MG 640 Final Exam Managerial Economics Latest
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PART I : Problem/Discussion
1. a. Why would you expect unemployment to fall during an economy’s expansionary phrase and to rise during a contractionary phrase? Discuss and make reference to the business cycle.
b. Why does GDP measure only final goods and services produced rather than all goods and services produced? Explain
2. Why is the aggregate demand (AD) curve downward sloping? Discuss and use graphs where necessary?
The Aggregate Demand (AD) curve is downward sloping because consumption, investment and net exports are affected by changes in the price level . Aggregate Demand (AD) is the sum of the demand for all goods and services in the economy. It can also be seen as the quantity of real GDP demanded at different price levels.
(AD) = C + I + G + (X – M)
C= total consumer expenditure on goods and service
I= total investment spending by companies for capital goods such as factories, equipment and
computers
G= government expenditure for publicly provided Goods and service such as roads, bridges and Medicare.
X= export
M= import
There are three reasons behind why the aggregate demand curve is negatively sloped, the interest rate effect, the wealth effect, and the open economy effect. The interest rate effect is the most important reason for the downward slope. It has to do with a change in investment. A higher price level increases the interest rate, which results in businesses and consumers to reduce because of the higher cost of borrowing. Hence, as price increases, real GDP decreases. The wealth effect, also known as the real balance effect or the real money balances effect, has to do with changes in consumer spending. It is the change in expenditures resulting from a change in the real value of money balances when the...