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Course Course Number University or College Professor’s Name Student Name: Section: Macro1 Exercise #3 Please limit your answers to the spaces provided. If necessary, write on the back of the page. Do not attach printout or additional pages. All questions pertain to the Macro1 module in the SimEcon® software package. Make sure that you have read the “Macro1 Manual” and SimEcon® Operation Instructions”. These materials may be found at the Class Web site prior to beginning the exercise. For many of the exercise’s questions, it will be necessary to refer to those instructions. For many of the exercise’s questions, it will be necessary to refer to your text. Open the Macro1 module. You will see a table called “State of the Macroeconomy”. Select “Inflation” and click “Continue”. You will see a table called “Initial Conditions: “Inflation”. Write down the values for the various parameters below: Consumption: Investment: Government Spending: GDP: Taxes: __________ __________ __________ __________ __________ Unemployment: Inflation: Interest Rates: __________ __________ __________ Click “Continue”. You will see a table called, “Macro Policy Tools”. Given the current situation that this economy is in, the best policy would be to (increase, decrease, leave unchanged) __________ government spending, to (increase, decrease, leave unchanged) __________ interest rates, and to (increase, decrease, leave unchanged) __________ taxes. Select “Government Spending” and click “Continue”. Change the government spending to $1,440 and click “Continue”. A table will appear that is entitled “Long Term Results”. Write down the values that you see on this table: Real GDP: Consumption: Investment: __________ __________ __________ Unemployment Rate: Inflation Rate: __________ __________ In the long run, as a result of these policies, GDP will __________ (increase, decrease, remain unchanged). As a result of this policy, in the long run, consumption will __________ (increase, decrease, remain unchanged), and investment will __________ (increase slightly, decrease slightly, remain unchanged). What is the reason for this? __ ____________________________ ______________________________________________________________________ __ Course Macro1 Exercise #3 Page 2 In addition, in the long run, inflation will ____________ (increase, decrease, remain unchanged), while unemployment will ____________ (increase, decrease, remain unchanged). Based on the long run outcome, compared to the initial conditions, how large was the “government spending multiplier” in this case? If full employment GDP is $4,500, how much or a change in government spending would there have to be to reach that level, starting from the initial conditions? Click, “See Graph”, and draw this graph below: As a result of this policy, the aggregate expenditure curve has __________ (moved up, moved down, remained unchanged). This movement of the aggregate expenditure has caused a/an __________ (increase, decrease, no change) in real GDP. Click the button entitled “AD-AS Graph”. Draw this graph below: The AD-AS graph tells us that we are _________________________ (above full employment, below full employment, at full employment). In this current situation, the best policy would be to (increase, decrease, leave unchanged) __________ government spending, to (increase, decrease, leave unchanged) __________ interest rates, and to (increase, decrease, leave unchanged) __________ taxes. Is it possible to be above the full employment level of output? __________ (Yes, No) Course Macro1 Exercise #3 Page 3 Why or why isn’t it possible to be above the full employment level of output? ______________________________________________________________________________ ______________________________________________ _______________ What is meant by the “natural” rate of unemployment? ___________________________ ______________________________________________________________________________ ____________________________________________________________________________ _ Which line indicates the long run aggregate supply curve? _____________________________ _ ____________________________________________________________________________ _ This is because economists think that in the long run the economy naturally gravitates toward _________________________. Now click the “Back” button, you will see the table entitled, “Set Government Spending”. Are we still experiencing inflation? __________ (Yes, No). Click “Reset Policy”. You will see a table entitled, “Macro Policy Tools”. Select “Government Spending” and click “Continue”. Change government spending to $1,443.182 and click “Continue”. You will see the table entitled, “Long Term Results”. Write down the values of this table below: Real GDP: Consumption: Investment: __________ __________ __________ Unemployment Rate: Inflation Rate: __________ __________ Is it necessary to enact policies that further reduce inflation? ________ (Yes, No). Why or why not? _________________________________________________________________________. What have we given up at the expense of reduced inflation? First of all, GDP and consumption are both ____________ (higher, lower, about the same) and unemployment is ____________ (higher, lower, about the same). Does there seem to be a trade-off between unemployment and inflation? __________ (Yes, No). What is the nature of this trade-off? _________________________________ ______________________________________________________________________________ Click, “See Graph”, and draw this graph below: Course Macro1 Exercise #3 Page 4 As a result of this policy, the aggregate expenditure curve has __________ (moved up, moved down, remained unchanged). This movement of the aggregate expenditure has caused a/an __________ (increase, decrease, no change) in real GDP. Click the button entitled “AD-AS Graph”. Draw this graph below: The AD-AS Graph tells us that we are _________________________ (above full employment, below full employment, at full employment). In this current situation, the best policy would be to (increase, decrease, leave unchanged) __________ government spending, to (increase, decrease, leave unchanged) __________ interest rates, and to (increase, decrease, leave unchanged) __________ taxes. Classical economic theory believes that the economy automatically adjusts itself to full employment within a short time. If you believed in classical economic theory in the extreme, how much time do you think would be required for the economy to automatically adjust to full employment? __________. Choose one answer: (3 months, 2 years, practically forever). If you believed in classical economic theory, would you support government intervention in the economy? __________ (Yes, No). If you believed in Keynesian economic theory in the extreme, how much time do you think would be required for the economy to automatically adjust to full employment? __________ Choose one answer: (6 months, 2 years, practically forever). If you believed in Keynesian economic theory, would you support government intervention in the economy? __________ (Yes, No). Liberals often want to __________ (increase, decrease, leave unchanged) government spending, while conservatives often want to __________ (increase, decrease, leave unchanged) government spending.