Economics Test Questions
Assignment #1 – Model Answers Aim for around 1000 words and certainly no more than 1250 words
Last week, Japan's government downgraded its views on consumer sentiment and machinery orders, while the Bank of Japan effectively cut its assessments on exports. The Wall Street Journal, August 13th, 2012.
a) Using the basic Keynesian model, provide a detailed analysis of the likely impact of the changes described above for Japan’s real GDP and rate of unemployment. (20 marks) b) Suppose the government responds to what you have outlined in part (a) with a change in fiscal policy. What would the government be trying to achieve? Explain how this might impact on the stock of public debt. (10 marks)
Note: You need to demonstrate a detailed knowledge of the construction and use of the 45degree diagram and any other economic analysis you use. You must make it clear that you have a complete understanding of the macroeconomic principles that underlie the model and concepts. Explain what assumptions you are making. Above all, explain the economics of what you are describing. It will be very difficult to obtain a passing mark for this assignment if you do not provide a complete explanation of exactly how and why the economy responds in the way that you are describing.
Part (a) Assume prior to the exogenous changes identified in the quote, i.e., these changes are determined outside of the basic Keynesian model, the economy is at the initial equilibrium level of GDP denoted by Y* (full employment), illustrated in Figure 1. The initial equilibrium is characterised by an equivalency between planned aggregate expenditure, PAE, and output, Y; and between planned injections, J P , and withdrawals, W. The initial equilibrium is consistent with points A and A’ on, respectively, the initial planned aggregate expenditure schedule, PAE0, and the withdrawals schedule, W0 (Bernanke et. al. 2008, 209). At this level of income, there will be no unplanned change to inventories. Note also
Last week, Japan's government downgraded its views on consumer sentiment and machinery orders, while the Bank of Japan effectively cut its assessments on exports. The Wall Street Journal, August 13th, 2012.
a) Using the basic Keynesian model, provide a detailed analysis of the likely impact of the changes described above for Japan’s real GDP and rate of unemployment. (20 marks) b) Suppose the government responds to what you have outlined in part (a) with a change in fiscal policy. What would the government be trying to achieve? Explain how this might impact on the stock of public debt. (10 marks)
Note: You need to demonstrate a detailed knowledge of the construction and use of the 45degree diagram and any other economic analysis you use. You must make it clear that you have a complete understanding of the macroeconomic principles that underlie the model and concepts. Explain what assumptions you are making. Above all, explain the economics of what you are describing. It will be very difficult to obtain a passing mark for this assignment if you do not provide a complete explanation of exactly how and why the economy responds in the way that you are describing.
Part (a) Assume prior to the exogenous changes identified in the quote, i.e., these changes are determined outside of the basic Keynesian model, the economy is at the initial equilibrium level of GDP denoted by Y* (full employment), illustrated in Figure 1. The initial equilibrium is characterised by an equivalency between planned aggregate expenditure, PAE, and output, Y; and between planned injections, J P , and withdrawals, W. The initial equilibrium is consistent with points A and A’ on, respectively, the initial planned aggregate expenditure schedule, PAE0, and the withdrawals schedule, W0 (Bernanke et. al. 2008, 209). At this level of income, there will be no unplanned change to inventories. Note also