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Economic Principles: GDP, Expenditure, and Federal Reserves

Section 1:
1. Distinguish between real and nominal GDP. Which one is a better measure of the business cycle?
2. What are the determinants of investment spending?
3. Why do managers need to be aware of how the price level and the level of unemployment are changing?
4. Why is it important that managers be aware of Federal Reserve action and policy statements?
5. The macro environment will have an impact on the competitive strategies of a firm/industry. What should a manager do in anticipation of this?

Section 2:
1. Why is judging trends in economic indicators important to managers?
2. If the U.S. economy is experiencing a decrease in consumer wealth, a credit crisis in the financial markets, and declining consumer and business confidence what components of aggregate demand are affected and what are the policy options?
3. When the government increases spending to combat unemployment, why should it increase taxes to pay for the increased spending? why run a deficit instead?
4. Deficit spending for education and scientific research may impose less of a tax burden on future generations than deficit - financed increases in transfer payments. Do you agree or disagree? Explain your answer.
5. Some frictional and structural unemployment is probably a sign of a healthy economy. Why is that true? Your answer should include a definition of frictional and structural unemployment.
6. The Federal Reserve System is one of our government's key tools for regulating the economy.
a) What is the Federal Reserve and who is the current chairperson?
b) What are three tools the Federal Reserve has?
c) How are these three tools used to stimulate economic growth?
d) How are these three tools used to contain economic growth?
7. Explain how the aggregate expenditure function shifts, and why, in response to changes in each of the following variables:
a) The real interest rate increases.
b) Consumer confidence decreases.
c) Higher taxes are imposed on business profits.
d) The economies of many countries in the rest of the world go into recession.

Solution Preview

Section 1
1. Distinguish between real and nominal GDP. Which one is a better measure of the business cycle?
Nominal GDP is a macroeconomic measure of the value of economic output at current market prices and includes all the changes in market prices within the current year while real GDP is a macroeconomic measure of the value of economic output that has been adjusted for inflation and/or deflation. Real GDP is a better measure of the business cycle because it accounts for deflation and inflation thus shows the actual growth or decline.

2. What are the determinants of investment spending?
a) The expected ROI (return on investment)
b) Corporate tax
c) Business confidence
d) Interest rates
e) Changes in national income
f) General expectations
g) The level of corporate and household savings
h) Technological changes
i) Cost of capital goods
j) Stock of capital
k) The level of economic activity

3. Why do managers need to be aware of how both the price level and the level of unemployment are changing?
Unemployment and the rate of change of unemployment influence money wages, and wage changes, in turn, bring about changes in the level of prices. Changes in unemployment levels have an impact on disposable income, whereby high unemployment leads to low disposable income and vice versa so prices reduce with high unemployment and increase with low levels of unemployment.

4. Why is it important that managers be aware of Federal Reserve action and policy statements?
Federal Reserve action and policy statements have a direct impact on the public's demand for goods and services because they alter borrowing costs, the availability of bank loans, the wealth of households, and foreign exchange rates, thus managers need to be aware of these changes so that they can plan accordingly.

5. The macro environment will have an impact on the competitive strategies of a firm/industry. What should a manager do in anticipation of this?
A manager should align their business approach to the changes in the macro environment and change their competitive strategies in order to capitalize on these changes and gain or capitalize on their competitive advantage.

Section 2
1. Why is judging trends in economic indicators important to ...

Solution Summary

This solution explores a variety of economic principles, theories and concepts. The solution explains the distinction between real and nominal GDP, highlights the determinants of investment spending, and explains why managers need to be aware of how both the price level and the level of unemployment are changing. The solution also examines the components of aggregate demand and how they are affected by changing economic climate.

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