Question

Microeconomics

1. New Durable goods orders were up in January over December which were greater than November and above one year ago. What can we infer about this for the near-term for the economy?

2. The Goods and Services International trade deficit was over $600B in 2018. If you were asked what this means for the health of the U.S. economy, what would you say?

3. Keynesian model:

Define the multiplier

Let the marginal propensity to consume = .9; what is the effect of increasing Investment spending by 50?

4. The economy is at full employment:

would you recommend the government initiate an “infrastructure” spending program?

Why or why not?

What model are you using?

5. Quantity Theory Questions:

Give the quantity theory equation

Define its variables

Explain how it works

Answer 1

Answer:

1. New Durable goods orders were up in January over December which were greater than November and above one year ago. What can we infer about this for the near-term for the economy:

The New durable goods production is increasing in the economy when compared to last trends.

It is clear  from the above statement that new durable goods orders were increasing which means the people are consuming more of new durable goods,

Hence the demand for this goods are increasing compared to last trends.

we infer:

So it is evident that production of durable goods are increasing which means producers will have more supply of this goods which increase the employment opportunities for people.

So all this factors help the economy to grow in durable goods production sector.

2. The Goods and Services International trade deficit was over $600B in 2018. If you were asked what this means for the health of the U.S. economy, what would you say:

This international trade deficit has been the largest for the US in its entire history.

This means that either there are reduced exports, or increased imports.

The foreign goods are probably cheaper than the domestic ones, which may have prompted the people to import more, hence increasing the deficit.

To finance this deficit, the government will have to borrow by selling their government treasuries.

This will put pressure on interest rates.

But if firms' capacity isn't as high, then their investment costs would rise and they won't produce at par.

conclusion:

This would impact the interest payments of the firms, if this will be the case in the economy, then the foreign investors will leave the market which will lead to a currency depreciation.

The pressure on the government will further increase, and if now the growth rate isn't increased, it can prove deadly to the economy.

3. Keynesian model:

Define the multiplier

Let the marginal propensity to consume = .9; what is the effect of increasing Investment spending by 50:

Definition of multiplier:

The multiplier is a measure which determines the final change on the aggregate demand such as how much the IS curve shifts to the left or right due to a change in spending.

The multiplier is measured by:

1/(1-MPC)

where MPC is the marginal propensity to consume

it shows that the final change in the output would be much larger than the change in spending amount due to the multiplier effect.

MPC 0.9

Investment spending = 50

Multiplier = 1/(1-MPC)

=1/(1-0.9)

=1/0.1

=10

Increasing investment spending by 50 causes the output to increase by: 50*10 = 500

4. The economy is at full employment:

would you recommend the government initiate an “infrastructure” spending program?

Why or why not? What model are you using:

Infrastructure is very important for overall development of any country.

Infrastructure is a reflection of country's development. Infrastructure focuses on bridges, dams, roads and urban infrastructure .

All infrastructure expenses are paid from governments fund, that is why it is very important to use that fund in an efficient manner so that.

recommend the government initiate an “infrastructure” spending program:

YES

So I strongly recommend that government should initiate an Infrastructure spending program

Reason:

Because infrastructure is the backbone of country's development and progress so it should be done.

If Country's Infrastructure is at good level already so governments fund should be used for other important things like for promoting employment and erasing poverty etc.

These are also very important problems of our country that should get focus.

model we are using:

Currently we are using both models hand in hand because infrastructure is also getting better and better with time and unemployment is also decreasing and with that poverty level is  also getting reducing slowly and gradually .  

5. Quantity Theory Questions:

Give the quantity theory equation Define its variables Explain how it works:

Quantity theory equation is:

MV = PT

Variables:

M = money supply

V = velocity of circulation (ie the number of times money changes hands)

P = average price level

T = volume of transactions of goods and services

Explanation:

The quantity theory of money states that there is a direct relationship between the quantity of money in an economy and level of price of goods and services sold.

According to QTM, if the amount of money in an economy doubles, price levels also doubles, causing inflation.

The consumer, therefore pays twice as much for the same amount of the good or service.