ECO 2303 Unit III Assessment

Question 1:
 Determine whether each of the following would cause a shift of the aggregate demand curve, a shift
of the aggregate supply curve, a shift in neither curve, or a shift in both curves.
 If a shift is caused, indicate which curve shifts, and in which direction it shifts.
 What happens to aggregate output and the price level in each case?
1. The price level changes.
2. Consumer confidence increases.
3. The supply of resources decreases.
4. The wage rate decreases.

Answer 1:
1) The Price Level Changes:

 The Price level changing won’t cause a shift in either curve (aggregate supply or
aggregate demand). The price changing will cause aggregate output to change, which
is a movement along the curve.

2) Consumer confidence increases: 

 This would result in consumer confidence to rise causing the AD curve to shift to the
right because consumer consumption increases which will result in increased output
and increased price level. AS remains unchanged.

3) The supply of resources decreases:

 Aggregate supply shifts left because cost will rise and output will decline. AD will
remain the same in short run.

4) The wage rate decreases:

 A fall in input prices, causes the costs of production to fall, which increases profit
margins and entices firms to produce more, which results in a shift to the right of the
supply curve.
Question 2:
Compare the classical economic theory that was used prior to the Great Depression to the Keynesian
theory used after the Great Depression. Your response must be at least 200 words in length.

Answer 2:
The era before the great depression macroeconomics was viewed on the laissez-faire philosophy
of Adam Smith (McEachern, W. A., 2018). Classical economics is a free-market economy or
self-regulating economy that limits the role of the government when it comes to managing the
economy. They detest government debts, and they believe the economy does not derive any
benefit from our government’s increased spendings. They support a balanced budget. They
believe the economy is always capable of achieving real GDP that is obtained through the use of
the economy’s resources. That if and when circumstances arise within an economy that no
government intervention is needed, because of the self-adjusting mechanisms that exist in the
market and will bring them back to the real GDP in due time.

The Keynesian theory supports an active role of the government and especially during times of
recession and depression. They support government debts and believe that the spendings of the
government will increase aggregate demand. Keynesian believed if the government would put
into action federal budget policies that would increase the aggregate demand curve causing it to
shift to the right and back to its original, this would result in the real GDP increases which in
return would increase employment (McEachern, W. A., 2018). The Keynesian philosophy is that
government interventions are an absolute necessity during economical troubling times. These
economists believe if we can fix the short run then it will produce in the long run.

Question 3:
Explain how gross domestic product is calculated using each of the following: the income approach and
the expenditure approach. Your response must be at least 200 words in length.

Answer:
GDP- Expenditure Approach
GDP = Consumption + Investment + Government + Net Exports
Is Equal to
GDP- Income Approach
GDP = National Income + Depreciation + Indirect Business Tax
Our textbooks define GDP (gross domestic product), as the measure of the market value of all
final goods and services produced in an economy for a specific time period (McEachern, 2019).
GDP is measured in one of two ways, either by total spending on US production of final goods
and services (referred to as Expenditure) or by total income earned through the production of
those goods and services (referred to as Income approach) during a specific time period.
The income approach uses the national income, which is found by adding the wages, profits,
rents, and interest earned, the sum is considered the total national income. This approach uses the
sum of income used to produce goods and services and is used to examine the purchasing power
of households and the financial status of business income. Double-entry book-keeping ensures
the value added by production output equals the amount paid in aggregate income for the
resources used in production (McEachern, 2019). Once you have the national income measure,
you will add depreciation and indirect business taxes, the sum is the GDP using the income
approach.
The expenditure approach is the sum of the market value of all expenditures for final goods and
services in the US for the year. This approach uses the sum of spending on production. To
simplify, it’s the sum of consumption, investment, government purchases, and net exports (total
exports less the total imports), the total sum of these is the GDP using the expenditure approach.
The formula used in the expenditure approach is GDP = Consumption + Investment +
Government spending + Net imports (eXports – iMports). No matter which approach is used to
find the GDP, they should be equal measures. The total amount derived from expenditures less
indirect business taxes and depreciation and the total is the national income.

McEachern, W. A. (2018). ECON MACRO (6th ed.). Cengage Learning US.

https://online.vitalsource.com/books/9781337671804