Essay on Principles of Macroeconomics

Both price level and real GDP will increase

What will happen to the expected price level? What impacts does this have on wage bargaining power of workers?

The expected price level will rise. Bargains are made for higher wages for the workers

In the long run, which curve will shift due to the change in price expectations created by the stock market boom? In which direction will it shift?

In the long run, the short-run aggregate supply curve will shift to the left.

How does the new long-run macroeconomic equilibrium differ from the original equilibrium?

The price level is higher and the real GDP is the same

Question Two

Why are the net exports and net capital outflows tend to be equal? How does an increase in the price level change interest rates?

In any country, the value of exports produced is always equal to the value of the reciprocal payments of some asset that buyers in other countries make to the producers. The value s also equal to the total amount currency that is traded in the foreign exchange market over that year. The buyers in other countries trade in their assets leading to the conversion to the equivalent amount in the countrys currency. The more you expect money to devalue, the more interest compensation will be demanded

How does this change in interest rates lead to changes in investment and net exports?

A rise in the interest rates discourages spending on investment goods thereby leading to the decrease in the demand of aggregate quantity of goods and services. An increase in the interest rates leads to the fall of the supply of YTLs in the market for foreign-currency exchange because people wish to purchase fewer foreign assets, this leads to the appreciation of YTL thereby decreasing the net exports.

Question Three

When the economy enters recession due to a decline in demand, what will happen to the price level?

Both the output and input prices usually register a fall during recession, but inflation rate increases during a boom. However, the same does not go below zero because of the consistent increase in the supply of money.

Assume there is no government intervention, what will ensure that the economy still eventually gets back to the natural rate of output (real GDP)?

If there is no response from the government, the actual price level then falls below the price level that people expect. Individuals then correct their misperception of the price level gradually leading to the fall of expected prices and causing aggregate supply curve to shift to the tight (Mankiw, 2014). The shifting to the right of the aggregate supply then finally restores the economy to the natural rate of output.

Question Four

What other variables, besides GDP, tend to decline during recessions? Given the definition of real GDP and its components, explain the declines in the economic variables which are to be expected.

The variables that tends to decline along with the real GDP are such as employment, investments, incomes, sales, and home purchases. GDP helps to measure in several ways among them being the production of, expenditures on, or the income generated from the final goods and services. It is factual that any variable used in the measurement of production follows suit in the direction of the GDP

Empirical studies show that the long-run trend in real GDP of the USA has an upward trend. How is this possible given the business cycles and macroeconomic fluctuations? What factors explain the upward trend in spite of the cycles?

The same is as a result of economy correcting itself. Despite the fact that there might be short periods of negative real GDP growth, most of the years result in larger GDP growth that balanced out with the negative real GDP years. Various factors explain the upward trend include as such as the increments in labor force, advancement in technological knowledge, and the capital stock.

Question Five

What is the initial point of the long-run macroeconomic equilibrium? What are the equilibrium values? What does he appearance of the long-run aggregate-supply (LRAS) curve indicate? How does it differ from AS?

The initial point is where there is an intersection between AD and point A, the values are therefore on P1 and Y1. LRAS that exists on the real GDP at the full potential and unemployment at its natural level, and the same differs from AS since AS moves into equilibrium with LARS and AD.

What are the factors that can shift short-run aggregate supply curve from AS1 to AS2? What does point A represent in the graph? What does point B represent? Is its the short-run or long-run macroeconomic equilibrium? Explain.

There are various factors and some of them are shifts that arise from the changes in labor, shifts from the changes on capital, shifts from the changes in natural resources, shifts from the changes in technology, and the shifts from the changes in expected price level. Point A is a representation of a long-run equilibrium and Point B is a representation of the short-run equilibrium.

Assume aggregate demand (AD) is help constant, in the long-run, starting from point B, what will the economy likely experience? Will it reach the long equilibrium?

The economy would have a rising output and falling prices, the same would not reach long equilibrium since it takes place only at the intersection of the aggregated demand curve and the long-run aggregated supply curve.

Reference

Mankiw, N. G. (2014). Principles of macroeconomics. Cengage Learning.