Intermediate macroeconomics Assignment Example | Topics and Well Written Essays - 250 words

Intermediate macroeconomics - Assignment Example The cycle can be illustrated graphically as shown below. Potential output is the total production of output that is possible when all the factors of production are fully and efficiently employed. For example when the unemployment rate is about 5% since a 0% unemployment rate cannot be achieved in real economic conditions. Actual output is the real physical output that has actually been produced in the economy. Output gap is therefore expressed as the difference between the potential output and the real output. Large output gap is an indication of increased unemployment rate. The neo-classical theory uses output gap to explain business cycle. Y=c[y-t(y)]+i(r)+g dy=c’(dy-I’dy)+I’dr =c’dy-c’I’dy+I’dr dy-c’(1-i’)dy=I’dr dy(1-c’(1-i’)d=I’dr dy=I’dr/1-c’(1-i’) dy/dr=I’/1-c’(1-i’) The expenditure multiplier explains the amount o change in output due to a unit change in government expenditure while tax multiplier explains the amount of change in output due to a unit change in tax rate. m/p=l(r)+k(y)