Block22 Answers
Block22 Answers
Block22 Answers
Block 22 Answers
Activity SG22.1
Draw a quick sketch showing an upward sloping smooth line for trend output and a wavy line showing
actual output – mark the phases of the business cycle on the actual output curve.
Answer:
Activity SG22.2
The table below is based on Maths 27.1 and includes consumption as a further element of the system.
Use the formulas provided for each column, assuming a = 5/4 and c = 2/3, to complete the table (do
calculations to the nearest whole number): Assume that Y = 0 prior to period 1 (hint: this makes
investment = 38 in period 2). This example shows how the multiplier-accelerator interaction can
produce cycles. In other respects, the actual numbers are somewhat unrealistic. Think about why this
is.
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EC1002 Introduction to economics
Answer:
Pse insert here the Excel spreadsheet as well as the scatter diagram of output over time.
-400
The actual numbers are somewhat unrealistic because income/output assumes negative values which
are difficult to interpret. Also, cycles are of ever-increasing magnitude which contradicts real world
experience.
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EC1002 Introduction to economics
Activity SG22.3
In your own words, briefly summarise the discussion of how fluctuations in stockbuilding and
competitiveness can lead to business cycles.
Answer:
A key point to make is that in a recovery, firms must increase their output more slowly than the rate
of increase in aggregate demand, in order to restore the equilibrium level of stockholding. The story
about competitiveness depends on the country having a fixed exchange rate.
Activity SG22.4
Answer the following multiple choice questions on real business cycles:
a) Potential output
b) Actual output
c) Real output
d) International trade
Answer: (a)
2) Real business cycle theorists argue that _________ can explain short and long-term fluctuations in
output.
Answer: (c)
3) Real business cycle theories suggest that ___________ to correct departures from the optimal
growth path
Answer: (d)
Explanation: Supply-side policies are not aimed at correcting departures from the long-run growth
path. In the next chapter we will see that such policies are designed to change the long-run growth
path itself.
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EC1002 Introduction to economics
Activity SG22.5
To help you work through this material, summarise it by filling out the table. Then check your
responses by comparing it to the summary table the authors have created (Table 27.2).
Answer:
Once you have filled in the table, you should check it against to the summary table (Table 27.2) in the
textbook.
Answer: (c)
2) Investment depends mainly on:
Answer: (b)
3) If an increase in investment leads to a bigger increase in national income, this is the:
a) accelerator
b) aggregate demand
c) real business cycle
d) multiplier.
Answer: (d)
4) The impossibility of negative gross investment provides a _________ to fluctuations in _______
a) ceiling; stockbuilding
b) Ceiling; capital prices
c) floor; output
d) Floor; the capital-output ratio
Answer: (c)
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EC1002 Introduction to economics
Answer:
You could discuss the following topics: political business cycles, multiplier-accelerator
model, the role of ceilings and floors, fluctuations in stockbuilding, competitiveness and
fixed exchange rates, spillover from other countries (international business cycles).
c) Potential output is often depicted as a smooth, gently rising line. However, it does not
necessarily need to increase smoothly over time. What might explain fluctuations in
potential output?
Answer:
Students should use the real business cycle theory to explain fluctuations in potential
output.
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