Extras

Question 1

equation for rate of inflation

Answer 1

(price index year 2 - price index year 1) / (price index year 1) x 100 percent

Question 2

real interest rate equation

Answer 2

nominal interest rate - inflation rate

(it’s the nominal interest rate adjusted for the change in the purchasing power of money)

Question 3

unemployment rate

Answer 3

(number of people unemployed) / (number of people in the labour force) x 100 percent

Question 4

output gap

Answer 4

(actual real GDP - potential real GDP) / (potential real GDP) x 100

aka

(Y_actual - Y_potential) / (Y_potential) x 100

Question 5

what does the equation S + (T - G) = I + (X - IM) describe? what does each variable in the equation represent?

Answer 5

this equation reps an ECONOMIC EQUILIBRIUM CONDITION

signifies that when income equals national expenditure, national savings equals national asset formation

the equation states that private savings (S) plus the fiscal surplus (which is the excess of government tax revenue (T) over government spending (G)) should be equal to total private investment (I) plus net exports (X - IM)

S: private savings

T: gov tax revenue

G: government spending

X - IM: net exports

Question 6

explain how net exports can be viewed as a way of forming assets for an economy. provide examples/scenarios to illustrate your explanation

Answer 6

net exports can be seen as a way of forming assets for an economy because when the value of goods and services produced domestically and sold to foreign markets (exports) exceeds the value of foreign goods and services purchased domestically (imports), there is POSITIVE NET REVENUE from trade, which takes the form of a NET TRANSFER OF CURRENCY/ASSETS from FOREIGNERS TO THE DOMESTIC ECONOMY

ie. a trade surplus, where exports exceed imports, leads to an accumulation of foreign currency reserves, which can be invested or used for future economic development

ie. China’s trade surplus is a notable example, allowing it to amass significant foreign exchange reserves for various purposes

Question 7

suppose a country runs a budget deficit. assume private savings and trade balance are unaffected. how would this affect the equation S + (T - G) = I + (X - IM)?

Answer 7

T < G

T - G is negative

keeping S and (X - IM) fixed as indicated, this implies that there are fewer funds available for private investment

consequently, private investment (I) has to be lower

Question 8

describe the potential implications of running a large budget deficit in the long run

Answer 8

implications of a large budget deficit in long run DEPEND on the REASONS BEHIND THE DEFICIT

if deficit is from INCREASED GOV SPENDING, its impact would VARY based on whether the expenditure is focused on INVESTMENT or CONSUMPTION

if deficit is due to REDUCTION IN TAXES, it may not necessarily have negative implications for the long run

CAREFUL ANALYSIS is REQUIRES to assess the overall economic impact of the deficit

Question 9

suppose that wealth increases by 200 - how does this affect the consumption function and the saving function?

Answer 9

consumption function shifts up in a parallel fashion (an increase of 200 at every level of real national income)

saving function shifts down in a parallel fashion (decrease of 200 at every level of real national income)