Please help with this worksheet Application of Inflation. GDP. Income. Employmen
ID: 1178585 • Letter: P
Question
Please help with this worksheet
Application of Inflation. GDP. Income. Employment, AS, AD, Monetary and Fiscal Policy analysis all in one. Your nominal wages are 20,000 a year. The labor force is 2.5 million and is unchanged by the oil shock. Before the oil shock the price level was and GDP was . The economy has been shaken by a sharp increase in the price of crude oil. Because of this oil shock the economy has moved away from its full employment level of GDP and is experiencing a 1 percent increase in the unemployment rate. The BLS released a report stating that the unemployment rate at the new equilibrium is now at 5%. Estimate the CPI index in the base year. How much would a basket of goods that cost $5,000 in the base year cost if the CPI is 120? What is the unemployment rate in this question if the economy is operating at full employment? Estimate the # of unemployed in the economy at the full employment level of GDP. What type of workers do we expect to be unemployed at full employment? How will this oil shock to the economy effect GDP and the Price Level? Draw the new equilibrium after the oil shock and label the new Price Level and GDP (this is not a random calculation, there is an exact GDP value that can be calculated using the information in this assignment the Price Level cannot be calculated in this question). How will this oil shock to the economy affect the Price Level? How will this change in the Price Level affect your real income? Estimate the # of unemployed in the economy at the 5 percent unemployment rate. Explain the three main categories of unemployment present when the economy is operating at a 5 % unemployment rate.Explanation / Answer
no, gross national product is the value of the economy---The value (in US dollars) of a country's final output of goods and services in a year. The value of GNP can be calculated by adding up the amount of money spent on a country's final output of goods and services, or by totaling the income of all citizens of a country including the income from factors of production used abroad.
So what equilibrium means is the spending is equalling the profits of a country, so it is equal. No gain or loss.
It does not equate to full employment.
NO
equilibrium is when aggregate expenditure = national income
full employment is the level at which you are utilizing all resources at optimum level.
they can be the same only when the economy is at its PPC, optimum level.
at other times when equilibrium & full employment differ,
there results a deflationary or inflationary gap.
using the EX /Y diagram is a good way to see it visually
Recession:-
Equilibrium GDP is where the economy will settle with current market forces. If this is less than full employment GDP, it means that the economy will operate below full employment. At levels below full employment, the economy is in a recession.
In the short run inflation erodes the value of money, as demand for labor outstrips supply.
The increased cost of labor is soon reflected in the cost of everything else.
Banks start to raise their interest rates to compensate for the inflation as well. The costs of production continue to rise, and eventually exceed the rise in wages.
As prices rise, the quantity of goods demanded goes down.
Eventually their is an over abundance of goods and services being produced and businesses start laying off workers. This actually creates a recession, but that doesn't last forever either. You could call that equilibrium if you want to.
An economy that is operating above full employment is experiencing an expansionary gap, i.e. actual output is more than potential output.
i. I think the main problem with prolonged expansionary gaps is that inflation rises. Demand for goods and services significantly rises above a firm's normal capacity, and so firms tend to raise their prices in the long run. This generally results in increased inflation.
ii. I think this answer will depend on what economic model you are working with. In the Basic Keynesian model, prices are held constant in the short run, so the current price level would remain the same in the short run. However, in the long run, firms will increase their prices to meet demand.
The level of short-run equilibrium output will be above potential output (Y>Y*)
iii. full employment output (potential output) will be less than actual output
What can be done to fix it?
The government can use Fiscal Policy to try to eliminate the expansionary gap. They can do this in two ways.
1) Increase Taxes and/or decrease transfer payments. This will decrease disposable income (income - taxes), which reduces consumption spending, and that results in a lower level of equilibrium output.
In the Basic Keynesian Model this is represented by the PAE curve pivoting downward from its origin so that it now intersects the 45 degree line at the level of potential output. So by increasing taxes, the government has eliminated the ouput gap and now potential output = actual output.
2) Government can decrease it's spending to eliminate the ouput gap.
In the basic keynesian model, a decrease in government spending results in the PAE curve shifting downward. If the government reduces its spending by the correct amount, the PAE curve will intersect the 45 degree line where potential output = actual output, thus eliminating the expansionary gap.
Another way to eliminate the expanisaion gap is with monetary policy. The central back would increase the interest rate, which will decrease consumption spending (because consumers would rather invest their money in perhaps a bank account or similar investment to enjoy the interest rates) and planned investment would decrease (because firms would be less likely to make any new investments while there is a high interest rate because the repayments would be higher.
So in the basic keynesian model, this would be represented by the PAE curve shifting downward due to the reduction in consimption spending and planned investment. This would eliminate the expansionary gap so that actual output=potential output.