a) GDP = C + I + G + (X - M). Therefore, GDP= (250+60+94-2) = $ 402 billion.

b) Net investment (NI) = Gross investment- depreciation. This mean then that NI=60-40 which is $20 billion.

c) Disposable income (DI) = GDP - tax (T). This is can then be calculated by; (402-120) = $ 282 billion.

d) Household savings = Disposable income (DI) - Consumption expenditure. Household savings is therefore given by; (282- 250) = $32 billion.

Note * represents multiplication sign

a) The nominal GDP for the year 2009 will the summation of the price multiplier by quantity for the three commodities which is equivalent to 10* $ 10 +20* $3 + 20*$4.  This gives a total of $ 240 as the nominal GDP for the year 2009.

b) The value of real GDP for the year 2009 is the total value of price for the base year*quality for the three commodities which is equivalent to 6*$9 +18*$2 +25*$5 which give $ 195 as the real GDP for the year 2009.

c) The GDP deflator is calculated as nominal GDP/real GDP*100% which is therefore (204/195)*100% = 123.08 for the year 2009.

a) Marginal propensity to consume (MPC) is change in consumption divided by the change in disposable income. Since the in consumption is $27 and change in real disposable income is $45. MPC = $27/$45 which is equivalent to 0.6.

b) Given that the MPC is 0.6, the multiplier would be 1/1-MPC =1/ (1-0.60)=1/0.40=2.50. GDP is increasing by $ 120 Billion. Given the value of GDP and the multiplier, the change in government spending is calculated using the formula from above findings. 2.50* change in government spending=$12 billion. The increase in spending will be 4.8 billion

c) Completed table


Civilian Population

Employed Part-time

Employed Full-time

Employed Total

        0.9E.p.t                   4.2 L.F.t

       1.4                 2.8 E.f.t          

       1.1                        4.7

      1.5                   3.2

      1.2                          4.8

   1.5                      3.3

d)     Unemployment rate is equivalent to the unemployed divided by the total labor force. Therefore the unemployment rate for June 1999 is 1.4/4.2 which is .033 while of June 2004 is 1.5/4.7 which is 0.32 and that of June 2009 is 1.5/4.8 which is 0.31.

e)      The employment growth has kept pace with labor force because as employment increase with time from June 1999 so does the labor force. As labor force increase from 4.2 to 4.8, the unemployment rate decrease from 0.33 to 0.31 in June 2009.


The government normally uses it fiscal policy to influence the economy of the country. This involves the uses of the government expenditure that is the aggregate expenditure and use of the revenue it collects that is the tax to influence the aggregate demand in the economy. The two instruments of fiscal policy are used to use to influence some economic variables like the aggregate demand and the level of economic activities. when there is a tax cut in the economy due to reduction in the tax rate, the amount of disposable income available will rise this is because the amount of net tax is reduced. An increase in the amount of disposable income will mean increase in the consumption rate in the economy since the consumers are left with a lot of money to consume as illustrated in the formula which shows that the induced   consumption increases (Edwin, 2000).

A decrease in tax rate causes an increase in the aggregate expenditure since some the components of aggregate expenditure are affected. The next exports increases since tax cut means more exports are made rising the value of net export. The values of the planned investment also since the people are encourage borrowing from the government bills and bonds. Savings will also increase resulting in the increase in investing which is directly related to savings. Consumption will also increase making since the price of commodities will decrease.

Paying employees' efficiency wages is normally done deliberately by the employers. This means the employees are paid above the market-clearing wages. These kinds of wages are higher than the necessary to retain the employees. These wages are therefore made as incentives to the employees to stay and remain productive. This also boosts the morale of the employees making them feel good about themselves and become more productive. However, such payment causes structural unemployment in the economy. This occurs since the market does not clear with the market pricing mechanism. This is because this mechanism breaks due to the inelasticity of wages in the market. Wages can no longer adjust to the conditions in the market forcing some of the workers to quit the market at higher wage. These workers who quit the labor force create a big lot of unemployed people in the economy whose unemployment was caused by maximum wage.

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For example workers operating expensive machines are paid efficiency salary since employees find it costly to replace them since they are highly skilled. Paying these workers more that what the market offers will prevent them from leaving with the valuable skills needed. This spurs demand for machine operators prompting the wages of this kind of job to increase. The employers will therefore find it suitable to substitute machines with either capital or labor. Workers will be unemployed and will have to seek employment else where most likely in the unskilled market. There will be increased supply of labor and fall in wages in this market deepening the income disparities between the unskilled and the skilled market. 

Cost-push inflation is one of the types of inflation that is caused an independent and substantial rise in the cost of basic and important goods and services without having a suitable alternative to replace them. As illustrated in the above diagram, the aggregate supply curve shifts leftwards due to increase in the cost of goods and services. This shift pushes the prices of goods and services upwards resulting in cost-push inflation.

There are many causes that can of cost-push inflation but the oil crisis of the 1970s has always been major cause of the inflation that was experienced in most western countries. The main cause of increase in price independent to the aggregate demand is due to the boom in the economy. It can also be experience due to increase in the wages as a result of greater trade union efforts to have the wages increased. Some of the other possible causes of this inflation are the profits that give firms the power to push the prices upwards independent of demand.

This forces the firms to be concentrated forcing them to shift towards oligopoly and monopoly markets (Edwin, 2000). Since we operate in a global economy, there are chances that goods and services imported if their costs of importation rises due to reason beyond our control firms will be forced to increase the increase the prices to pay for this rise. This causes inflation commonly referred to as imported inflation. Exhaustion of natural resources and increase in taxes can cause cost-push inflation.

When this type of inflation occurs policy makers are faced with the dilemma of how they are going to meet the high costs that result from increase in the cost of raw materials and other expenses incurred in the provisions of the goods and services. They are faced with dilemma on how to reduce these costs. In many cases they decide to increase the prices so as to use the extra amount collected to meet this inflated cost. However the increasing the prices has a negative on the consumers as they have to purchase these goods and services at higher price. This discourages consumption which may result to low sales for the firms. Policy makers are there interested in how the effects of inflation are countered without shifting the burden to the consumer.

In the short-run aggregate supply curve will shift to the right when there is a discovery in the new and better methods of production in the economy. This is because real production rises due to the effects of new technology in use. When there is growth in the economy's capital stock, the SRAS curve will also shift to the right since more goods and services are production resulting in the increase of real production level in the economy. Wage increases in many industries as a result of enterprise bargaining will however cause the curve in the SRAS to shift to the left. This is because the quantity produced will decrease while the price per unit of this quantity will increase.

In the long-run, aggregate supply curve will shift to the right when the better methods of production are discovered in the economy. This is because better methods improve efficiency in production resulting in the increase in real production. Growth in the capital stock will result to the shifting of the aggregate supply curve in the short-run since there will be an increase in capital required in production. However an increase in wages of employees due to enterprise bargaining will result in the shifting of the aggregate supply curve to the left in the long run since prices will increase while the real  GDP will reduce (McConnell, Brue& Flynn, 2009).

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