1. The multiplier is 5 (1/1-0.8) this is then multiplied by 50 (10^8) this would increase the overall RGDP by $250 billion instead of only $50 billion because once the 50 is invested, 80% is spent somewhere else and %20 is saved.
2. If DI is stable how does consumption change?
Consumption changes when disposable income stays constant when expectations change. For example if the aggregate price level rises then consumption will decrease because every dollar has less value than before.
Tuesday, November 13, 2012
Tuesday, October 23, 2012
Inflation
Why is unexpected inflation a societal problem?
Unexpected inflation is an issue because there is no time for the government or businesses to make price adjustments to counter inflation. If shop owners knew that inflation was coming they would be able to raise their prices accordingly. Since they cannot raise prices, the revenue they obtain from the goods they sell is worth less than what they expected. These firms, if you will, have not gained the same value from the goods/services they sold then they had in mind. Also the cost of living increases when there is inflation. Workers will not be paid as much but will need to pay more for the cost of living as their tax rate stays the same. People have less money and have to pay more...this truly is a societal problem.
Unexpected inflation is an issue because there is no time for the government or businesses to make price adjustments to counter inflation. If shop owners knew that inflation was coming they would be able to raise their prices accordingly. Since they cannot raise prices, the revenue they obtain from the goods they sell is worth less than what they expected. These firms, if you will, have not gained the same value from the goods/services they sold then they had in mind. Also the cost of living increases when there is inflation. Workers will not be paid as much but will need to pay more for the cost of living as their tax rate stays the same. People have less money and have to pay more...this truly is a societal problem.
Tuesday, October 16, 2012
GDP
What does GDP measure? And is it an accurate Macroeconomic indicator?
Gross Domestic Product is the measurement of the total price for all the goods and services produced, by a nation. GDP is most effective when it takes into account the rate of inflation because it can adjust to the value of the currency. GDP is a double edged sword when it comes to accuracy because although it tells us how much our country is producing it does not take into account other factors involved in the production of goods. All in all it is not an accurate indicator of macroeconomic success because it fails to take into account the environmental price of goods produced. By polluting a lake for business adds to overall GDP and cleaning up that lake adds to the GDP. However, fishermen who fish in that lake lose their market which lowers the overall GDP.
Gross Domestic Product is the measurement of the total price for all the goods and services produced, by a nation. GDP is most effective when it takes into account the rate of inflation because it can adjust to the value of the currency. GDP is a double edged sword when it comes to accuracy because although it tells us how much our country is producing it does not take into account other factors involved in the production of goods. All in all it is not an accurate indicator of macroeconomic success because it fails to take into account the environmental price of goods produced. By polluting a lake for business adds to overall GDP and cleaning up that lake adds to the GDP. However, fishermen who fish in that lake lose their market which lowers the overall GDP.
Tuesday, September 11, 2012
Incentives
Describe 3 examples how incentives can result in unintended consequences.
In Wheelan's Naked Economics, he goes over the possible unintended consequences when incentives are not thoroughly explored. One example is when the Mexican legislature implemented a policy that would reduce emissions released from cars. The policy called for one day of the week in which cars with certain license-plate numbers were prohibited from driving. Mexicans reacted to this policy by buying old used cars that would allow them to drive on the day of the week they were prohibited from driving. These cars released more emissions than before and more total cars were on the road. Another example is when CEOs are given stock options in the company. While these stock options are designed to ensure the long term success of the company, they often cause the inverse. Greedy CEOs often increase the profitability of their firm in the short run and leaving the company vulnerable to failure in the long run. This immediate success would allow for the CEO to sell his stock options for a high price. The third example is the Black Rhino, an endangered species in Africa. Environmentalists want to keep them in nature reserves, at the protection of their surrounding communities. However, if the Rhino ceases to exist then it will bring no financial benefit to the town, thus giving them no incentive to protect this natural wonder.
In Wheelan's Naked Economics, he goes over the possible unintended consequences when incentives are not thoroughly explored. One example is when the Mexican legislature implemented a policy that would reduce emissions released from cars. The policy called for one day of the week in which cars with certain license-plate numbers were prohibited from driving. Mexicans reacted to this policy by buying old used cars that would allow them to drive on the day of the week they were prohibited from driving. These cars released more emissions than before and more total cars were on the road. Another example is when CEOs are given stock options in the company. While these stock options are designed to ensure the long term success of the company, they often cause the inverse. Greedy CEOs often increase the profitability of their firm in the short run and leaving the company vulnerable to failure in the long run. This immediate success would allow for the CEO to sell his stock options for a high price. The third example is the Black Rhino, an endangered species in Africa. Environmentalists want to keep them in nature reserves, at the protection of their surrounding communities. However, if the Rhino ceases to exist then it will bring no financial benefit to the town, thus giving them no incentive to protect this natural wonder.
Thursday, September 6, 2012
Power of Markets
Prompt: Using Wheelan as a guide, discuss how economic decisions about what to produce, how to produce, and how much to produce are made.
Wheelan, as most economists turn to the invisible hand as the driving force of a free market economy. This invisible hand is the power of people striving for their utility. Firms will produce items whose marginal cost is overpowered by its marginal gain. These products must be in demand of the public or the marginal cost will out weigh the marginal gain thus making this product non-profitable. Since resources are scarce, people must bid or pay to obtain resources they desire. This essentially creates supply and demand which dictate the price of these items. During periods when demand outweighs supply goods increase in value. When supply outweighs the demand the price will drop significantly. This is the invisible hand's way of telling a company their product is no longer profitable. Once a firm realizes that the certain product is no longer profitable, they can chose to improve, innovate or stop production and move on. Firms attempt to find the most efficient way to produce these goods in order to increase their profit.
Wheelan, as most economists turn to the invisible hand as the driving force of a free market economy. This invisible hand is the power of people striving for their utility. Firms will produce items whose marginal cost is overpowered by its marginal gain. These products must be in demand of the public or the marginal cost will out weigh the marginal gain thus making this product non-profitable. Since resources are scarce, people must bid or pay to obtain resources they desire. This essentially creates supply and demand which dictate the price of these items. During periods when demand outweighs supply goods increase in value. When supply outweighs the demand the price will drop significantly. This is the invisible hand's way of telling a company their product is no longer profitable. Once a firm realizes that the certain product is no longer profitable, they can chose to improve, innovate or stop production and move on. Firms attempt to find the most efficient way to produce these goods in order to increase their profit.
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