Econ Chapter 5

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Macro Economics

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Florida National University

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1. Why do economists pay more attention to national economies (for example, the

U.S or Canadian economies) than to state or provincial economies (such as

California or Ontario)?

The better indicator of the economical health of a nation is achieved by considering the national

economic than the state or provincial economies. Even though the state economies ultimately

contribute to the national economy, the latter provides a more accurate image of the country

than state. The countrywide economy provides more reliable data to the economists as state

economy fluctuates depending on the major economic activity. Economists cannot benefit from

state economies as they provide less insight into the overall state of the national economy.

Furthermore, economists can benefit from national economy as there is a larger quantity of

complete data useful for analysis and forecasting.

3. Differentiate between stock and flow variables. Give an example of each.

Stock variable is a variable that is measured at a particular point in time and include capital

inventory, cash in hand and deposits. On the other hand, Flow variables is a variable that is

measured at over a specific period of time. They include annual budgets and monthly savings

(Singh, 2015)

5. Why doesn’t the national bureau of Economic Research identify the turning points

in economic activity until months or even a year after they occur?

The economy has different phases and these phases fluctuate depending with the season and

other occurrences. According to Kimmy (2008) these occurrences generate minor disturbances

in the economy which are hard to recognize. An example is the drop in production level. In this

scenario, the economist might consider the decrease in production level as temporary. In

addition, economic recession takes a long period of time to be recognized and economist have

to look back in a past period to understand the occurrences.

12. What is the relationship between demand side economics and the federal budget

deficit?

The government’s ability to affect aggregate demand by either promoting effective demand or

achieving full employment at its optimum level is called demand side economy. For a

government to eliminate unemployment, it has to avail more money for consumption by

increasing public spending and cutting taxes on business. According to Prateek (2020) the

action taken by government to achieve optimal employment creates a federal budget deficit

which implies that the government is spending more than its receiving in terms of revenue. The

reduced taxes and increased public spending expand aggregate demand and also increase

federal budget deficit.

15. The price level grew slightly faster than real GDP between 1947 and 2014. Does this

mean that the rising price level masked an actual decline in output? Why or why not?

This does not mean rising price level masked an actual decline in output. The actual reason for

this is the increase in population and resources like capital. Between 1974 and 2014, population

increases and the economy created more employment opportunities to sustain the increased

population. Technology positively impacted the growth of capital and this in turn lead to

growth in productivity levels and lead to rise in real GDP (Vali, 2013)

Problems and Exercise

16. Review the information on demand and supply curves in chapter 4. How does the

aggregate demand aggregate supply curve presented in this chapter differ from the

market curves of chapter 4?

At all alternative price levels, aggregate demand reflects overall spending on the economy. It

is the amount of the government, corporation, and individual consumers' total expenditure on

the economy. The summation of multiple individual demand curves is an aggregate demand

curve. On the other hand, a consumer demand curve, including demand for vehicles, illustrates

the demand for cars over a period of time at different price levels.

The demand for a good often depends on the demand for another relative good at different price

levels. If the price of other goods decreases, the demand for individual goods rises, and if the

price of other goods increases, the demand for individual goods increases. Both the aggregate

demand (AD) and the market demand (MD) curves of the individual product slope down, but

for different reasons. Due to wealth, interest rate and foreign trade effect, AD slopes, while the

MD slopes due to price.

The aggregate supply curve is the amount of real GDP generated at different price levels. The

aggregate supply curve analyzes how the quantity of all goods and services produced in the

economy changes as the price level changes. In other words, the aggregate supply curve is the

sum of the individual supply curve of all goods and services in the economy.

17. Determine whether each of the following would cause a shift of the aggregate demand

curve, a shift of the aggregate supply curve, neither or both. Which curve would shift and

in which direction? What happens to aggregate output and the price level in each case?

The price level and quantity demand in aggregate demand curve have a negative relationship

hence making it downward slopping. Increase in price level decreases the quantity demanded

and vice versa. The price level and quantity demand in aggregate demand curve have a positive

relationship hence making it upward slopping

a) The price level changes

Changes in price level will cause the movement along the demand and supply curve and this

does not change the aggregate output.

b) Consumer confidence declines

Decline in consumer confidence shifts the aggregate demand to the left and no shift in the

aggregate supply. This will decrease the equilibrium price and quantity

c) The supply of resources increases

Increase in supply of resources reduces the price and causes the decrease in cost of production

by increasing the supply curve by shifting it to the right. There will be no impact on aggregate

demand curve and only aggregate supply curve will shift to the right.

d) The wage rate increases

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1. Why do economists pay more attention to national economies (for example, the U.S or Canadian economies) than to state or provincial economies (such as California or Ontario)? The better indicator of the economical health of a nation is achieved by considering the national economic than the state or provincial economies. Even though the state economies ultimately contribute to the national economy, the latter provides a more accurate image of the country than state. The countrywide economy provides more reliable data to the economists as state economy fluctuates depending on the major economic activity. Economists cannot benefit from state economies as they provide less insight into the overall state of the national economy. Furthermore, economists can benefit from national economy as there is a larger quantity of complete data useful for analysis and forecasting. 3. Differentiate between stock and flow variables. Give an example of each. Stock variable is a variable that is measured at a particular point in time and include capital inventory, cash in hand and deposits. On the other hand, Flow variables is a variable that is measured at over a specific period of time. They includ ...
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Tags: income tax rate disposable income Aggregate Supply curve Canadian economies stock variables