Macroeconomic Models

Question 1

‘Services do not contribute to GDP as much as industry because industry produces
tangible goods.’ Comment.

Answer 1

Services can contribute to GDP for tangible and intangible products. Goods and services

Sevices represent an even larger proportion than tangible goods in GDP, this proportion is 80%-20% in favour of services in developed countries

Question 2

What is a procyclical variable? with examples

Answer 2

A variable that tends to rise in periods of high growth and tends to fall in periods of low growth
Examples:
- Consumption
- Investment
- Government tax revenue
- Capacity utilization
- Inflation?

Question 3

What is a countercyclical variable? with examples

Answer 3

A variable that tends to fall in periods of high growth and tends to rise in periods of low growth
Examples:
-Unemployment
-social security payments
-Risk primea

An cyclical variable is one that neither increases or falls during high growth

Question 4

What is a leading land agging variable? with examples

Answer 4

• A leading variable is one that moves before (and helps predict) GDP
  
  • e.g. consumer confidence index
• A lagging variable is on that moves after ( and therefore predicts) GDP
  
  • e.g. inflation

If it is neither then it is coincident e.g. consumption and investment

Question 5

In a macroeconomic model, what is the difference between an exogenous and an
endogenous variable? Use the IS-LM model as an example to illustrate your answer.

Answer 5

Endogenous variable: a variable a macroeconomic model attempts to explain
Exogenous variable: a variable a macroeconomic model does not explain

Question 6

Is the IS-LM model a dynamic or a static model? Explain your answer

Answer 6

IS-LM is a static model is static because
- variables are not dated, it does not tell us how variables in t(current period) affects variables in t+1(next period)

A static model tells us what the equlibrium is
A dynamic model describes to us how to get there or move away from the equilibrium