ECO401 Quiz 3 Solution and Discussion

[zareen]

Suppose if investment rises by Rs 100 billion at each price level. If the value of the multiplier is 4, what is the amount of change in real GDP demanded at each price level?

[zareen]

The aggregate supply curve is the relationship between the:

[zareen]

If leakages into the circular flow of income rise, then the value of multiplier will:

[zareen]

In Keynesian economics, an inflationary gap results if aggregate expenditures are:

[zareen]

Gross Domestic Product is:

[zareen]

Unemployment due to changing job or due to movement around the country is known as:

[zareen]

Unlike the Classical economists, Keynes believed that the economy could get stuck in the short run for a significant period of time because:

[zaasmi]

@zareen said in ECO401 Quiz 3 Solution and Discussion:

Unlike the Classical economists, Keynes believed that the economy could get stuck in the short run for a significant period of time because:

Sticky-prices (or Rigidities)

Demand

(Specifically, the second option: There was insufficient aggregate demand.)

Unlike Classical economists who believed “Supply creates its own Demand” (Say’s Law), Keynes argued that if consumers and businesses don’t spend enough, the economy will remain in a recession because prices and wages are “sticky” and do not adjust downward quickly enough to restore full employment.

[zaasmi]

@zareen said in ECO401 Quiz 3 Solution and Discussion:

Unemployment due to changing job or due to movement around the country is known as:

Frictional

(Specifically, the third option: Frictional unemployment.)

Frictional unemployment is considered “natural” and even healthy for an economy. It occurs because:

• Job Transitions: Workers are between jobs or searching for a better “fit.”
• Geographic Mobility: Individuals moving to different parts of the country for personal or professional reasons.
• New Entrants: Students or graduates entering the workforce for the first time.

Would you like me to clarify the difference between Frictional and Structural unemployment?

[cyberian]

@zareen said in ECO401 Quiz 3 Solution and Discussion:

Gross Domestic Product is:

Flow

(Specifically, the second option: A flow variable.)

Why it is a Flow Variable:
Time Dimension: GDP measures the total value of goods and services produced over a specific period (usually a quarter or a year).

The “Water” Analogy: In economics, a flow is like the water running from a tap into a bathtub (the amount added per minute), whereas a stock is the total amount of water sitting in the tub at a specific moment.

GDP vs. Wealth: GDP is a flow (income earned over a year), while National Wealth is a stock (total assets owned at a single point in time).

[cyberian]

@zareen said in ECO401 Quiz 3 Solution and Discussion:

The concept that “Demand creates its own supply" is given by:

Keynesians

(Specifically, the third option: Keynesians.)

This is the inverse of Say’s Law (“Supply creates its own demand”), which was the cornerstone of Classical economics.

John Maynard Keynes argued that in a depressed economy, production and employment are determined by Aggregate Demand. When people, businesses, and the government spend more, businesses respond by increasing production and hiring more workers, effectively “creating” their own supply to meet that demand.

[cyberian]

@zareen said in ECO401 Quiz 3 Solution and Discussion:

Gross National Product (GNP) is:

Flow

(Specifically, the second option: A flow variable.)

Why it is a Flow Variable:

Just like GDP, GNP (Gross National Product) is measured over a specific interval of time (typically one year or one quarter). It represents the total market value of all final goods and services produced by the residents of a country, regardless of where the production takes place.

• Flow: Measures a rate per unit of time (e.g., amount of production per year).
• Stock: Measures a quantity at a specific point in time (e.g., total national debt on December 31st).

Would you like me to explain the difference between GDP and GNP to help you distinguish between the two for your exam?

[cyberian]

@zareen said in ECO401 Quiz 3 Solution and Discussion:

In Keynesian economics, an inflationary gap results if aggregate expenditures are:

Greater

(Specifically, the second option: Greater than aggregate production.)

Why it occurs:

An inflationary gap exists when the total planned spending (Aggregate Expenditure) exceeds the economy’s capacity to produce goods and services at full employment.

• The Gap: Because the economy is already producing at its maximum potential, this “excess” demand cannot be met with more physical goods.
• The Result: Instead of increasing output, the excess spending forces prices upward, leading to inflation.

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[cyberian]

@zareen said in ECO401 Quiz 3 Solution and Discussion:

Overestimation of national product in national income calculations is known as:

Double counting effect.

This occurs when the value of intermediate goods (materials used to produce a final product) is added to the national income multiple times at different stages of production.

To avoid this overestimation, economists use two main methods:

Final Product Method: Only counting the value of the finished good sold to the end consumer.

Value Added Method: Adding only the specific value created at each individual stage of production.