Question

1. In an economy at full employment, Y=C+I+G+NX. List, define, and explain, the component parts of the formula? Would you consider our Economy at Full Employment now? Why or why not? 2. For a normal product at a store, we are the demander and the store is the supplier. When it comes to labor, however, we are the supplier and the various businesses are the demanders of our labor. In the labor market, how are our supply and a firm’s demand affected by a real wage increase and decrease? 3. Explore the Robert Solow’s capital deepening model (appendix to chapter 8). Explain what each of the lines represents and why capital deepening must eventually come to an end (8A-3 on page 177). What are the effects on the model of technological progress and higher savings rates? 4. The federal government currently taxes the increase in the value of shares of stock when they are sold. This is called the capital gains tax. Explain why, if the government reduced the tax rate on capital gains, it could actually receive more total revenue. In your answer, carefully distinguish between tax rates and tax revenue. 5. Critical Thinking: In an economy at full employment you may or may not have crowding out with increased government expenditures (the G in the formula). If we do have crowding out, what happens when the government increases spending? Looking at our formula again, Y=C+I+G+NX, if we increase Y, what happens on the other side of the equation?

Answer 1

Answer 1:

The component parts of the formula above are as follows:

1. Consumption Expenditure = This refers to the level of income spend on buying goods and services in the market. This consists of autonomous consumption or level of consumption when income is zero and also proportion of the disposable income spent on consumption.

2. Investment expenditure = This refers to the expenditure incurred either by the individual, government or firm for the creation of new capital assets like machinery, building etc.

3. Government Spending - Government spending includes all government consumption, investment and transfer payments.

4. Net Exports - The Net exports of a nation is given by the difference between the total amount of exports and total amount of imports of a nation.

Yes, the United States economy is currently operating at very close to the full employment level of the economy. This is because the output produced by the economy is close to the potential level of output of the economy. Also, the unemployment rate is at its lowest level because of full employment in the economy. Thus, currently the United States economy is operating close of the full employment level of the economy.