Excercise 1
a)
Referring to the circular flow model, please explain the relationship between marcoeconomic production, spending and income.
The sum of spending for goods equals the value of the sum of produced goods, which by definition gives the GDP.
the circular flow model
b)
Please plot the time series of GDP, which shows how GDP typically developes over time. Add a linear trend line to your plot.
c)
Referring to your plot from b) please explain the terms “Business Cycle” and “Economic Growth”.
Economic Growth =
long term developement / trend of the GDP
line through the wavey line
Business Cycle =
short-term fluctuations around the trend. Wavey line in the diagram.
d)
Now add another time series to your plot, which shows how potential GDP developes over time. Moreover, explain what is meant by “potential GDP”.
Potential GDP gives the GDP, that could be produced using all production factors / capacities with optimal capacity utilization.
Excercise 2
Over the short run, GDP moves in cycles. Can you explain these fluctuations? What triggers a recession? How is it stopped and reversed into an upswing again?
—> GDP can suddenly drop down if there is a sudden decline of demand which the production adjusts to or a sudden decline of supply.
( -> demand / supply shocks )
—> since wages are sticky in the short-run, firms are not willing to lower the prices in order to stimulate demand.
—> Therefore the government intervenes by demand-stimulating measures such as tax reductions or increased government spending which then leads to increased production gain.
Excercise 3
Please, set up the Keynesian consumption function.
Excersice 3
What does the marginal propensity to consume (MPC) stand for?
Which range of values can be taken by MPC?
Please explain.
MPC: amount of additional income used for spending _ or: increase in spending if income marginally increases
( 0 < MPC < 1 )
And what about the autonomous consumption component Ca, can it be zero or negative?
Ca: Part of consumption that does not depend on income, which cannot be zero or negative, since it is necessary to consume basic needs even if the income is not large enough -> In this case basic consumption is financed by debt or by past savings.
Last changed2 years ago
