Principles of Macroeconomics: 2

4.7%

Calculate the growth rate between 2013 -2014: 8.42%
the growth rate between 2014 -2015: 4.34%
the growth rate between 2015 -2016:-1.09%
Average growth rate=(8.42+4.34-1.09)/3 ≈≈4%

4%

Y = $10 trillion
C = $5 trillion
TR = $2 trillion
G = $2 trillion
public saving = $1 trillion

Technological change increases the profitability of new investmen

an increase in the proportion of income after net taxes used for consumption

a change from an income tax to a consumption tax, an increase in household saving, & a decrease in the government deficit

recession; trough

by less than $500

C to A

B to C

firms develop new products that replace old products in the economy, thereby encouraging economic growth

an upward shift of

knowledge; increasing returns to scale; economy

The growth rate of real GDP per capita will be higher in Alpha than it is in Beta

Aggregate expenditure is equal to GDP

aggregate expenditure that year was greater than GDP that year

[Planned Inventory > Actual Inventory
Planned Investment > Actual Investment
AE > RGDP]

an increase in consumption spending

decrease consumption by $9 million

[MPC=1-MPS=1-0.1=0.9
MPC=ΔC/ΔYΔC/ΔY
ΔCΔC=MPC ΔYΔY=0.9(-10m)=-9m
Cosnsumption will fall by 9 million]

Actual inventories are greater than planned inventories

Households expect future income to decline

$2 billion

the multiplier is a value between zero and one

False ; As price change, we move along the AD curve

True

False

True

False

A) Equilibrium real GDP is determined where aggregate expenditure = real GDP. The values for aggregate expenditure for each level of real GDP are given in the table below. They are found by adding together C + I + G + NX. The value where real GDP equals aggregate expenditure is $3,000 billion, and this is equilibrium.

$1,000 --- $1,200
$2,000 --- $2,100
$3,000 --- $3,000
$4,000 --- $3,900

B) The MPC is found by the formula ΔC/ ΔY (change in consumption / change in income)
ΔC =$900 billion and ΔY = $1,000 billion, so the MPC = $900 billion / $1,000 billion or 0.9.

C) The economy is not at full employment. Equilibrium GDP is $3,000 billion, which is less than potential GDP. The economy is in recession.

D) Refer to part c. GDP must rise to $4,000 billion to be at full employment. This means that GDP must increase by $1,000 billion. To find the right change in government spending, use the multiplier formula:
ΔGDP = M × ΔG. We know the △GDP we want to achieve is $1,000 billion. We can find the multiplier since we know the MPC:

multiplier = 1 / (1 - 0.9) = 1 / 0.1 = 10
$1,000 billion = 10 x ΔG =
$1,000 billion / 10 = ΔG = $100 billion
Actually, MPC=0.9, hence M=10

Well because of the return to saving would increase, saving will increase as well as the supply of loanable funds. So, the supply curve for loanable funds will shift to the right and lower the real interest rate as well as increase the quantity of loanable funds exchanged.

[One determinant of the amount of household saving is the interest rate or the after-tax rate of return that households earn on the amount that they save. The higher the rate of return, the more the household will save. Individuals care about the rate of return that they earn from saving after taxes. Decreasing the tax rate on income earned from saving will increase the after-tax return from saving.
Since the after-tax rate of return rises for every dollar invested, the supply of loanable funds will increase, shifting the curve for loanable funds to the right. If the supply curve for loanable funds shifts to the right, this will lower the interest rate. As the interest rate declines, more investment projects become profitable. Firms will respond by increasing the amount of investment. This will raise the amount of capital available per worker. As the capital-to-labor ratio increases, so does labor productivity and growth in the economy.]

Firms help the economy's knowledge capital by doing research and development. But knowledge capital is nonrival, meaning that if one firm uses it, it doesn't stop another firm from using it as well. The knowledge capital is nonexcludable because if one firm gets it, all the other firms do too. So Paul Romer thinks that knowledge capital is a major key to determine economic growth. So if one company creates a brand new of something, other companies can't be prevented from using their knowledge/research and continuing on with it. So they have a free ride, they didn't have to pay for it or contribute to the hard work. As the question states, "new growth theory is that investment in research and development will be too low in an economy," is as I stated above. No one will want to create something new while putting in all their time, money, and effort, if someone/ some company is able to freely expand off of their ideas and research. So it will decrease the investment in research as well as the development of new products.


[According to Romer, knowledge capital is a key determinant of economic growth. Firms contribute to an economy's knowledge capital by conducting research and development. But there is a problem. Knowledge capital is nonrival in that if one firm uses it, it does not prevent another firm from using it. Also knowledge capital is nonexcludable because if one firm gets it, all other firms get it too. That is, once the formula for a drug is known, it becomes widely available for other firms to use. If this is the case, when one firm invents a drug, once the formula for the drug is known, other firms cannot be prevented from benefiting from the research and development they did not pay for. These firms have the incentive to free ride. If this is the case, the original firm inventing the formula cannot capture all the benefits of the formula. Some of the marginal benefits will go to other firms. If this is the case, the firm will choose the amount of research and development equal to the amount that will equate the marginal costs and the marginal benefits for the firm. Since the marginal benefits to the firm will be low, then the firm will not invest enough in research and development.]