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Inflation, Budget Constraint, Unemployment Rate

Use the concepts of gross and net investment to distinguish between an economy that has a rising stock of capital and one that has a falling stock of capital. "In 1933 net private domestic investment was minus $6 billion. This means that in that particular year the economy produced no capital goods at all." Do you agree? Why or why not? Explain: "Though net investment can be positive, negative, or zero, it is quite impossible for gross investment to be less than zero."

Briefly explain how the following would shift the IS function to the right:A change to lump-sum taxation (Specify whether increase or decrease is needed to shift IS curve to the right.), A change to government spending (Specify whether increase or decrease is needed to shift IS curve to the right.)

Explain briefly how a change to the following MS, MD, or P (ceteris paribus) would shift the LM function to the right. Include in your discussion whether the variable would have to increase or decrease to cause the rightward LM shift. Discuss which of these the FED exercises control over.
a.MS.
b.MD (money demand).
c.P (price index).

Suppose that private sector spending is highly sensitive to a change in interest rate. Compare the effectiveness of monetary and fiscal policy in terms of rising and lowering real GDP

Assume that a hypothetical economy with an MPC of .8 is experiencing severe recession. By how much would government spending have to increase to shift the aggregate demand curve rightward by $25 billion? How large a tax cut would be needed to achieve this same increase in aggregate demand? Why the difference? Determine one possible combination of government spending increases and tax decreases that would accomplish this same goal.

Solution Preview

Gross Investment = Net Investment + Depreciation
We can rearrange this to say:
Net Investment = Gross Investment - Depreciation

The capital stock of an economy rises when net investment is positive, that is when gross investment exceeds depreciation. The capital stock falls when net investment is negative, that is when gross investment is less than depreciation.

In 1933 net private domestic investment was minus $6 billion. This does NOT mean the country produced no capital goods: what it means is that the production of capital goods was less than what was lost due to wear and tear, thus the net impact was an overall loss in capital stock.

Gross private investment in most cases cannot be negative, since you can decide not to invest in new factories, but how do you decide to make a negative investment on an economy wide scale. The only possible case I can think of, and many will disagree with this, is when China under Mao went for what is now called the "Great Leap Forward." Farmers started melting their ploughs and other equipment to provide steel to the government, thus destroying the existing capital, ...

Solution Summary

Government spending, tax, MPC, LM functions and more are investigated in this solution that solves various economic problems in 774 words with calculations displayed.

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