Explain the sources of inflation in the macroeconomy

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Introduction to Macroeconomics

1. The Obama Record. Since taking office, President Obama has repeated that he took over the nation as it was experiencing the "greatest economic crisis since the Great Depression." Consider the figures provided below and describe the movement of the macroeconomy in the business cycle during the recent times.


Real GDP Growth Rate
(%)

UN Rate
(%)

Mean Duration of UN
(weeks)

Average CPI Growth Rate
(%)

Federal structural

Budget Deficit
($billions)

Budget Deficit
(%)

2005

3.3

5.1

18.4

3.4

­-493.6

­-2.5

2006

2.7

4.6

16.8

2.5

­-434.5

­-1.8

2007

1.8

4.6

16.8

4.1

­-342.2

­-1.1

2008

­0.3

5.8

17.9

0.1

­-641.8

­-3.1

2009

­2.8

9.3

24.4

2.7

­-1549.7

­-9.8

2010

2.5

9.6

33.0

1.5

­-1371.4

­-8.7

2011

1.6

8.9

39.3

3.0

­-1368.8

­-8.5

2012

2.3

8.1

39.4

1.7

­-1148.9.

­-6.8

2013

2.2

7.4

36.5

1.5

-­719.0

­-4.1

2014

2.4

6.2

33.7

0.8

­-514.1

­-2.8

2015

2.4

5.3

29.2

0.7

­-465.7

­-2.5

2016

2.0**



0.47***

­-623.8*

­-3.3*

[Source: Economic Report of the President 2016; Table B­1, B­10, B­11, B­13, B­17, B­18 (structural budget deficit = budget deficit as percentage of gdp). * = estimated; ** = based on BEA estimate of first quarter 2016; *** = BLS estimate (as of 5/12/16).]

2. Is South Africa a rich nation or a poor nation? Is the macroeconomy of South Africa is performing better, worse, or same than the other nations of the world? Explain. What are the key elements in the natural resource endowment and in its social­political­economic institutions which explain the macroeconomic position of South Africa and of the performance of South Africa's macroeconomy?

ECONOMIC STATISTICS FOR SOUTH AFRICA (2015 est) [source: CIA WORLD FACTBOOK: www.cia.gov]

? total population = 53,676,000 ­ ­ ­ ranked 26th largest in the world
? total GDP (in Purchasing Power Parity) = $724 b. ­ ­ ­ ranked 31st largest in the world (out of 230 nations ranked) (up from $714 b. in 2014)
? GDP per capita = $13,400 ­ ­ ­ ranked 116th highest in world (out of total of 230 nations) (up from $13,200 in 2014)
? real GDP growth rate = +1.4% ­ ­ ­ ranked 162nd highest in world (out of 225 nations) (down from +1.5% in 2014)
? Unemployment Rate = 25.9% ­ ­ ­ ranked 116th lowest in world (out of 207 nations) (up from 25.1% in 2014)
? Inflation Rate = 4.8% ­ ­ ­ ranked 173rd lowest in the world (out of 226 nations) available (down from 6.1% in 2014)
? Distribution of family income ­ Gini index = 62.5 (in 2013) ­ ­ ­ ranked 4th most unequal in the world (out of 144 nations) (up from 59.3 in 1994)
? Government Budget surplus (+) or deficit (­) = ­4.4% of GDP ­ ­ ­ ranked 156th lowest surplus out of 220 nations) {note: revenues of $84.15 b. minus expenditures of $98.26 b. = deficit of $10.11 b.}
? Public Debt = 45.4% of GDP ­ ­ ­ ranked 97th highest in world (out of 176 nations) (up from 44.8% of GDP in 2014)
? Exports = $85.14 b. ­ ­ ­ ranked 38th largest in world (out of 224 nations) (down from $92.54 b. in 2014)
? Imports = $86.81.3 b. ­ ­ ­ ranked 35th largest in world (out of 223 nations) (down from $98.87 b. in 2014)
? Population below poverty line = 35.9% (in 2012) poverty line standard is set by South African government

Worldwide median values in 2015:

? total GDP (in Purchasing Power Parity) = $37.88 b. (Estonia ­ ­ ­ ranked 115th largest out of 230 nations)
? GDP per capita = $13,600 (Serbia ­ ­ ­ ranked 116th highest out of 230 nations)
? real GDP growth rate = +2.7% (Albania ­ ­ ­ ranked 113th highest out of 225 nations)
? Unemployment Rate = 8.9% (Surimane ­ ­ ­ ranked 104th lowest out of 207 nations)
? Inflation Rate = 2.1% (Republic of the Congo ­ ­ ­ ranked 113th lowest out of 225 nations)
? Distribution of family income - Gini index = 37.9 (Cambodia in 2008 ­ ­ ­ ranked 73rd most unequal out of 144 nations)
? Government Budget surplus (+) or deficit (­) = ­3.0% of GDP (Italy ­ ­ ­ ranked 111th lowest surplus out of 220 nations) {note: revenues of $876 b. minus expenditures of $930.5 b. = deficit of $54.5 b.}
? Public Debt = 47.4% of GDP (Honduras ­ ­ ­ ranked 88th highest out of 176 nations)
? Exports = $4.41 b. (Cuba ­ ­ ­ ranked 112th largest out of 224 nations)
? Imports = $7.068 b. (Mozambique ­ ­ ­ ranked 112th largest out of 223 nations)

3. Use the Aggregate Demand ­ Aggregate Supply Model (Market for GDP) provided below to describe business cycle which would occur if the economy were to experience a large positive shock to Aggregate Demand. Will the macroeconomy remain in the new equilibrium forever, or will it change to a new position in the long­run?

Explain. Show these various equilibrium shifts/positions on the graph.

659_Various Equilibrium Shifts Graph.jpg

4. Define the Inflation rate and explain how measurements of the Inflation are constructed. Describe and explain the sources of inflation in the macroeconomy. What problems and dangers might be associated with inflation aisde from those directly related to the business cycle and aggregate economic conditions? Explain.

5. Use the Aggregate Demand ­ Aggregate Supply model to describe a possible expansionary fiscal policy action by the government. Assume that the economy is out of its equilibrium "steady­state" position due to a negative shock to Aggregate Demand. First, Describe the case in which "the stimulus" program works optimally, and what happens in the business cycle. Second, Describe some of the things that might go wrong with fiscal policy actions, and show on the graph the case in which the outcome was not that intended or desired by the policy makers. How should public confidence in the effectiveness of fiscal policy solutions to recessionary macroeconomic downturns be qualified by our understanding of the complex details of fiscal policymaking and possible indirect effects of public finance decisions? Are the Keynesian economists right?

701_Various Equilibrium Shifts Graph1.jpg

Reference no: EM131069866

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