intro to econ Choose one of the following models and answer the following questi
ID: 1211710 • Letter: I
Question
intro to econ
Choose one of the following models and answer the following questions based on the one model you chose supply and demand/equilibrium price and quantity planned aggregate expenditure/equilibrium output money demand/equilibrium interest rate Each model is based on one or more functional relationships and an equilibrium condition. What is the functional relationship in this model (The supply and demand model has two functional relationships. If you choose this model to explain, select just one, supply or demand to explain in this part.) Which functional model will you explain______The independent variable is________The dependent variable is__________The relationship is direct inverse Briefly describe the causal link. Why does the dependent variable respond to changes in the independent variable the way it does What is the equilibrium condition in this model In equilibrium_______=________Briefly explain why the equation above describes a situation of equilibrium. Why could we expect this situation to be stable Name one feature of the real world that might have an influence on the phenomenon described by the model but is not included in the model.Explanation / Answer
A) We will explain supply/demand model. In this model we choose demand. The independent variable is the price and the quantity demanded is the dependent variable determined by the price. The relationshiop is inverse since more is demanded at a lower price.
Note that when the consumer buys more of a product as it price falls, the demand curve is usual downward sloping.
B) A) We will explain planned aggregate expenditure and equilibrium output. In equilibrium, AE = Y or planned aggregate expenditure equals output.
This is called Keynesian cross. The Keynesian cross is a fundamental model of determination of income. It enunciates that there is one level of national income at which planned expenditure equals actual expenditure. Planned Expenditure is the amount households (in the form of Consumption, C) firms (in the form of Investment, I) and government (in the form of government spending, G) would like to spend on goods and services.
Before this level, AE>Y, so there is excess demand. Demand is more so firms hire more workers produce more and so real output or Y increases. Gradually, all the excess demand is eliminated.
Similarly, after this level, AE<Y, so there is deficient demand. Demand is less so firms fire workers and produce less and so real output or Y decreases. Gradually, all the excess output is eliminated. So this equilibrium is stable.
C) The third model is about money market. An outside factor not given in the model is the velocity oe money. The frequency with which people make transaction in cash is known as the velocity of money. Higher the velocity of money, with fixed money supply and price level in the short-run, increases the demand for money.
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