Econ 104 Essay 3
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Economics
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May 8, 2024
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4/4/2022
The Classical Macroeconomic Model Vs. the Keynesian Macroeconomic Model
To begin, classical economics was created based on the ideas present during the Enlightenment, otherwise known as the age of reason. According to chapter 8 of the textbook, “With its foundation of Enlightenment thinking, the Classical macroeconomic model reflects the desire for individual freedom, social equality, and economic growth” (Van den Berg). The primary goal of the classical macroeconomic model was to put an emphasis on reason, rational thinking, and individualism, which were ideas that were very relevant during the Enlightenment. A key factor of the classical model was that it relied on the idea of the invisible hand of the market, as well as Say’s law. In summary, the classical model believes that the economy is always at full employment and that wages and prices are always flexible.
Next, the Keynesian macroeconomic model was created by John Maynard Keynes, a prominent economist during the Great Depression. This model was created because Keynes rejected the ideas presented by the classical model. Keynes believed that his model better represented the ever changing economy, especially after observing many patterns and changes caused by the Great Depression. In response to this depression, the Keynesian model was designed to better manage demand, as well as prevent economic recessions. This can be better represented by the aggregate demand function, which explains how government, investment, and
consumer demand are related to income (Van den Berg, Chapter 9). Because of the characteristics of this model, the economy can get stuck at a level far below its capacity when unemployment rates are higher than usual.
1
4/4/2022
Now to compare both models, the classical model is thought to be more stable because there are less variables and characteristics to affect the model, while the Keynesian model is more unstable because of all of the characteristics that it takes into account. Also, the Keynesian model was thought to be more static rather than dynamic because Keynes relied on assumptions of certain elements (Van den Berg, Chapter 9). The Keynesian model is more dynamic because it
uses techniques that constantly re-evaluate the economy to get more accurate and changing information. Because of the way that the Keynesian models take more variables into account, it is a more holistic model than the classical model. This model of macroeconomics is more narrow, because it makes assumptions about the economy over the long run.
Next, between both of these models, the Kenesian model is better grounded because while it makes assumptions, the model is based on real world observations. The classical model is not well grounded by observations, because even though the initial assumptions were accepted, classical models did not strive to be logical (Van den Berg, Chapter 8). Because of the way that both of these models make assumptions, the Keynesian model focuses on the short run, looking primarily at expansions and recessions, while the classical model focuses on the long run, assuming that resources are fully employed. Both of these models are useful for explaining the inner workings of the economy, but the Keynesian model is more useful because it focuses on facts and observations rather than assumptions. Lastly, the dialectic approach can contribute to our understanding of the macroeconomy because dialectic processes are ever changing, and they give a better immediate reading of the economy. The dialectic approach can give us readings and predictions that will better prepare the economy for the future. 2
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Related Questions
1.6 In the Simple Keynesian Macroeconomic Model, which of the following will determine the level of
autonomous spending by South African households?
a) The level of economic growth
b) The level of risk and or uncertainty
c) The level of the interest rate
d) Savings and or credit
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Indicators dashboard assignment 2022
Macroeconomics is about more than just the models discussed in the textbook. JM Keynes wrote
about the master economist:
..."He must understand symbols and speak in words. He must study the present in the light of the past
for the purposes of the future".
As part of your training as master economists, you need to keep an eye on the news and
macroeconomic indicators that economists are interested in.
For 20% of your module mark you need to present the indicators that you followed throughout the
semester in a indicators dashboard. This is due on 27 May 2022.
Instructions:
•
You can compile your dashboard in any way that you like, but for assessment you need to
upload a pdf report on eFundi.
