BU204_Section2_Unit6

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1 Unit 6 Assignment Template: Aggregate Demand and Aggregate Supply Name: BU204 Section Number: 2 Date:11.28.2023 Assignment This assignment addresses the market for loanable funds, marginal propensity to consume, the multiplier effect, aggregate supply (AS), aggregate demand (AD), and the basic concepts of open economy macroeconomics This assignment assesses your knowledge on the following Course Outcome: BU204-1: Examine how consumer spending, savings, investment spending, and other factors contribute to long-run economic growth. 1. A business contemplates building a new manufacturing facility and will need to seek loanable funds of $130 million. It expects that the new facility will yield a 12% return on investment (ROI). What is the current loanable funds market equilibrium rate depicted in the graph below? Given the current loanable funds market equilibrium depicted in the graph below, is it likely that the firm will borrow the money to build the new facility? Why?

2 Description: A graph showing the supply, in a red straight line rising to the right, and demand, in a straight blue line descending to the right, for loanable funds with the market interest rates on the vertical axis and money available on the horizontal axis. Initial equilibrium is at 8% interest rate and 300 million dollars. Yes, the firm will likely borrow the money due to the return being at 12% and the equilibrium rate being 8%. The difference will yield a profit for the business which is why they would go ahead with the loan for their new facility. 2. Given the income and consumption for the three individuals in the table below, calculate their individual marginal propensity to consume (MPC) and the total marginal propensity to consume for the entire group.

3 Name Income Consumption MPC Anne $20,000 $17,000 (17000/20000) = .85 Brad $30,000 $22,000 (5000/10000) = .5 Claire $40,000 $24,000 (2000/10000) = .2 Total (90000) (63000) (63000/90000) = .7 3. The following questions relate to long-run macroeconomic equilibrium and the stock market boom. Assume that a hypothetical economy is at long-run macroeconomic equilibrium with full employment and stable prices. Suddenly, the stock market prices increased much more than expected, increasing investors’ wealth and causing a short-term period of increased optimism about the future of the economy. a. In the short-run, will the AS curve or the AD curve shift? In which direction will it shift? In the short-run, the AD curve will move right due to the consumers increase in wealth. b. In the short-run, what will happen to the price level and the quantity of output (real GDP)? In the short-run, price level and real GDP will both increase. c. Explain what, if any, impact will there likely be on workers’ wages and the reasons for this impact. Expected price level raises will raise higher than actual price. Higher price level will increase demand in higher wages so the short run supply will fall due to the increase. d. In the long-run, which curve will shift due to the change in wages and price expectations created by the stock market boom? In which direction will it shift?

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4 The demand curve will shift to the left due to the decrease in demand. e. When the economy returns to its long-term output level, how will the new long-run macroeconomic equilibrium differ from the original equilibrium? When the economy returns to its long term output level, there will be an increase in long run macroeconomic equilibrium from the original equilibrium. 4. Studies indicate that net exports and net capital outflows tend to be equal. a. Explain why net exports and net capital outflows always tend to be equal. All international transactions involve the exchange of an asset for a good or service so net export equals net capital outflow. b. Explain how a change in interest rates can lead to changes in net exports? A change in interest rates means a change in exchange rates which leads to change in net exports. Lower interest rates means an increase in spending on net exports 5. Assume there is a decrease in the demand for goods and services, which leads to a decrease in the real GDP, and eventually the economy falls into recession. a. When the economy enters a recession due to a decline in demand, what will happen to the price level? When the economy enters a recession due to a decline demand, the price level of all goods and services will fall. b. Assume there is no government intervention. Explain how the economy will eventually get back to the natural rate of output (real GDP)? Without government intervention, the economy will eventually get back to its natural rate of output. Reduction in wages will lower production costs which means businesses will produce more at a lower given price.

5 6. Several macroeconomic variables decline during recessions. One of these variables is the GDP. a. What other variables, besides real GDP, tend to decline during recessions? Given the definition of real GDP and its components, explain the expected declines in these economic variables. Besides real GDP, spending, employment rates, and wages will decline during a recession. b. Empirical studies indicate that the long-run trend in real GDP of the USA has an upward trend. How is this possible given business cycles and macroeconomic fluctuations? What factors explain the upward trend despite the cycles? The long run trend in real GDP of the USA has an upward trend due to advancements in technology, manufacturing of surplus goods for exports and strategic economic models and policies. These factors have continued to keep the USA on an upward trend despite business cycles and fluctuations. ---------------------- References: Krugman, P., & Wells, R. (2020). Macroeconomics (6th ed.). Macmillan Higher Education. https://purdueuniversityglobal.vitalsource.com/books/9781319320164

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