Compute equilibrium level of real gross domestic product

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Reference no: EM131984633

Assignment: Principles of Economics

Question 1

Assume the economy is initially in equilibrium at full employment.

a) Illustrate this situation using a diagram of the AD-AS model (including the long-run AS curve).

b) If investors suddenly became very optimistic about future profits, what would happen to the price level and real GDP in the long-run. Illustrate your answer using a diagram of the AD-AS model.

Question 2

Complete the following table.

Year	Working age population (millions persons)	Labour force (millions persons)	Employed (millions persons)	Unemployed (millions persons)	Participation rate (%)	Unemployment rate (%)
1	18,169,000		9,642,000	770,000
2		10,671,000	9,938,000		57.82%
3	18,763,000	10,789,000		738,000		6.84%
4	19,082,000				58.52%	6.45%

Question 3

Let's say the economy is experiencing a boom and the inflation rate has risen to 10%.

a) What open market operations is the Reserve Bank of Australia likely to engage in?

b) Explain how investmentexpenditure, consumptionexpenditure and net export expenditure are likely to be affected by the Reserve Bank's decision.

Question 4

According to the Keynesian model of the economy, aggregate expenditure is the key determinant of the equilibrium level of real GDP.

Y = C + I + G + X - M
C = C₀ + c x (Y - T)

Symbols	Meaning	Value
Y	Real gross domestic product
C	Consumption expenditure
C₀	Autonomous component of consumption expenditure	$400 billion
c	Marginal propensity to consume	0.8
T	Taxes imposed	$150 billion
I	Planned investment expenditure	$50 billion
G	Government expenditure	$200 billion
X	Export expenditure	$20 billion
M	Import expenditure	$25 billion

a) Calculate the income-expenditure multiplier.
b) Calculate the equilibrium level of real gross domestic product.
c) If export expenditure increased from $30 billion to $60 billion (ceteris paribus), calculate the economic growthrate.
d) If the marginal propensity to consume rose from 0.8 to 0.9, calculate the economic growthrate.

Reference no: EM131984633

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