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Answers to 6 common macroeconomics questions

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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?

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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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Similar Posting

Answers and explanations for common multiple-choice Macroeconomics test questions.

Question #1
What is the short term economic outcome if price levels in the US increase and consumers buy less output as a result?
1. Aggregate demand shifts to the right.
2. Aggregate demand shifts to the left.
3. Aggregate demand does not shift, movement along this curve.

2. Question #2
Suppose that the real wealth of households increases significantly. As a result, the short term impact is that
1. Aggregate demand shifts to the right.
2. Aggregate demand shifts to the left
3. Aggregate demand does not shift, instead there is a movement along this curve.

3. Question #3
When expectations for corporate profits are diminished, economists expect that in the short term
1. Aggregate demand shifts to the right.
2. Aggregate demand shifts to the left.
3. Aggregate demand does not shift, instead there is a movement along this curve.

4. Question #4
If a series of tornados damages factories and infrastructure in the industrial regions of the US, a short term consequence is that
1. Aggregate supply shifts to the right.
2. Aggregate supply shifts to the left.
3. Aggregate supply does not shift, instead there is a movement along this curve.

5. Question #5
If companies invest in more efficient machinery and equipment, then
1. Aggregate supply shifts to the right for the short term.
2. Aggregate supply shifts to the left for the short term.
3. Aggregate supply does not shift, instead there is movement along this curve in the short term.

6. Question #6
If the Environmental Protection Agency significantly relaxes (reduces) environmental regulations, then one short term outcome is that
1. Aggregate supply shifts to the right.
2. Aggregate supply shifts to the left
3. Aggregate supply does not shift, instead there is a movement along this curve.

7. Question #7
In an effort to reduce budget deficits, the federal government decides to reduce its spending. The reduction is likely to impact both real GDP and the aggregate price level in the THE SHORT TERM. In fact:
1. Real GDP increases and the price level decreases.
2. Real GDP decreases and the price level decreases.
3. Real GDP increases and the price level increases
4. Real GDP decreases and the price level increases.

8. Question #8
Suppose that potential shareholders anticipate an increase in profitability so that there is a sharp increase in stock prices. In the short term,
1. Real GDP increases and the price level decreases.
2. Real GDP decreases and the price level decreases.
3. Real GDP increases and the price level increases.
4. Real GDP decreases and the price level increases.

9. Question #9
A widespread technological advance occurs so that the industrial sector of the economy becomes more efficient. In the short run:
1. Real GDP increases and the price level decreases.
2. Real GDP decreases and the price level decreases.
3. Real GDP increases and the price level increases.
4. Real GDP decreases and the price level increases.

10. Question #10
Remarkably, the price of an important raw material decreases. The price change leads to a short term
1. Increases in real GDP and the price level decreases.
2. Decreases in real GDP and the price level decreases.
3. Increases in real GDP and the price level increases.
4. Decreases in real GDP and the price level increases.

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