EC1009 - Introduction to Macroeconomics Test

1a)
£600 million
1b)
£4000 million
1c)
£5000 million
1d)
£1000 million
2)
The quantity of goods and services produced in an economy over a year while prices
stay unchanged is evaluated via real GDP. A country with higher real GDP has
superior living standards in general, but GDP is the total amount of goods and
services generated through time. This economic expansion may come at the expense
of increased pollution and fossil fuel use. Factories are always polluting since they
are in operation for long periods of time. As we all know, pollution is bad for the
human body since it decreases air quality and raises the risk of serious health
consequences.
Real GDP takes into account what is spent on education, healthcare, the
environment, and other things, but it does not take into consideration the amount of
education or who is becoming educated. If children do not receive a proper
education, they will be unable to find a good-paying job in the future to support
themselves. This does not imply improved living standards.
Another issue is that because real GDP does not account for the number of hours
individuals work, economic growth is influenced by productivity. People may well
have worked for low wages or even minimum wage. People would have worked long
hours, placing their bodies under stress.
Another argument why higher real GDP does not imply higher living standards is
because real GDP does not take poverty into account. As a result, economic progress
may be accompanied by an increase in poverty. Poverty causes all types of people to
have a shorter life expectancy and a higher risk of mortality. The real GDO does not
take income distribution into account.
As a value, real GDP does not consider people's well-being. Happiness is influenced
by a variety of variables.
3a)
A fiscal expansion occurs when the government uses government funds to enhance
aggregate demand. One method the government can do is to boost consumption by
lowering income taxes, which increases the motivation to work. One of the
consequences of fiscal growth is an increase in interest rates. As shown in the
diagram, fiscal expansion pushes the IS curve to the right, increasing national output
due to the multiplier effect. Another consequence of fiscal growth is an increase in
trade imbalance.

3b)
The national debt is the sum of all money borrowed by the government and the
amount it owes to its creditors. Keeping the national debt as a proportion of GDP low
is beneficial because it allows the government to see how long it will take to repay
the debt in years. The higher the proportion, the less likely the government is to be
able to repay it completely. It can also be used to compare one country's debt to that
of other countries, giving the government a better picture of the economy's health. It
also provides an important picture of how a country's overall economy is doing.
4a)
When a rapid increase in aggregate demand leads to a rapid increase in economic
growth, this is known as demand-pull inflation.
When overall prices rise as wages and raw materials rise, this is referred to as cost-
push inflation. Production costs rise while aggregate supply falls. AS moves to the
left, the price level rises from P1 to P2, and real GDP falls to Y2. This implies that
cost-push inflation might result in lower economic growth, resulting in a lower
quality of living.

4b)
As shown in the graphs AD1 to AD2, under demand-pull inflation aggregate demand
rises. From P1 to P2, prices rise, and real GDP rises from Y1 to Y2. The economy's
total output rises, and products and services are produced. Living standards are rising
as the economy approaches full employment.
5)
Increased government funding for public sectors is thought to crowd out private
sector spending because it implies that increased public spending would result in
reduced private sector investment and expenditure. Because of social welfare,
crowding is possible. When governments raise taxes to fund or expand social
programmes, individuals and corporations have less discretionary income, potentially
reducing generous contributions. In this approach, government spending on social
welfare may reduce private-sector contributions to the same causes, therefore
balancing government spending. The IS curve moves from IS1 to IS2 when
government spending increases. E2 becomes the new point of balance.
6a)
The Lucas critique, named after American economist Robert Lucas's work on
macroeconomic policymaking, claims that forecasting the effects of a change in
economic policy solely based on previous data, particularly heavily aggregated
historical data, is silly. It specifically states that decision rules in Keynesian models,
such as the consumption function, cannot be considered systemic in the idea of
being consistent with changes in government policy variables.
6b)
Individuals' opinions are based on three factors: human rationality, knowledge
available to them, and past experiences. This hypothesis indicates that people will
learn from their mistakes. Because rational expectations allow people to forecast the
impact, the Phillips curve is inelastic.
7a)
The difference between total government expenditure and total income is known as
the fiscal deficit. The primary fiscal deficit is the amount of money the government
needs to borrow without taking interest into account. The fiscal deficit will surpass
the primary fiscal deficit. The gap between the fiscal deficit and interest payments is
the primary deficit. The budget imbalance is large for fiscal measures, and fiscal
policy is used to keep the economy under control. Using fiscal measures, the
government can raise taxes.
7b)
8)
Interest and income are represented by the IS curve. Changes in government
consumption are one of the causes that affect the IS curve. The output for interest
rates rises in tandem with government spending. An increase or drop in taxes is
another factor that alters the IS curve; when taxes rise, consumption falls, resulting
in a decrease in income. Consumer confidence is another element that influences the
IS curve; as consumer confidence rises, so does consumer spending, resulting in a
rise in aggregate demand.
The IS curve shifts to the right when taxes are raised. IS1 curve switches to IS2, I1Y1
curve shifts to I2Y2. Increases in real outflow and real interest rates A decline in
government consumption is one factor that causes the IS curve to shift to the left.

The IS curve shifts to the left when government consumption decreases. As can be
seen in the diagram, I1Y1 shifts to I2Y2, and real interest rates and production drops.
9)
The LM schedule depicts all possible combinations of interest rates and income levels
in which demand equals supply. The LM curve is positive sloping. As a result, an
increase in interest rates reduces the demand for money. The degree of
compensation must increase to keep up with the demand for money equal to the
fixed supply. As a result, the LM schedule suggests an increase, which is associated
with an increase in income. The lower the responsiveness of money demand to
interest rates, the greater the responsiveness of money demand to income. As a
result, the LM becomes steeper. The equilibrium of supply and demand for money
determines the interest rate in a closed economy.
10)
It's a model of comparative-static equilibrium. It overlooks the importance of
temporal lags in analysing the effects of economic policy changes.
It's also known as the fixed-price model. We are unable to investigate the effects of
changes in aggregate demand on output and pricing using the model. We can't
analyse the inflation problem if we use the Keynesian version of the model because
we must assume a fixed price level. On the other hand, in the neoclassical version of
the model, the price level is set by the nominal money supply, and output is
supposed to be determined exogenously when full employment is achieved.

The LM curve in this graph is near vertical and the IS is interest elastic because the
rate of interest in money reduces from I0 to I1 which increases the income value
from Y0 to Y1