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Econ 104 Study Guide

by: Jennifersmith

Econ 104 Study Guide Econ 104


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About this Document

Will help you to study for your exam/quiz 1
Principles of Macroeconomics
Thomas A. Kemp
Study Guide
Econ104, Economics, Macroeconomics, Microeconomic
50 ?




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This 2 page Study Guide was uploaded by Jennifersmith on Monday September 19, 2016. The Study Guide belongs to Econ 104 at University of Wisconsin - Eau Claire taught by Thomas A. Kemp in Summer 2015. Since its upload, it has received 12 views. For similar materials see Principles of Macroeconomics in Economcs at University of Wisconsin - Eau Claire.

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Date Created: 09/19/16
Please type up your answers to the questions below. Be sure to also diagram each step Using the circular flow diagrams we’ve gone over in class. (You can draw these by hand.) • Say the Government spends $1000 for roads and pays private business to Complete the actual construction. • Of this $1000 business will pay out $1000 in total wages. • Of this $1000 in income households would like to save 10% a) At this point what is total nominal household demand for goods and services? C = Co + C (1      = 1000 + (.1) (900) = $1090 b) Will household incomes increase or fall in the future if nothing changes? It will remain the same because the prices and government spending is going to remain  the same.  • Say Business decides that it will borrow $100 from households for an expansion • Say Business meets the household demand from (a) above and again pays all the Revenue out to households in the form of wages. a) What would we call this borrowing by business? This borrowing by business calls loan. b) Why do we call it this? Because business is borrowing money from financial sector (investment spending).  Therefore business will have to pay the borrowed money back to the financial sector with the interest on it.       c) Is this system stable? (Assume the business will keep borrowing $100 from Households every period.) That is, will economic activity increase or decrease in the future?  This system is stable as long business pay all the bills as well wages. If business fails to pay  wages and bank then the system becomes unstable. Money has to move around according to the  circular flow diagram.   d) What is Government debt (Nominal) at this point? What are the ‘Real’ assets of The  Government at this point? Government debt. (Nominal): $100 “Real” assets government: Roads $1000 e) What are the ‘Real’ assets of Households at this point? “Real” assents of Households: $1000­$100=$900       f) What would happen total nominal assets if Government tried to eliminate the          (Nominal) debt and levied a $1000 tax on households? Then household’s saving will increase. Households won’t be able to save and business  won’t be able to borrow money. As household taxes increases, income will decrease as  well as nominal debt. Household spending will decrease and this effect would cause  disturbance in circular flow diagram. 


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