What would the overspent be trying to achieve? Explain how this might impact on the stock of public debt. (10 marks) Note: You need to demonstrate a detailed knowledge of the construction and use of the degree diagram and any other economic analysis you use. You must make it clear that you have a complete understanding of the macroeconomic principles that underlie the model and concepts. Explain what assumptions you are making. Above all, explain the economics of what you are describing.
It will be very difficult to obtain a passing mark for this assignment if you do not provide a complete explanation of exactly how and why the economy responds in the way that you are describing. Part (a) Assume prior to the exogenous changes identified in the quote, I. E. , these changes are determined outside of the basic Keynesian model, the economy is at the initial equilibrium level of GAP denoted by Y* (full employment), illustrated in Figure 1. The initial equilibrium is characterized by an equivalency between planned aggregate expenditure, PEA, and output, Y; and between planned injections, J P , and withdrawals, W.
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The initial equilibrium is consistent with points A and A’ on, respectively, the initial leaned aggregate expenditure schedule, PAVE, and the withdrawals schedule, WOW (Brenan et. Al. 2008, 209). At this level of income, there will be no unplanned change to inventories. Note also that unless there is an exogenous change, we would expect the economy to remain at this equilibrium. Also shown on the Figure is the economy’s consumption function, C d -?C -? CT + -? t)Y .
This lowers the intercepts of the consumption and PEA schedules and raises the intercept of W. (2) As planned investment is a component Of planned injections (together with exports and government expenditure), a fall in machinery orders implies the planned injections line, JOB, will shift downward by the amount of the exogenous fall in planned investment. (3) Likewise, a fall in exports orders will also imply the planned injections line, JOB, will shift downward.