Explain the circular-flow model of the economy in terms of resource and monetary flows. Discuss the role of injections and withdrawals within this model. What are the limitations of this model of the economy?
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Explain the circular-flow model of the economy in terms of resource and monetary flows. Discuss the role of injections and withdrawals within this model. What are the limitations of this model of the economy?
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- Why monetary policy and fiscal policy are important macroeconomic tools used to stimulate the economy?Task 3 Consider a closed economy where the goods and money markets are described by the following relationships: C = 200 + 0.9(Y – T) I = 400 – 15r M = 200 + Y – 100r P G = 150 T = 100 M = 2000 P = 2 Where Cis planned consumption, / is planned investment spending, Tis government tax revenues, G is government purchases, M is the money supply, P is the price level and r is the interest rate. a) Derive the two expressions for the IS and LM equilibrium relationships respectively. Sketch a graph of the two relationships. b) Calculate the equilibrium value of output Y and interest rate r (round off your answers to one decimal point). Compute also the level of consumption and investment spending in equilibrium and check whether the actual level of spending matches the equilibrium level of output. c) The government reduces taxation to T=50 in order to boost economic activity. Assume no changes in the values of all the other variables. 1. What is the immediate increase in income before the…What happens when an economy was initially in full employment, following a strongly expansionary monetary or budgetary policy?
- Task 3 Consider a closed economy where the goods and money markets are described by the following relationships: C = 200 + 0.9(Y – T) I= 400 – 15r M/P = 200 + Y – 100r G = 150 T = 100 M = 2000 P| =2 Where Cis planned consumption, I is planned investment spending, T is government tax revenues, G is government purchases, M is the money supply, P is the price level and r is the interest rate. c) The government reduces taxation to T=50 in order to boost economic activity. Assume no changes in The values of all the other variables. 1. What is the immediate increase in income before the economy adjusts to its new equilibrium? 2. What are the economy's equilibrium level of output Y and interest rate following the cut in taxation? Compute the equilibrium level of consumption and investment spending. With the help of the IS/LM graph, carefully explain what happens to the economy following the cut in taxation. d)lf the government intends to pursue monetary policy instead of fiscal policy in…What is the circular flow model, and how does it illustrate the flow of goods and money in an economy?Which of the following best describes the role of households and firms in the circular flow model of the economy? Firms provide households with factors of production in exchange for money; households provide firms with goods and services in exchange for money Households provide firms with factors of production in exchange for goods and services Households supply the factors of production to firms in exchange for money; firms supply goods and services to households in exchange for money Firms and households exchange money with one another in the pursuit of higher incomes and profits
- A) Distinguish between the short run and the long run as they relate to macroeconomics. Why is the distinction important? B) Use graphical analysis to show how each of the following would affect the economy first in the short run and then in the long run. Assume that the United States is initially operating at its full-employment level of output, that prices and wages are eventually flexible both upward and downward, and that there is no counteracting fiscal or monetary policy. i) Because of a war abroad, the oil supply to the United States is disrupted, sending oil prices rocketing upward. ii) Construction spending on new homes rises dramatically, greatly increasing total U.S. investment spending. iii) Economic recession occurs abroad, significantly reducing foreign purchases of U.S. exports.Assume an economy is currently operating at point A. What key policy recommendations would you make for an economy like this one that is currently operating at point A? Justify why you believe this is appropriate policy.Assume a two-sector economy model is given by: Y = C + I, C = 97 + 0.7Y, I = 180 – 125i M s = 255, L 1 = 0.2Y, L 2 = 220 – 175i where Y is income, C is consumption, I is investment, i is rate of interest, M s is money supply, L 1 is transactionary demand for money and L 2 is speculative demand for money. a) Find the equilibrium income level and interest rate, together with equilibrium levels of C, I, L 1 and L 2 . b) Show what happens to the equilibrium conditions if autonomous investment falls from 180 to 110. c) Demonstrate your answers to (a) and (b) graphically.
- i. Distinguish between the wealth effect, interest rate effect, and the foreign price effects of a price change. ii. Why does the Aggregate Supply curve cross the potential GDP line? iii. The Aggregate Supply/Aggregate Demand model and the microeconomic analysis of demand and supply in particular markets for goods, services, labour and capital have superficial resemblance but they also have many underlying differences. Using relevant examples where applicable, outline and discuss these differences.a) Consider that the Ghanaian economy is a Small and close, which ischaracterised by the following.AD=C+I+G+NXC=a+bY*Y*=disposalincomeT=T 0I=I 0G=G0Md/P=Ld(Y,i)Ms=money supply, which is given.AD=Aggregate demand, C=consumption, G=Government expenditure, T=Tax, P= Price level, I=Investment, NX=Net exportsa)Consider an increase in Government spending ∆ > .Assume for now thatboth price and expected price are fixed. Also assume that government doesnot implement any other policy than the increase in Government spending.What is the effect of this policy on the goods market? b)What is the effect on equilibriumin the money market? Present your answer ina well-labelled diagram, showing both money supply and demand before thepolicy was implemented, and that after the policy was implemented in thesame graph. c)Solve for equilibrium in the goods market.d)Suppose the policy change is rather an increase in real money supply not a decrease in government spending. What is the effect of this policy…What happens in the circular flow model during a recession.