Macroeconomics - Problem Set

The slant of the relationship is characterized as the measure of progress in one variable given a unit change in the other variable. In the given relationship, the incline is given by the measure of fall in cost required to expand number of visits by a unit.

economic and stock market expansion. When the curve is normal, economists and traders rest much easier.

Refer to the sets of the aggregate demand, short-run aggregate supply, and long-run aggregate supply curves. Use the graphs to explain the process and steps by which each of the following economic scenarios will shift the economy from one long-run macroeconomic equilibrium to another equilibrium. Under each scenario, elaborate the short-run and long-run effects of the shifts in the aggregate demand and aggregate supply curves on the aggregate price level and aggregate output (real GDP).

Expansionary fiscal policy results in a reduction of taxes and increased government spending and therefore increasing the demand level in an economy. The institution of expansionary fiscal policy raises disposable income through reduction of taxes in the economy and this improves the rate of consumption. Therefore, tax reduction is an appropriate expansionary fiscal policy that can be deployed to help an economy that could be undergoing a recession (DeLong & Summers, 2012). Consequently, tax reduction could be a vital government tool for increasing the Gross Domestic Product. Low taxes encourage individuals to work hard and thus boosting the county’s GDP.

economy. While the rate cuts would raise the after-tax return to working, saving, and investing,

The president quickly realized what these high rates where doing to the economy, so he “proposed across-the-board tax rate reductions that reduced the top tax rate from more than 90 percent down to 70 percent” (mitchell) and tax revenue from 1961 to 1968 grew 62%. President John F. Kennedy remarked on his actions “an economy hampered by restrictive tax rates will never produce enough revenues to balance our budget just as it will never produce enough jobs or enough profits… In short, it is a paradoxical truth that tax rates are too high today and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now” (mitchell) stating that the path to the future needed for our economy to grow lower rates. His prediction was followed by rapid growth from 1965 to 1968 when the collections of tax grew and unemployment fell yearly. From 1961 to 1965, those with $1 million or more income doubled their tax payments as well.

early retirement, and (2) it reduced the payroll tax by half for workers who continued

With respect to progressive tax, an income tax, a tax rate or an increase in the taxable base can effect in one of the two taxpayers responses, both equally significant to dynamic forecasting. The income effect foresees hat when taxes are increased on tax payers, they will work harder to achieve the same amount of dollars after taxes, on the other hand the substitution effect predicts that given the same situation instead of working harder, the will choose to engage in non-taxable activities.

Will the number of workers hired change? Why? What might be an unintended consequence of a higher minimum wage law designed to help low income workers?,” I will start by plotting a graph of demand and supply curves where wage (minimum wage) is on the y-axis (vertical axis) and number of workers on the (horizontal axis) x-axis, the price floor will be above the equilibrium wage. The quantity demanded at the price floor will be Nd and will be less than the quantity demanded at equilibrium price or wage in accordance with the law of demand. The quantity supplied at the price floor will be Ns and will be higher than the equilibrium quantity or number in accordance with the law of supply. So, the difference between the quantity supplied at the price floor (Ns) and the quantity demanded at the price floor (Nd) is an excess supply or surplus. This means that there will be a small number (Nd) of workers employed and a lot of them (Ns - Nd) unemployed but looking for work. Therefore, the number of workers hired will change, meaning reduce, because the higher the price the lower the quantity demanded according to the law of demand. The unintended consequence of a higher minimum wage law designed to help low income workers is that the since wage is a cost of production, a higher minimum wage will lead to the reduction in the number of workers employed and that the supply curve for the goods and services produced by firms will shift to the left that is the supply will

An increase in aggregate demand leads to an increase in the demand for labour shown as a shift from DL to DL1 which leads to increase in employment as a result of the wage rate increasing from 1 to 2. However, due to the natural rate of unemployment the supply of labour shown as SL, shifts to the right to SL1 where the wage rate is represented as 3 and employment returns to the natural rate.

In addition it limits the development of the skill needed for certain fields of work. Normally income is highly correlated with skills. Maximum wage

The rightward shift of the AD curve causes prices and output to rise, but the latter rises only temporarily as the already tight labor market gets tighter, leading to higher wages and a leftward shift of the AS curve, with its concomitant increase in P* and decrease in

to the right { more labor is demanded at each wage. When output price falls,

Tax cuts also feature heavily in supply-side policy and were a key component of the Thatcher and Major governments between 1979 and 1997. Sarkozy has also proposed tax cuts, capping income tax at 50% for the highest earners. Twinned with making the 35 hour week more flexible by including tax free overtime in his policy, this reinforces Sarkozy’s slogan, ‘work more to earn more’. (bbc.co.uk) This may result in the substitution effect as people spend more time working and less time on leisure activities. How this will impact on the circular flow of income in the long run is uncertain as it is unpredictable whether the money will continue to circulate or the French will be inspired to save.

The diagram shows aggregate supply shifting outwards from AS1 to AS2 and consequently the price level falls from P1 to P2 and real gross domestic product rises from Y1 to Y2.