$20.00 Economics Questions
1. Use the concepts of gross and net investment to distinguish between an economy that has a rising stock of capital and one that has a falling stock of capital. “In 1933 net private domestic investment was minus $6 billion. This means that in that particular year the economy produced no capital goods at all.” Do you agree? Why or why not? Explain: “Though net investment can be positive, negative, or zero, it is quite impossible for gross investment to be less than zero.”
2. Briefly explain how the following would shift the IS function to the right.
a. A change to lump-sum taxation (Specify whether increase or decrease is needed to shift IS curve to the right.)
b. A change to government spending (Specify whether increase or decrease is needed to shift IS curve to the right.)
3. Explain briefly how a change to the following MS, MD, or P (ceteris paribus) would shift the LM function to the right. Include in your discussion whether the variable would have to increase or decrease to cause the rightward LM shift. Discuss which of these the FED exercises control over.
b. MD (money demand).
c. P (price index).
4. Assume that a hypothetical economy with an MPC of .8 is experiencing severe recession. By how much would government spending have to increase to shift the aggregate demand curve rightward by $25 billion? How large a tax cut would be needed to achieve this same increase in aggregate demand? Why the difference? Determine one possible combination of government spending increases and tax decreases that would accomplish this same goal.
5. Explain why relatively flat as opposite relatively steep labor demand curves are more consistent with the empirical observation that there are relatively minor changes in the real wage rate over the course of the business cycle.
6. Is sustainable long-run equilibrium always reached when the AD and SAS curves intersect? Why or why not?
7. “In the steady state, the government benefits from inflation.” Explain.