Principles of Macroeconomics

(10 points) Consider the market for higher education in the state of Illinois, where private universities compete for students with public universities.
Draw a supply and demand curve showing the market for public universities. Label your graphs with an S for the supply curve, a D for the demand curve, P on the vertical axis, and Q on the horizontal axis.

P S

On your graph, show the effect of the state of Illinois, reducing state funding that is provided directly to the public universities. Does it cause the supply curve or the demand curve to shift? Explain why and show which way the appropriate curve would shift.

The reduction in state funding causes the demand curve to shift to the left. This is because for public universities to enroll the number they can sustain, finance contributes greatly to this. Reduced funding then lowers the capability of these universities to sustain students. Decreased demand only allows for sustainability. This is graphically shown below:

P S

The supply curve remains constant due to a constant number of students being channeled from high school.

As a result of the shift, what happens to the price and quantity of public universities?

The resulting price and quantity levels become low due to the establishment of a new low-level equilibrium point.

Now draw a separate graph showing the market for private universities. Label your graphs with an S for the supply curve, a D for the demand curve, P on the vertical axis, and Q on the horizontal axis.

On your second graph showing the market for private universities, show the effect of the state of Illinois, reducing state funding that is provided directly to the public universities. Does it cause the supply curve or the demand curve to shift? Explain why and show which way the appropriate curve would shift.

The supply curve would shift to the right. This is due to more students enrolling in private universities resulting in reduced admissions in public universities.

As a result of the shift, what happens to the price and quantity of private universities?

The price reduces as a result of this while quantity levels increase. This means that these private universities receive more of students cheaply.

(8 points) Consider a macroeconomy in equilibrium.
1. Draw this economy using Aggregate Supply (short run and long run) curves and an Aggregate Demand curve in equilibrium. Be sure to label each graph and show the appropriate titles on your horizontal axis and vertical axis.

Using the symbols AD and AS represent the aggregate demand and aggregate supply levels, the following graph shows the relationship:

The graph above shows that aggregate demand is inversely proportional to price levels and directly proportional to change in quantity levels. The aggregate supply curve shown obeys the law of supply.

On your graph, show the impact of the financial crisis of 2007-2008. What curve(s) would shift? Which way? Why?

In this case, aggregate supply curves shift to the left. This is because the financial crisis contributed to economic shrinking hence less output. This leads to excess demand in the economy due to unchanged demand levels.

As a result of the shift(s), what happens to output and prices in the economy? Why?

The shift leads to an increase in prices due to excess demand. Quantity levels go down also due to shrinking in production. This is all attributed to less money available to enhance the purchase of raw materials.

What should be the appropriate action taken by the government as a result? Explain.

The government should increase its expenditure to boost economic performance. This can be done through subsidizing production to restore the previously attained economic performance levels.

(8 points) Consider a bank that has lent all its excess reserves. Now suppose a customer withdraws a substantial amount from his/her checking account, and no new money came into the bank.
1. What problem, if any, does this create for the bank?

This situation could create a situation of loss of customers. This could result from a loss of customer confidence.

What are at least three options the bank has to resolve this problem?

One option is the bank to be placed under receivership. The second way is the bank to borrow more from the central bank to meet customer deposit levels. Thirdly, the bank can close down some of the branches and use the generated savings in rebuilding its image and delivering better.

Which option (if you were the bank) would you choose and why? Explain.

I would choose more borrowing to meet customer withdrawals. This would uphold customer trust without endangering the built reputation.

(4 points) What one topic from those we’ve covered in Principles of Macroeconomics was most interesting to you? Describe it and discuss why it was interesting to you.

One topic most captivating to me is the area of aggregate demand. This equates the gross domestic output to consumption, investment, government expenditure, and net returns from abroad. This topic was interesting to me just because of my interest in understanding the variables involved in this national income identity.

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