1. (10 points each) According to the theory introduced in chapter 3, give a shor

Question

1. (10 points each) According to the theory introduced in chapter 3, give a short answer to each of the questions answered in chapter 3. Using math might help in some of them (use less than 100 words for each answer).

a. How much do the firms in the economy produce?
b. Who gets the income from production?
c. Who buys the outcome of the economy?
d. What equilibrates the demand for and supply of goods and services?

the theory is National income in chapter 3 in the book macroeconomics 9th edition by N. Gregory Mankiw

Explanation / Answer

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a. How much do the firms in the economy produce?

Answer- The firms in the economy are bound by the amount of resource at their disposal. Hence the firms can only produce the amount of goods that can optimally be produced with the available land, labor, capital and entrepreneurship. Also the production is guided by demand and supply forces in the economy.

Y = F(K,L), where k = Capital and L=Labor and Y= production function

b. Who gets the income from production?

Answer- the income from production is divided between the producer and the government. The producer sells the produce to earn profits and the government lays tax on the profit to earn income from the production in the economy. Also the income from production is divided in wages and rent that was used as a resource in production.

Profit = TR – TC

= PY – WL - RK

= PF(K, L) – WL - RK

c. Who buys the outcome of the economy?

Answer- the end consumer or the customer will buy the produce of the economy. However the consumer may buy the goods for personal consumption or for further production of goods in the economy. This may change as per the economic demand and supply factor prevalent.

d. What equilibrates the demand for and supply of goods and services?

Answer- The interest rate brings the supply and demand to equilibrium position. At the equilibrium interest rate, household tries to save and the firms aim to invest hence balancing the supply and demand in the financial market.

Y = C + I + G,

C = C (Y – T) ,

I = I(r)

G = (G), T = (T)

Supply of good and services

Y = F (K,L) = Y

And hence - Equilibrium

Y = C (Y T ) + I(r) + G

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