Net purchases of goods and services by general government

in the domestic market

10. Net domestic capital formation

11. Net indirect taxes

50

60

10

500

(-) 25

10

100

10

100

160

150

In the tiny island nation of Bongo, the nation’s wealth is broken down as follows: 50 percent is cash in checking and savings accounts, 25 percent is housing, and 25 percent is stock holdings. Last year, Bongo experienced an inflation rate of 25 percent, and housing prices and stock prices each increased by 10 percent. Explain what happened to real wealth in Bongo last year, and how this change in real wealth helps explain the downward slope of the aggregate demand curve.

5. White House officials often exude more confidence than they actually feel about future prospects for the economy. Why might this be a good strategy? Are there any dangers inherent in it?

4.Suppose the government announces it will pay for half of any new investment undertaken by firms. How will this affect the investment demand curve?