Econ assignment- 6 questions Assignment Example | Topics and Well Written Essays - 2250 words

Econ - 6 questions - Assignment Example b. The autonomous spending multiplier can be estimated as 6.99, [i.e. 1/(1-0. 0.8571) = 1/0.1429 = 6.99] with the marginal propensity to consume valued as 0.8571 (Economicae, â€Å"Autonomous Spending Multipliers†). c. Based on the provided information, the total government expenditures amounted to 2000 and the equilibrium value of real income in this economy has been calculated to be 6900. Thus, the amount of an increase in government spending that would lead to a 1000 increase in real income would be (6900+1000-2000) = 5900. d. The tax rate which needs to change so as to generate a 1000 increase in real income would be [(0.30/6900)*1000] = 0.04 (approximately). In this regard, the simple household income tax rate is 0.30, equilibrium value of real income is 6900 and the increase in real income is expected to be 1000. As household real income and tax rates are identified to be inversely correlated, to generate an additional real income of 1000, the tax rate will be required t o be reduced by 0.04, i.e. to 0.26. QUESTION 2 Let’s assume that in the late 1970s, the U.S. economy was operating at potential output with a natural rate of unemployment of 4 percent. In June 1979, OPEC was able to triple the price of crude oil. This led to a (leftward/rightward) ___leftward_____shift of the ___demand____curve. As a result, the aggregate price level (increased/decreased) ___increased____indicating a (fall/rise) ____rise___ in inflation. Additionally, actual output (rose above/fell below) ____fell below___potential output causing unemployment to (fall/rise) ______rise__. This combination of inflation and output is referred to as ______stagflation___. The newly appointed Chair of the Federal Reserve, Paul Volker, responded by decreasing the money supply, resulting in (decrease/increase) __increase_______in interest rates. This led to a (leftward/rightward) ____leftward__ shift of the _____supply_______ curve. As a result, the aggregate price level (increased/d ecreased) _____increased_____indicating a (fall/rise) ___rise__in inflation and (increase/decrease) _____decrease___in unemployment. In addition, Ronald Regan became president in 1981. His administration cut the tax rate and increased government spending, resulting in new levels of government deficits. This led to a (leftward/rightward) ___rightward___shift of the ___demand___ curve. As a result, the aggregate price level (increased/decreased) __increased____ indicating a (fall/rise) ___rise____ in inflation and unemployment to (fell/rose) ______fell___. QUESTION 3 a. The concepts of ‘off-shoring’ or ‘offshore outsourcing’ is fundamentally related with the shifting of production to any overseas subsidiary by a multinational firm. Moreover, it can also be described as conducting trade in the form of goods and/or services in different foreign nations. With regard to an offshoring model, it can be affirmed that the higher relative wage of skilled labors in the foreign country would eventually result in higher degree of skilled-labor intensiveness in the home country. Similarly, it is to be affirmed that the lower relative wage of high skilled labors in the home country would make skilled-labor intensive related actions less expensive in comparison with the foreign country. Thus, it can be stated that the home country labor market would desire to undertake its different production activities at the lower margin of the value chain for a given product (Chang, â€Å"