For those interested,
Due next week: WB pg 17: Essay 2(a) only.
Due next thursday:
Essay: "If inflation is so bad, governments should keep inflation at zero." Discuss. (25m)
Sidenote: If im not wrong, Mr lin say can write in point form but must be detailed. Alternatively, you can write in full. It is to be presented in class and Mr Lin will only be filling up details.
When is the assignment due?
For tommorow, 16 feb mon, Mr lin is going through the class test. So if im not wrong he will go through it on the next econs tutorial which is on the wed.
"Inflation gap is on the next topic"
Please dont sleep during lecture.
-Sidenote: Please make an effort to do the extra questions too. So yeah, carry on mugging for your chem test tmr. Im curious to see whether we can hit mr ong's challenge of at least 12/14 people getting e.
This is for those who had missed the econs tutorials for orientation. I am only typing this question out as it is the only question that I found that contains the K multiplier which is tested tommorow. I will photocopy it for anyone who wants it together. Also, I cant type out the diagram online so I will just use the words. I will type out what I have copied down in class.
Start:Intro
-Investment is a form of injection
-Addition to the circular flow of income
-Definition: Total planned expenditure on goods and services.
-Definition of investments: Process of creating capital ( K ) goods.
-Planned expenditure = income.
-J = W
-J = injection = investments + government spending + exports
-W = Savings + taxes + imports
-J increase. J > W
-Expenditure > Income
-Income of firm producing capital goods Increase
-This will spark off another round of consumption
-At the same time, part of the addition Income is withdrawn as savings, taxes and imports.
-Process continues until J = W
-The new equilibrium is at C ( fig 1 ) where the national Income is at Y1 income level.
-Hence, increase in expenditure has incrased national income.
-K = multiplier
-Change in Y= K x Change in I -----------(1) (I suppose Y = national Income while I = investment)
-The value of K is given by eqn 2.
-K= 1/MPW ---------------(2)
-Eqn 2 shows that the lower the marginal propensity to withdraw (MPW), the larger the multiplier. Hence, the larger will be the impact on national I by a given Change in Y.
-However, the AE model is based on the assumption of the excess capacity. This may not be the case in the economy. If I increase but the economy is at full employment already, inflation may result. Thus in this case, the increase in I will not lead to the increase in national Income.
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Sidenote:
-Norminal Income --> How much % Income increase
-Real I --> How much % Income increase and how much % increase in price level. ( Relative. If im not wrong, when the income increase, the real income may not increase due to inflation. )
-Mutiplier effect stops when Change in I = Change in W.
Econs - qn 1d.
Zhongye, please forward to class.
Dear 105, I've looked through your essays.
Two problems:
1. Many of you missed the focus of the question by over elaborating on the multiplier. THis question is about macroeconomic goals.
2. Discussion is largely missed. There is rarely a for or against in each of ur discussion on each indicator. Work on this. But I think writing quality has overall improved. Keep it up!
Regards,Mr Lin
Tutorial Problem Set 2
Question 1 (WB pg 8):
Distinguish between inflationary and deflationary gaps. (10 marks)
Question 2: This problem set aims to consolidate the lessons learnt in economics since
the beginning of the term. To successfully complete the problem set, students will have to
utilize the full range of knowledge and skills acquired. Knowledge include the
macroeconomic models and indicators; whereas skills involve answer planning and stepby-
step explanation of macroeconomic processes as discussed in class.
Refer to the case study on the Colombian economy (WB pg 1).
a) How did the performance of the Colombian economy in the second half of the
1990s compare with that in the first half? (2 marks)
b) “Sharp decline in economic growth has caused a rise in the governments’ budget
deficit”. Explain why this may be so. (3 marks)
c) Using AD – AS model, analyse the possible effects on economic growth rates and
inflation due to the change in unemployment between 1994 and 1999. (6 marks)
d) Using the AD – AS model, analyse the possible effects on output and price levels
due to a change in government expenditure on investment projects in Columbia.
(6 marks)
e) How far would you recommend the increase of government expenditure as a
measure to improve Columbia’s economic performance in the late 1990s? (8
marks)
Think1:
(i) How would a devaluation of the peso affect the balance of trade,
unemployment rate and inflation in Columbia? (6 marks)
(ii) Imagine you are an economic advisor to the Columbian government. Discuss
the policy(s) that the government may exercise to improve Columbia’s
economic performance. (Hint: How may we make use of the multiplier?) (10
marks)
1 These are higher-order level thinking questions.
I will not go through in class, but will be extremely happy to discuss them if there is time or receive answer schemes through emails. It will be wrong however to dismiss these questions as being irrelevant to the syllabus – they are not! On the contrary, such questions have become frequent guests of A-levels economics exams.