•
This report needs to present the indicators data in tables and graphs, and you need to briefly
interpret them:
o Use the macroeconomic policy objectives as a starting point: economic growth and
increasing employment, stable and low inflation, a sustainable…
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Consider the following macroeconomic model:
Y = C + Io + Go
C = a + b(Y-T)
T = d+tY
Where the endogenous variables are Y, C and T, while the exogenous
variables are G₁ and I. The parameters are such that a > 0,d>0,0
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Macroeconomic policy is concerned with the operation of the economy as a whole. In broad terms, the goal of
macroeconomic policy is to provide a stable economic environment that is conducive to fostering strong and
sustainable economic growth, on which the creation of jobs, wealth and improved living standards depend. ?"
https://www.aph.gov.au/About Parliament/Parliamentary Departments/Parliamentary Library/pubs/BriefingBook44p/
Which one of the following is NOT an objective of macroeconomic policy?
A. To reduce unemployment.
O B. To stabilise the price of maize.
O C. To bring or keep inflation under control.
O D. To increase the rate of economic growth.
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7. 1. Consider a neoclassical growth economy described by the following.•Yt = K0.3t ·L0.7t (aggregate production function)•s = 0.35 (saving rate)•δ = 0.10 (depreciation rate)•n = 0.01 (population growth rate)•L1 = 120 (initial population)•K1 = 160 (initial capital stock)•g = 0 (technological growth rate)Compute K, Y , k, y, and c for the first three periods. Please report numerical answersto two decimal points.
(a) K1 = ; Y1 = ; k1 = ; y1 = ; c1 =(b) K2 = ; Y2 = ; k2 = ; y2 = ; c2 =(c) K3 = ; Y3 = ; k3 = ; y3 = ; c3 =
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John Maynard Keynes spearheaded a new school of macroeconomic theory during the Great Depression. Which of the following represents a Keynesian point of view of macroeconomics?
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Consider an competitive economy with interest rate r =MPK=0.05,capital depreciation rate o = 0.03, technology growth rate g = 0.03, and populationgrowth rate n = 0.02(1) Why should we be interested in the Golden Rule steady state of an economy?
(2) Is the economy depicted above running on its Golden Rule steady state? If yes,explain how you get your answer. If no, what should the government do to achievethe Golden rule steady state?(3) It is said that the Golden Rule steady state gives the greatest growth rate of
consumption per capita. True or False? Explain your answer.(4) It is said that population is usually a burden to economic growth. So if we canreduce the population growth rate from n = 0.02 to n = 0.01, everyone will be betteroff, in the sense of enjoying greater growth rate of consumption in the new GoldenRule steady state. True or False? Explain your answer.
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Figure 1: Hayek’s (Classical) AD-AS Model
1.1. Hayek says that markets will heal themselves and that government should not intervene. How does the AD-AS model reflect Hayek’s idea that governments cannot increase real GDP beyond the level that the free market economy is able to produce?
1.2. Do you believe that the Hayek’s classical AD-AS model explain the factors that cause changes (shifts) in AS realistically? Why or why not?
Figure 2: Keynes’s AD-AS Model
2.1. In Figure 2 above, what are the factors that may cause the aggregate demand to shift from AD to AD1? What is the difference between demand pull inflation, cost push inflation and recession?
2.2. In macroeconomics, the immediate short run is known as a length of time when both input prices and output prices are fixed. In the short-run, input prices are fixed but output prices are variable. In the long run, input prices and output prices can vary.
Describe the AS curve in the Immediate Short run.
Describe the AS curve…
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Why/how has Covid-19 led to a global economic recession?
While the originating place of Covid-19 was China, why do you think Western countries have experienced a sharper economic recession than China?
As per the definition(s) of recession that we discussed in Chapter 13 of the Econoomy from CORE, do you think Afghanistan is currently in a recession?
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Briefly explain how one or more of the microeconomic components, namely consumption,investment, supply and demand for money influence macroeconomic outcomes and formulations of the following macroeconomic theories:a. Solow Growth Model b. The Mundell-Fleming model c. Neoclassical Model of Investment Use mathematical equations and graphs where necessary.
