Economics

During the period 1999-2000, we were in an expansion, but not a boom. This period followed the boom in the 90s, but we can see a flattening of the output line during this time. The output here is above potential output, indicating expansion but because the slope of the output line during these couple of years is lower than the slope of the potential output, this period would not be considered a boom. Another time period where we see this situation was in 1973-1974 as the economy transitioned from boom to recession. Output growth stalled, but was still ahead for potential output for a couple of years before falling behind in the middle part of this decade.

It is incorrect that every recession in the past six decades has been caused by an increase in oil prices. Some of these recessions can be attributed to increases in oil prices, which resulted in a subsequent drop in economic activity. But there have been other causes as well. For example, the collapse of the Soviet Union brought about a significant reduction in defense spending, bringing about a mini-recession in 1990. In the early 1980s a change in Federal Reserve policy brought about an increase in interest rates, which reduced investment both in terms of major consumer products (homes, cars) but also business investment as hurdle rates increased dramatically.

10) 3) a) the marginal propensity to consume implicit in this data is an increase of 800 for every 1000 increase in income, or 0.8.

A b) the expenditure multiplier is 1 / (1- MPC) or 1 / (1-.8) = 5 c) to calculate the equilibrium GDP in this economy, we should build a graph. Where this economy meets with the 45 degree line is the point of equilibrium GDP. In this case, that point is at GDP of 12,000.

A d) if government spending is dropped to 400 instead of 1000, the equilibrium GDP to 9000.