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Answers to 6 common macroeconomics questions

1. Define transfer payments and give an example. Explain why transfer payments are not included in GDP.

2. Which components of GDP (C,I,G,X,M) would be affected by the following:
a. You buy a pizza.
b. You buy a new house.
c. Tennessee resurfaces Interstate 40.
d. You buy a Lamborghini.
e. You buy a new stove.

3. The federal government has recently enacted several large spending bills (i.e. "economic stimulus.") Use the Modern Keynesian aggregate supply and demand system to tell which curve(s) shift and in which direction. Explain how the price level will be affected by these expenditures in the short-run. Explain how GDP is affected in the long-run.

4. Conduct the same exercise as in #3 using the Classical model. Explain how the price level will be affected by these expenditures in the short-run. Explain how GDP is affected in the long-run.

5. Compare your results from #3 and #4. Are the results different? Explain.

6. Why would it be important for a policy maker to understand these two major theories of economics?

Solution Preview

1. Transfer payments are redistribution of income. A simple example is welfare, which redistributes income from the government to welfare recipients. They are not counted in GDP because they do not represent production.

2.
a) C (Consumption spending - by households)
b) I (Investment spending - by firms)
c) G ...

Solution Summary

The topics covered are:
- Transfer payments
- Components of GDP
- Government stimulus initiatives
- Keynesian vs Classical economics

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