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Conversely, during a recession unemployment increases and less output is produced than
could in fact be produced with existing resources and technology.
The output gap measures the gap between actual output and the amount of output the
economy could produce at full employment given the existing resources. Full-employment
output is also called potential output.
(b) A stabilization policy is an action taken by the government to impact aggregate demand to
moderate the expansion and contraction phases of the business cycle. During an expansion,
the objective is to moderate the growth of spending: the objective during the recession
(economic contraction) is to reduce the rate of decrease in spending.
(c) Monetary policy aims to stabilize economic activity by controlling the money supply or
interest rates while fiscal policy utilizes a change in tax rates and or the level of government
spending for the same objective.
5. Explain the components of the equation
C Taka 20 0.90Yd
C C cYd
C
Represents other variables which affect consumption but whose value is unchanged.
Behavioral coefficient c measures the change in consumption that results from a change in
(c C / Yd )
disposable income
Taka 422.7
2
Rents
Interest
Profit
122.2
403.6
Proprietors income
Corporate
478.3
586.6
NATIONAL INCOME(NI)
Indirect business Taxes
5813.5
679.0
6492.5
754.2
GNP
Plus: Payments of factor income
to rest of the world
Less: Receipts of factor income from the
rest of the world
7246.7
215.3
-208.3
1.
2.
3.
4.
7253.8
Taka5813.5
Less:
Corporate profit
586.6
1066.3
1022.6
717.1
214.8
Plus:
Personal Income
6115.1
Less:
3
794.3
5320.8
7. Measuring GDP:
Suppose, in a two-sector model, that individuals receive the following payments from the business sector:
Wage: Taka 520, Interest Taka 30, rent Taka 10, and profits Taka 80. Consumption spending is Taka 550
and investment is Taka 90. (a) Find the market value of the output and household saving. (b) What is the
relationship of savings and investment?
Answer:
(a) The market value of output is Taka 640 [Income approach] = Wages of Taka 520 + Interest of
Taka 30 + Rent of Taka 10 +Profits of Taka 80. OR by adding consumption and investment (Taka
550 +Taka 90). [Under expenditures approach]. Saving is Taka 90, found by deducting the Taka
550 that individuals consume from their income Taka 640.
(b) Both saving and investment equal Taka 90. This relationship always holds true in a two-sector
model, since leakages must always equal injections.
8. What is leakage from the circular flow? Why is investment spending viewed as an injection into
the circular flow?
a. A leakage occurs when income received is not spent by its recipients; for example, when
households are the sole recipients of income from production, their decision to save is a
leakage from the flow of income and spending.
b. Investment represents an injection of spending into circular flow. Those who desire to
invest obtain funds from those who save.
9. Assume that in a closed economy individuals receive income of Taka 760 and pay taxes of Taka
100 to the government; consumer spending is Taka 560; gross investment is Taka; depreciation is
Taka 40; government spending is Taka 130. (a) Find GDP and household saving. (b) What are the
leakages and injections for this closed economy? What is the relationship of these leakages and
injections?
10. From the following data, find (a) National income, (b) personal income, (c) personal disposable
income, and (d) Personal saving.
a. Compensation of employees
b. Business interest payments
c. Rental income of persons
d. Corporate profits
e. Proprietors income
f. Corporate dividends
$1866.3
264.9
34.1
164.8
120.3
66.4
4
25
50
40
30
60
200x
Taka 1.5
7.5
6.0
5.0
2.0
30
60
50
35
70
200y
Taka 1.6
8.0
7.0
5.50
2.50
12. Suppose that households purchase the categories of goods and services listed in Column 1 of
Table 2.1; the relative importance of each category is given by the weight assigned in column 2.
The price index for each category during year 1 and year 2 is found in columns 3 and 4,
respectively. (a) From the data, calculate the CPI for year 1 and year 2. (b) What is the rate of
inflation between year 1 and year2 as measured by the change in the CPI?
Category
Food and beverage
Housing
Apparel
Transportation
Medical care
Entertainment
Other
Total
Weight
0.175
0.460
0.046
0.193
0.049
0.036
0.041
1.00
Year 2
270
330
180
308
330
241
250