ecs2602-tutorial-letter-with-assignments.

Calculate autonomous spending. Formula & calculations. The formula is C = A + MD. That is to say, C (consumer spending) equals A (autonomous consumption) added to the product of M (marginal propensity to consume) and D (true disposable income). Calculate equilibrium level output and income. Formula & calculation Calculate the income gap between the current level of output and income and the full employment level of output and income. Formula & calculation. Government spending can be used to reach full employment in the goods market. By how much should the government spending change? Show your calculations and indicate the direction of the change in government spending. Downloaded by Glichelle Delport () lOMoARcPSD| Taxes can be used to reach full employment in the goods market. By how much should taxes change? Show calculations and indicate the direction of the changes in taxes. Use the goods market model (axes below) to present the above economy graphically. Clearly indicate the following on the diagram The multiplier effect in the economy results from the behaviour of households. Briefly explain why. The multiplier effect refers to the increase in final income arising from any new injection of spending. ... Marginal propensities show the proportion of extra income allocated to particular activities, such as investment spending by UK firms, saving by households, and spending on imports from abroad. Taxes are part of autonomous spending in the goods market model. Briefly explain why a decrease in taxes increase the demand for goods and shifts the demand for goods curve upwards in the goods market, equal to c(T) and not T. Explain briefly in words why the net effect of an equal increase in government spending and taxes (in other words, the balanced budget) will still have a stimulatory effect on the level of output and income. Identify the three factors that impact on the nominal wage in the wage-setting relationship. Any factor, other than the unemployment rate, that increases the bargaining power of workers will cause the wage-setting relationship to change. Expected price level, institutional factorsuu Briefly explain why it is possible for labour to increase the real wage through nominal wage bargaining List the components of the “domestic demand for goods”. Give an example which would lead to an increase in the domestic demand for goods The determinants of C, I and G are the same factors that were explained in learning units 2 and 4. Consumption (C) is a function of disposable income (YD); investment (I) is a function of the level of output and income (Y) and the real interest rate (r); and government spending (G) is regarded as exogenous. Downloaded by Glichelle Delport () lOMoARcPSD| Use the following diagram to illustrate and explain in words why an explain in words why an expansionary monetary policy causes a decrease in the interest rate in the financial market Define a government budget deficit A budget deficit is an indicator of financial health in which expenditures exceed revenue. The term budget deficit is most commonly used to refer to government spending rather than business or individual spending, but can be applied to all of these entities. Which stabilisation policy can be used to reduce a budget deficit? A contractionary fiscal policy entails a decrease in the demand for goods in the economy by decreasing government spending and/or increasing taxes. A result of such a policy is that the budget deficit decreases. Uses the IS-LM model and chain of events (or words) to illustrate and explain how negative impact of a budget deficit reduction on the level or output and income can be counteracted by monetary policy. Clearly indicate the variables measured on the axes below. Define a depreciation of the nominal exchange rate. The nominal exchange rate E is defined as the number of units of the domestic currency that can purchase a unit of a given foreign currency. ... (Under the fixed exchange rate regime, a downward adjustment of the rate E is termed revaluation.) An increase in this variable is termed nominal depreciation of the currency. Use the following two diagrams (given the initial equilibrium level Y1) to show graphically ((illustrate) the impact of the following two events on the level of output and income and on the trade balance (i) An increase in the “domestic demand for goods” Diagram A (ii) An increase in the “demand for domestic goods” in Diagram B Compare the impact on the level of output and income and on the trade balance