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Suppose that the annual rates of growth of real GDP of Econoland over a five-year period were sequentially as follows: 3 percent, 1 percent, −2 percent, 4 percent, and 5 percent. What was the average of these growth rates in Econoland over these five years? What term would economists use to describe what happened in year 3? If the growth rate in year 3 had been a positive 2 percent rather than a negative 2 percent, what would have been the average growth rate?
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QUESTION 5Imagine the following simple Keynesian macroeconomic model for a closed economy.TD = C + Ip + G (total demand)C = C0 + YD (aggregate household consumption)YD = Y − T (aggregate household disposable income)Ip = I0 + aY − bR (aggregate planned investment)Y = TD (output, equilibrium condition)BB = T – G (government budget balance)With:G government consumption, T taxes, R real interest rate (exogenous variables)C0) and I0 autonomous consumption and investment0 < a, c, a+c < 1, b > 0 constant parametersDerive the equation for output and answer the following question. If the government in this model simultaneously increases its consumption G and its taxes T by the same amount, then:
total demand decreases, and equilibrium output declines.
total demand decreases, and equilibrium output declines, but only if C > G.
total demand increases, and equilibrium output rises. The rise of output is stronger the higher the households’ marginal propensity to consume.
total demand…
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-Disposable income (DI) = GDP - NT
8.
Imports (M)
Rest of the
world
C+1
9.
7.
Financial
markets
10
5.
Firms
Governments
Households
4.
Taxes
NT
C+I+G+(X- M) = GDP
Consumption (C)
Investment ()
Saving (S)
borrowing
Government
purchases (G)
Exports (X)
Government
= GDP
Aggregate income=0
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Correct Answer
You Answered
Question 2
Consider the following Malthusian Model. Suppose that output
in the economy is described by Y = √X√L. with Y being
aggregate output, X being the total amount of land, and I being
the total amount of labour. The amount of land is fixed at
17,920.
Suppose you are also told that the relationship between
consumption per worker and labour is: Lt+1
=
= (c - 15) × Lt.
What is the steady state level of labour L* here? (Hint: what is
Lt+1
in the steady state?)
Lt
70
Ⓒ90
80
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Economics
1. Suppose an economy that produces two goods
experiences an increase in its stock of labor. Will
this increase of labor cause a rise in output of both
industries according to the: Ricardian model,
Specific factors model, Heckscher-Ohlin model
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Explain how the equilibrium real interest rate and the equilibrium quantity of credit would change in each of the following scenarios and illustrate your answer with a well-labeled graph of the credit market.
As the real estate market recovers from the 2007–2009 financial crisis, households begin to buy more houses and condominiums, and they apply for more mortgages to enable those purchases.
Congress agrees to a large tax cut which increases the level of the government deficit.
Households begin to fear that a growing pandemic may cause them to lose their jobs and they increase their savings for a rainy day.
Businesses become more optimistic about the future of the economy, and decide to distribute more of their earnings as dividends to their shareholders.
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(a)
macroeconomics
(b)
microeconomics
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QUESTIONS:
1. How would the financing plan designed to supports businesses impact the…
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equilibrium model? Why or why not?
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Economics
In terms of Classical Economics and not Keynesian:
World trade has boosted growth rates in many
countries. In around 1980, mainland China opened
its economy to trade and foreign investment. The
Chinese also implemented many institutional
reforms promoting capitalism.
1) Calculate Chinese pre-reform cumulative and
annualized growth rates from 1950 to 1979.
2) Calculate Chinese post-reform cumulative and
annualized growth rates from 1980 to 2019.
3) Please explain the differences in your calculated
numbers using the changes the Chinese
government implemented.
Hint: Use Classical Economic fundamentals to
determine the pre-reform cumulative and
annualized growth rates for the above years and
then explain them. The GDP and growth rates can
be found online in many different places.
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1.
2.
Explain why macroeconomic analysis is particularly concerned with issues of
economic growth, unemployment, inflation, and balance of payments?
"Economic growth does not necessarily reduce the number of unemployed
workers". Explain this statement.
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