BUECO5903 Assessment Task 3 Assignment - Macroeconomics Instructions: This assignment contains four questions. You are required to answer all four questions. This is an individual piece of assessment....

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Question 1:
a) Gross Domestic product (GDP) is defined as measuring the final goods and services producing within the boundaries of a nation during particular period of time. GDP excludes measuring the non market or underground or black market transactions and environment of negative externalities.
b) Calculation of GDP using expenditure method: it measures the sum of all final goods and services purchased within the economy. Formula for GDP measured using expenditure method is Y = C+I+G+(X-M), Here Y indicates GDP of an economy, C- consumption expenditure , G-Government expenditure, I- Investment expenditure made for business activities and X – export, M- import.
c) Calculation of GDP using income approach: It measure s the total income created by all goods and services within a economy.GDP = Total National income (GNI)+Depreciation + Net foreign income + Sales taxes.
Gross national income /Total national income indicate the sum of profits, salaries and rent.
Depreciation is the decrease in value of the assets, sales tax is tax imposed by the government on sales of goods and services, and Net foreign income is the difference between factor income earned from abroad by residents and factor income earned by non residents in domestic country.
d) Measure of GDP through value added approach is the difference between the cost of all factor inputs involved in production process and the price of output at particular stage in overall the process of production.
e) Problem of double counting occurs when we count the value of goods and services more than once. This can be avoided by calculating GDP using final goods and services approach.GDP calculated using the final value of goods and services and excludes the intermediate value of those goods services in production process.
Question 2:
Components of aggregate demand : Aggregate demand (AD) is the sum of all consumption expenditure (C), Government expenditure (G), Investment expenditure(I), trade: export(X) minus import (I).An increase in any one of the AD components will shift the AD curve to the right and decrease in any one of these will shift the AD curve to the left.
Assumption about aggregate supply curve: Aggregate supply curve is upward sloping in short run, indicates the producer will respond o changes in the price of inputs and the quantity of output demanded. In long run when economy is at full or natural rate of employment, there won’t be any change in input price because the labour input market is at equilibrium level, therefore aggregate supply curve is vertical in long run .Long run aggregate supply shifts only when the output in the economy expands or contracts and it remains unchanged with the changes in price level. From below graph we can say that increase in output or real GDP level shift the aggregate supply curve to the right from LAS1 to LAS2, while contraction in real GDP or output will shift the vertical long run supply curve from LAS1 to the left as LAS3.
Long run Vertical supply curve (LAS)
AD and AS curve when government expenditure declines:
Initially the economy is operating at full or natural level of employment and this was indicated in the graph where LAS (long run Aggregate supply curve), SRAS (short run Aggregate supply curve) and AD1 intersect each other at price level P1 and output Y*.When government reduces the expenditure, aggregate demand curve will shift from AD1 to AD2, because people has less money to spend, this cause a reduction in demand for goods and services in the economy. Excess supply of Y* with shortage of demand shift the equilibrium downward with less price P2and less output Y2compared to the full employment level of price and output.
Question3:
If federal wants to increase the interest rate in the economy it will follows contractionary policy of money supply, when the performance of the economy is higher than potential real GDP level. Real GDP greater than potential GDP will increase the inflationary pressure in the economy and increase the unemployment rate. Below graph indicates how contractionary policy will affect the interest rate in the economy.
1) Effect of money supply and interest rate:
Let us assume money supply in the economy at interest rate level r0 where Md money...