Introductory macroeconomics

Following a long period of economic growth, the country of Ambrosia was affected by a severe financial crisis in 2008/9. The initial impact came from outside the domestic economy. Exports collapsed due to falling demand from the USA and other major trading partners, and foreign investors began to pull their money out of Ambrosia, leading to a rapid decline in the stock market (as share prices fell) and in the property market. Property market speculators became insolvent, and banks facing increasing losses due to defaults cut back on their lending to the private sector. Consumers facing decreasing wealth and rising job insecurity cut back on their spending. Business organisations facing lower demand and more difficulty in borrowing cut back on their capital investments. The economy went into a severe recession, with real output falling by 4% in 2009 and a further 2% in 2010. Unemployment increased from a pre-crisis level of 6% to 11% by 2010.
a)Using either an injections/withdrawals diagram or a Keynesian cross diagram,illustrate the impact on Real GDP of decreases in exports, private investmentspending and autonomous consumption.

b)Some economists argued that the Ambrosian government should act to reduceunemployment back towards 6% to avoid permanent increase in unemployment dueto hysteresis. Explain what is meant by hysteresis, with reference to cyclical andstructural unemployment, and the natural rate of unemployment.
c)The central bank initially cut its official interest rate to promote recovery. Explain howthis policy might work.

d)The government’s budget went into deficit as an automatic consequence of therecession. Explain the main reasons for this, and illustrate using a relevant diagram.

e)After interest rates had been reduced to zero, the government decided to use adiscretionary fiscal stimulus to assist with economic recovery. Explain what this mighthave involved, and illustrate the effect of this policy measure on the governmentbudget balance diagram you used in part (d)

Introductory Macroeconomics

provide brief answers to the following questions, based on the information included in the chart.
a) Identify the four elements included in Gross Domestic Product
b) Estimate roughly the extent of the percentage increase in US nominal consumer spending and US general government spending between 1984 and 2012 – just compare these two years).
c) What adjustment should be made to the Gross Domestic Product statistics in order to estimate the rate of economic growth, or increases in real consumption or government spending in a particular year?
d) What does the chart reveal about the US trade balance after 1997? How might this be linked to changes in the trade balance of other countries?
e) Which were the elements of GDP most affected by the global financial crisis of 2008?

Introductory Macroeconomics

provide brief answers to the following questions, based on the information included in the chart.
a) Identify the four elements included in Gross Domestic Product
b) Estimate roughly the extent of the percentage increase in US nominal consumer spending and US general government spending between 1984 and 2012 – just compare these two years).
c) What adjustment should be made to the Gross Domestic Product statistics in order to estimate the rate of economic growth, or increases in real consumption or government spending in a particular year?
d) What does the chart reveal about the US trade balance after 1997? How might this be linked to changes in the trade balance of other countries?
e) Which were the elements of GDP most affected by the global financial crisis of 2008?