Economic Problems

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1) When we analyze the unemployment rate, which three categories of unemployment can we use for a more detailed picture of unemployment? How do these three differ? (3)

2) What is a ‘recession’? (1)

3) Define the term GDP and explain your definition (i.e., what are the components of your definition and what do they mean?). (4)

4) Name two different kinds of transactions in an economy that are not considered part of GDP. Why are these transactions excluded from measuring GDP? (3)

5) What is the difference between GDP and GNP? (1)

6) If we want to assess changes in economic activity, why do we use changes in real GDP for finding an answer, instead of changes in nominal GDP? (2)

7) Assume the following values: Marginal Propensity to Consume (MPC) b = 0.75; Autonomous Consumption a = 300; Investment Spending I = 600. There is no government spending at this point.  a) For a consumption function C = a + bY, what is the equilibrium value for income Y here? (1)  b) What is the value of Y if Investment Spending increases to 750? (0.5)  c) If you add the government sector, with expenditure G = 250, what is the new equilibrium income? (For I = 750) (0.5)

8) What happens when the Marginal Propensity to Save (MPS) is reduced? How does equilibrium output change? (2)

9) What constitutes a ‘business cycle’? (Through which phases does an economy pass in the course of one cycle?) (2)

10) Compare the three multipliers that we have looked at for fiscal policy. (Which are those? How do they differ?) (3)

11) Money creation in modern banking systems:  a) Describe the process of the creation of money in the banking system in general terms. (2)  b) Then, work through the following numerical example: 200,- $US are newly deposited at Bank A, the only bank in country A. The reserve requirement ratio is 20%. Give the first three iterations in the process that multiplies money in the banking system. (3)  c) If the process plays out all the way, what is the eventual amount of money in deposits at bank A following the initial 200,- deposit? (1)

12) Explain how different approaches to government deficits can stabilize or destabilize economies. (2)

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