Question

-Why do oligopolists have the incentive to fix prices? What are the obstacle to succesful collusion?

- Suppose that the marginal propensity to consume in the economy is 0.75. Assuming that prices are constant, what effect would a $50 million increase in investment spending have on the equilibrium real GDP?

- Use the model of aggregate demand and aggregate supply to show the differences between demand-pull inflation and cost-push inflation.

- Why is crowding out an important issue in the debate over the merits of discretionary fiscal policy? Is crowding out equally likely to occur during all phases of the business cycle?

Answer 1

2. Change in GDP = Change in Investment spending / (1 - MPC)

Change in GDP = 50 million / (1 - 0.75)

Change in GDP = 50 million / 0.25 = $ 200 million

So, Equilibrium real GDP will increase by $ 200 million.

3. Demand-pull inflation: It is inflation which occurs due to increase in aggregate demand. Increase in AD occurs when there is increase in consumption expenditure, investment, government spending, increase in exports or reduction in imports.

Cost-push inflation: It is inflation which occurs due to increase in cost of firm.