Question

Macro Economics – Online Exercise 5 Chapter Five Concepts This exercise is voluntary. Should you reply to it, you’ll receive feedback. Should you not reply, it will not hurt your grade. It’s recommended, but not mandatory. Remember that explanations require the why &/or how clearly shared. Please, do not submit blanks. Doing so would preclude me from seeing the exact pitfalls preventing you from reaching the correct conclusions. I am here to help you, not judge you. 1. Variable investments, like purchasing raw materials, are unavoidable, and support the value of fixed investments, like buildings or machinery. Why then is investing in fixed investments more important? For instance, you can think of the latest push in the US to fix and enhance infrastructure. Why is a solid, up-to-date infrastructure so key to an economy? Answer: 2. It’s often said: “An economy is as good as the level of its personal consumption.” Why is that? Answer: 3. To have a trade surplus, a country’s credits must be greater than its debits. In other words, a country's value of exports must be larger than its value of imports to have a trade surplus. The US has a trade deficit, an economic measure of international trade in which a country's imports exceed its exports. A trade deficit represents an outflow of domestic currency to foreign markets. Explain why a trade deficit isn’t necessarily bad for an economy. In fact, it might be a sign that an economy is relatively stronger. (You may need to dig a little.) Answer: 4. *Real income = nominal income – inflation rate *Real raise = new income level – previous income level Here’s my question: What is the real raise (always in dollars) if a person with a $60,000 income gets a 4% raise, during a year when inflation rises by 3.1%? B) And what’s the real income? Answer: Here’s a sample question to show you how to solve such a problem. What is the real raise if a person with a $49,000 income get a 3.5% raise, in a year when inflation is 3.7%? B) What is real income? Answer: Real DI (Yd) dropped by -$98 ~ Raise – inflation rate = real raise 3.5% - 3.7% = -.2%; in dollars this means -$98, which is $49,000 x -.002 = -$98 = real raise ~ This means that real disposable income dropped by $98. ~ It makes real income $49,000 - $98 = $48, 902. What does this mean? It means the true or constant value of this person’s income is worth less, $98 less. Real income is purchasing power in layman terms. The way to come ahead is to get a raise that’s greater than inflation, which means real disposable income should increase every year or a person’s income value shrinks, and this leads to less wealth and investments in the long term. Let’s delve deeper…. 3.5% in dollars = $1,715 ($49,000 x 3.5%), however prices for all the goods and services rose by 3.7%, which in dollars = $1,813 ($49,000 x 3.7%). Therefore, real disposable income dropped by $1,813 - $1, 715 = -$98. If the final answer were positive, then real income would have gone up. Now what should this person do? To prevent having to borrow money, this person should cut out of their annual expenses $98, or find a way to earn $98 more. 5. What is RGDP (the real) if the GDP (nominal) increases by 2.2% in a year when inflation is 2.5%? Answer: Sample question to help you answer the question above. What is the RGDP if the GDP increases by 1.9% in a year when inflation rises by 1.5%? Answer: RGDP = GDP – Inflation rate. 1.9% - 1.5% = +.4% = RGDP change … This means total production increased by +.4% from the year before. So if the GDP is $10 trillion, then total production would have increased by $4 million, not by the 1.9% initially reported, because 1.5% of that was a simple price inflation.

Answer 1

1. Fixed investments in infrastructure improves economic growth by increasing employment and improving labor productivity. This increases GDP growth rate.

2. Personal consumption drives economic growth because more the personal consumption, greater is the demand for goods and services which encourages business to invest more, hire more labor and boost economic growth.

3. Trade deficit is the difference between imports and exports. U.S. has been running a trade deficit but its economic growth has been positive. Also when there is a trade deficit it means there would large foreign investments inflow due to a weaker currency.

4. Real income = nominal income – inflation rate

Real raise rate is 3.5%

Inflation rate is 3.7%

$60,000 x (3.5-3.7)= $60,000 x (-.2)=$60,000 - $120=$59,880.