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Optional Extra Credit Assignment Due July 30, 2003, Wednesday 1. Explain graphically the determination of the equilibrium GDP for a private closed economy. Explain why the intersection of aggregate expenditures schedule and the 45-degree line determines the equilibrium GDP. Graph: Because if we choose a point on the left side of the intersection like point E1 then the output will be more than the real GDP, and therefore the output will fall until we rich E0 again, and if we choose a point on the left side of the equilibrium like the point E2 then the output will be more than the real GDP. Then the output will fall until we rich E0 again. 2. What is the multiplier effect? What relationship does the MPC bear to the size of the multiplier? The multiplier effect is basically caused by the flow of money in the system. When one puts his money in the bank, bank loans most of that money to someone else. And then the next person spends the money and the third person who gains profit from selling an item puts him money in the bank loan the money so a new person. So the banks gain interest and give interest from and to many people for the same cash. The greater the MPC the greater the multiplier is. 3. Explain graphically the determination of equilibrium GDP for a private economy through the aggregate expenditures model. Now add government spending to your graph, showing its impact on equilibrium GDP. Finally, add taxation to your graph and show its effect on equilibrium GDP. Looking at your graph, determine whether equilibrium GDP has increased, decreased, or stayed the same in view of the sizes of the government spending and taxes that you selected. Graph: 4. What are the three basic functions of money? What are the components of the M1 money supply and M2 money supply? Functions of money: • Money is any asset that is widely acceptable as a means of payment and it is highly liquid. Money is a highly liquid asset because it can be converted easily and cheaply to cash. • Unit of account is a common unit for measuring how much something worth. With a standard of monetary unit like the $. • Store of value, money has some use as an asset because it holds its value over time assuming no inflation, money is also very liquid asset, which is another desirable quaily. M1: Cash in the hands of public + demand deposits at banks + travel checks M2: M1 + saving type accounts + money market mutual funds 5. What are the basic determinants of demand for money?
Approximate Word count = 1771
Approximate Pages = 7.1
(250 words per page double spaced)
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