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Macroeconomics - Assignment Example

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The contractionary gap refers to an economy that has not reached full employment equilibriums. Given that the labor resource is underutilized, there is a low level of gross domestic product in such an economy. After the fall in the planned investment results to an increase in…
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Download file to see previous pages The government therefore has to increase their purchases of these products to the same amount as that planned for reduction in the investment spending.
c. A change in taxes can produce the same result. This is because taxes affect the production of companies. When taxes are reduced, companies can use that money elsewhere such as for investment purposes, they will also be motivated to increase their production as they will be paying lower taxes.
d. In a balanced budget economy law makers have to be very keen on the fiscal policies that they put in place so as to restore the economy to full employment. The most feasible way this can be done is by taking of loans to invest in other areas that will be repaid over time.
The blue line in the graph represents the total demand. The red line in the graph represents the total supply of goods and services. The black line represents the economy’s capacity in the long run. The equilibrium where they intersect is the potential output.
a) When people buy goods and services using money the money is handed over to the stores who in turn pay their suppliers. The money circulates in the economy and is used by various people. The money supply is therefore maintained. When people use credit banks to pay for their shopping, there is no money that exchanges hands. This leads to a decrease in the money supply in the economy.
b) To reduce money supply the bank should increase lending rates. Higher rates mean that fewer people will be willing to borrow money from the bank and over time, there will be a decrease in the money supply within the economy.
A. i) The purchasing power parity theory is concerned with the exchange rates (Blaug, 2006). Therates of exchange between two currencies are at equilibrium as long as their domestic purchasing power at a given exchange rate is equal. In this case, Gold should cost the same in both Mexico and U.S after taking into account the interest ...Download file to see next pagesRead More
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