SHAHRUKH (11536)

Qs no 1:

Qs 02:

To increase the output it is obvious that the govt will execute the expansionary fiscal policy. As it effects
the above 4 in different ways.
Aggregate demand and supply:

The change in the supply of money and taxes by the policy makers effects aggregate demand indirectly.

But when the purchasing of goods and services is altered by the government it directly shifts the curve
of aggregate demand and supply

Price Level and Output:

Fiscal policy is used to expand the economy by increasing aggregate demand, which results in more
output, lower unemployment, and higher prices. Recessions are treated by expansionary fiscal policy.

Labour Market:
The expansionary fiscal policy reduces unemployement. Fiscal policy may influence company and
worker decisions, raising labour demand and supply, as well as the labour market structure, removing
frictions and developing skills.

Money Market:

Because it promotes more economic activity, expansionary economic policy causes the stock market to
rise. Stocks rise as a result of these measures, which result in increased sales and earnings for
businesses. Fiscal policy is a powerful tool for boosting economic activity and consumer spending.

Qs no 03:
Q 04.

Wealth effect

The wealth effect is a behavioral economic theory suggesting that people spend more as the value of
their assets rise.

Example: consider consumption of cheap fast food versus steak. As someone becomes wealthier, their
demand for cheap fast food is likely to decrease, and their demand for more expensive steak may
increase.

Misperception theory

when a seller sees the price of its products decline, it makes an erroneous assumption that their relative
prices have also declined. This misperception tends to induce sellers to supply less quantity to the
market.

Example: A dairy farmer may see a decline in the price of milk before he or she sees a price decline of
many other products at the grocery store.

Sticky wage theory

The sticky wage theory hypothesizes that employee pay tends to respond slowly to changes in company
performance or to the economy.

Example: in the event of a recession, like the Great Recession of 2008, nominal wages didn't decrease,
due to the stickiness of wages. Later, as the economy began to come out of recession, both wages and
employment will remain sticky.

Sticky price theory

Price stickiness, or sticky prices, is the resistance of market price(s) to change quickly, despite shifts in
the broad economy suggesting a different price is optimal. "Sticky" is a general economics term that can
apply to any financial variable that is resistant to change.

Example: if tomato prices plummeted, Chef Boyardee would more than likely not lower his prices, even
though his input costs decreased. Instead, he would simply take the greater margin as profit.

Monetary expansion

when a central bank uses its tools to stimulate the economy. That increases the money supply, lowers
interest rates, and increases demand. It boosts economic growth.

Example:The three key actions by the Fed to expand the economy include a decreased discount rate,
buying government securities, and lowered reserve ratio.
Fiscal contraction

A reduction in a government's budget deficit by reductions in public expenditure or increases in

taxation.

Example: An economic contraction is a decline in national output as measured by gross domestic

product (GDP). That includes a drop in real personal income, industrial production, and retail sales.

Vertical Money Supply

The money supply curve is vertical because the Fed sets the amount of money available without
consideration for the value of money.

Example:U.S. currency and balances held in checking accounts and savings accounts are included in
many measures of the money supply.

Open Market Operation

Open market operations (OMO) refers to Federal Reserve (Fed) practice of buying and selling primarily
U.S. Treasury securities on the open market in order to regulate the supply of money that is on reserve
in U.S. banks. This supply is what's available to loan out to businesses and consumers.

Example:The central banks sell government bonds to banks when the economy is facing inflation. The
central bank tries to control inflation by selling government bonds to banks. When government bonds
are sold by the central bank, it sucks the excess money from the economy. This causes a decrease in the
money supply.

Leading and Lagging Variable

A lagging indicator is an economic statistic that tends to have a delayed reaction to a change in the
economic cycle. A leading indicator is an economic statistic that tends to predict future changes in the
economic cycle. A co-incident indicator is a variable that changes with the whole economy.

Example: unemployment rate, corporate profits, and labor cost per unit of output. Interest rates can
also be good lagging indicators since rates change as a reaction to severe movements in the market.

Purchasing Power Parity

Purchasing power parity (PPP) is a popular metric used by macroeconomic analysts that compares
different countries' currencies through a "basket of goods" approach.
Example:if a basket consisting of 1 computer, 1 ton of rice, and 1 ton of steel was 1800 US dollars in New
York and the same goods cost 10800 HK dollars in Hong Kong, the PPP exchange rate would be 6 HK
dollars for every 1 US dollar.