Indifference curve, graph, income effect and substitution effect, a level economics

question 7

state & explain the 3 reasons 4 the downward slopping nature of ad curve

ad slopes downward people will buy more goods & services @ lower price levels,& vice versa.

real balances effect: the cash U hold is worth more when the price level falls,so U can buy more.

foreign trade effect: lower price levels in the united states convince customers 2 buy more american goods & fewer foreign goods.

interest rate effect: lower interest rates promote more borrowing & more spending.

question 8

state & explain the 2 reasons 4 the upward sloppng nature of as curve

as slopes upward;suppliers will bring more goods & services 2 market @ higher price levels,& vice versa.

profit effect: if there is no change in the cost of operating a business,rising prices will improve profits,& suppliers will bring more products 2 the market.

cost effect: cost increases make producing products more expensive.Producers will be willing 2 supply more only if prices also rise 2 cover those added costs.

@ high rates of output (near productive capacity),costs rise steeply & as steepens sharply.

question 9

use appropriate macro-equilibrium graph 2 explain how disturbances in the ad can lead 2 recession

ad will shift lft if:

sending decreases.

expectations get worse.

taxes increase.

ad will shift right if:

spending increases.

expectations improve.

taxes decrease.

on the graph,ad shifts lft away from full-employment gdp.

question 10

with the help of a graph explain how excessive demand leads 2 demand-pull inflation

excessive aggregate demand causes inflation.The price level rises from p0 2 p2 when aggregate demand expands 2 ad2.Demand-side theories emphasize how inadequate or excessive ad can cause macro failures.

question 11

explain how the long run as leads 2 macro-equilibrium where further changes in ad cause only change in price & not output.

if ad1 shifts 2 ad2,prices rise but output stays @ qn.As prices rise,short-run profits grow,but so do costs,wiping out the new profits.This kills the incentive 2 increase output.

question 12

list & describe the policy measures 2 counteract the business cycle.

fiscal policy: the use of government tax & spending powers 2 alter macroeconomic outcomes.The government can shift the ad curve 2 the right by spend- ing more m1y.Or it can cut taxes,leaving consumers with more income 2 spend.

m1tary policy: the use of m1y & credit controls 2 influence macroeconomic outcomes.Interest rates & the m1y supply can also shift the ad curve.Lower interest rates encourage consumers 2 buy more big-ticket items like cars,homes,& appliances—purchases typically financed with loans.B

aggregate demand

question 1                                                                                                                                                              

a) suppose the consumption function is c = $200 + 0.75yd.4 the given values of disposable income calculate the autonomous consumption,income-dependent consumption & complete the table

c = a + byd

c = current consumption  a = autonomous consumption b = marginal propensity 2 consume

yd = disposable income

b) also,calculate the savings/dissaving when disposable income is $800

question 2

use the given information 2 calculate the mpc & apc 4 the economy

question 3

write the general consumption function & explain autonomous consumption & income dependant consumption.

consumption refers 2 expenditures by households (consumers) on final goods & services.Consumer expenditures account 4 more than 2-thirds of total spending.Hence whatever factors alter consumer behavior R sure 2 have an impact on aggregate demand.Disposable income = consumption + saving.Autonomous consumption (a): consumer spending not dependent on current income.People consume even if they have no income by borrowing or drawing down savings.Income-dependent consumption (byd): consumer spending that increases as income increases,& vice versa.

the consumption function is c = a + byd

question 4

list & explain the factors that affect consumption function

c = a + byd

c = current consumption,a = autonomous consumption,b = marginal propensity 2 consume,yd = disposable income.The consumption function allows us 2 predict how much the consumption comp1nt of ad will change when incomes change

question 5

draw suitable graphs & explain how decreased consumer confidence affects ad

shifts of aggregate demand.Shifts of the consumption function R reflected in shifts of the aggregate demand curve.Consumers’ willingness 2 spend current income is affected by their confidence in the future.If consumers become more worried or pessimistic,autonomous consumption may decrease from a1 2 a2.This change will shift the entire consumption function downward.

question 6

explain what is investment?What R the factors that affect investment?

investment mean expenditures on (production of) new plants,equipment,& structures (capital) in a given time period,plus changes in business inventories.

expectations.Expectations play a critical role in investment decisions.No firm wants 2 purchase a new plant & equipment unless it is convinced people will later buy the output produced by that plant & that equipment.

interest rates.A 2nd determinant of investment spending is the rate of interest.Business firms typically borrow m1y 2 purchase plants & equipment.

technology & innovation.A 3rd determinant of investment is changes in technology & innovation.When scientists learned how 2 miniaturize electronic circuitry,an entire new industry of electronic calculators,watches,& other goods sprang 2 life.

question 7

explain how adverse expectations about economy affect ad through investment demand using appropriate graphs

as was the case with consumer behavior,we R looking @ investor behavior 2 help us understand aggregate demand.From figure 9.7 we see that knowledge of investor expectations & interest rates will tell us how much investment will be included in aggregate demand @ the current price level.We also see that a change in expectations will alter investment behavior & thereby shift the ad curve.When investment spending declines,the aggregate demand curve shifts 2 the lft.

question 8

explain how the state or local government expenditure & the federal government expenditure differ in times of economic downturn

the government sector (federal,state,& local) spends more than $3 trillion on goods & services,all of which is part of aggregate demand (unlike income trans- fers,which R not).State & local spending is slightly pro-cyclical,with expenditure rising as the economy (& tax receipts) expands & declining when the economy (& tax receipts) slumps.

question 9

explain what is recessionary gdp gap?In a macro-equilibrium graph indicate the recessionary gdp gap.What R the problems associated with recessionary gdp gap?

recessionary gdp gap: the amount by which equilibrium gdp falls short of full-employment gdp.@ p*,too much would be produced.There R unsold inventories.We cut back production & lay off workers.Equilibrium occurs @ p2 & qe,which is less than qf.

question 10

explain what is inflationary gdp gap?In a macro-equilibrium graph indicate the inflationary gdp gap.What R the problems associated with inflationary gdp gap?

inflationary gdp gap: the amount by which equilibrium gdp exceeds full-employment gdp.  @ p*,not enough would be produced.With inventories depleted,we begin 2 strain capacity & prices rise.Equilibrium occurs @ p3 & qe,which is greater than qf

explain how a decrease in aggregate demand can lead 2 deflation.Use graph 2 support yur answer.

deflation usually occurs during a deep recession,when there is a sustained fall in demand & output.This deflation may occur in the aftermath of credit boom & bust or severe tightening of m1tary policy.This simple ad/as model shows that a fall in ad can cause a lower price level.