Economics Answer Note #41

Question 1 3)Assume that the total expenditure of a consumer on two goods X and Y is birr 2000 and prices of goods X and Y are birr 50 and birr 40 respectively. 4) Then formulate his budget equation and sketch the graph Answer According to the assumptions given, a consumer spends a total of birr 2000 on two goods, X and Y, with prices of birr 50 and birr 40 respectively. This situation can be represented by a basic economic concept known as the budget constraint. The budget constraint describes the different combinations of goods that a consumer can buy given their budget and the prices of the goods. It is represented by the equation: P1x1 + P2x2 = M Where P1 and P2 are the prices of goods X and Y, x1 and x2 are the quantities of goods X and Y consumed, and M is the consumer's income or budget. By substituting the given values, we can formulate the budget equation for this specific situation as: 50x + 40y = 2000 To graph this equation, we can plot the different combinations of goods X and Y on a graph, with X on the horizontal axis and Y on the vertical axis. The budget line will be a straight line that connects the points where the consumer spends their entire budget. This can be calculated by finding the slope of the line using the formula: Slope = (Change in y)/(Change in x) = (-50)/(-40) = 5/4 The intercepts of the budget line will be (0,50) and (40,0), calculated by setting x or y to 0 and solving for the other variable. The graph would look like this: Insert Graph Here (budget line: y = (-5/4)x + 50) This graph shows all the possible combinations of goods X and Y that the consumer can afford with a budget of birr 2000 and the given prices. Question 2 The percentage of the noninstitutionalized working-age individuals who are employed or seeking work is known as 1) _______ A) discouraged worker. B) the labor force. C) the labor force participation rate. D) the stock of employed and unemployed workers. Answer The correct answer is C) the labor force participation rate. It is an important measure of the labor market and provides insights into the level of economic activity in a country. The labor force participation rate is calculated by dividing the total number of individuals in the labor force (employed and unemployed) by the total number of individuals in the working-age population. It is expressed as a percentage. Question 3 Suppose 2010 is the base year. From 2010 to 2020, the price index increases from 100 to 102.5. If nominal Gross Domestic Product (GDP) is $2,800 in 2020, then the real Gross Domestic Product (GDP) in 2020 is Answer The real Gross Domestic Product (GDP) in 2020 can be calculated using the following formula: Real GDP = Nominal GDP / Price Index (base year) * 100. In this case, the base year is 2010, therefore, we can use the price index of 100 as the denominator in the formula. Substituting the given values into the formula we get: Real GDP (2020) = $2,800 / 100 * 100 = $2,800. This means that the real GDP in 2020 is the same as the nominal GDP since the price index increased from 100 to 102.5, the real GDP remains constant. This also indicates that there has been no change in the overall output of goods and services in the economy from 2010 to 2020. Question 4 ) Which of the following conditions describes an inflationary gap? 3) _______ A) The short-run equilibrium level of real GDP is below the long-run level of real GDP. B) The short-run equilibrium level of real GDP is above the long-run level of real GDP. C) The actual interest rate is above the equilibrium interest rate. D) The actual interest rate is below the equilibrium interest rate. Answer The correct answer to this question is B) The short-run equilibrium level of real GDP is above the long-run level of real GDP. An inflationary gap occurs when the actual level of output in the economy exceeds the potential level of output in the long run. This means that the economy is producing at a level higher than its sustainable capacity, resulting in an upward pressure on prices. Inflationary gaps are a result of an excess of aggregate demand (total spending in the economy) over aggregate supply (total production in the economy). This can be caused by factors such as increased consumer confidence, government spending, or low interest rates incentivizing borrowing and spending. In order to accurately calculate and identify an inflationary gap, several key economic indicators must be considered. These include the actual level of output in the economy, the potential level of output (also known as the full-employment level of output), and the equilibrium interest rate. Question 5 The Board of Governors of the Federal Reserve System is A) composed of seven members who are appointed by the President and approved by the Senate. B) composed of representatives from the country's 12 largest commercial banks. C) elected by the general public. D) composed of 12 members of the Senate and the U.S. House of Representatives. Answer The Board of Governors of the Federal Reserve System is composed of seven members who are appointed by the President and approved by the Senate. This body is responsible for overseeing the nation's monetary policy, regulating banking institutions, and maintaining the stability of the financial system. The seven members of the Board of Governors serve a term of 14 years, with appointments being staggered so that one term expires every two years. This is designed to ensure continuity and stability within the Board. The appointment process for members of the Board of Governors involves the President nominating individuals who are then subject to confirmation by the Senate. The Senate's Committee on Banking, Housing, and Urban Affairs conducts hearings to evaluate the nominees' qualifications, their views on monetary policy, and their ability to serve effectively on the Board. Once confirmed by the Senate, the appointed members begin their term on the Board. It is worth noting that the Federal Reserve Act does not specify any qualifications for serving on the Board of Governors. However, in practice, individuals who are appointed to the Board tend to have extensive experience in economics, banking, finance, or other related fields. This is important as the Board is responsible for making critical decisions that impact the U.S. economy and financial system as a whole. In terms of the composition of the Board of Governors, it is essential to understand that the Federal Reserve System consists of three main components: the Board of Governors (which we have discussed), the 12 regional Federal Reserve Banks, and the Federal Open Market Committee (FOMC). The FOMC is comprised of the seven members of the Board of Governors and five of the twelve Federal Reserve Bank presidents. This committee is responsible for setting the nation's monetary policy by setting interest rates and controlling the supply of money in the economy. In conclusion, the Board of Governors of the Federal Reserve System plays a crucial role in the U.S. economy and financial system. The members of the Board are appointed by the President and confirmed by the Senate, and they serve a 14-year term. They are responsible for overseeing the nation's monetary policy, regulating banking institutions, and maintaining the stability of the financial system.