Macroeconomics Answers

21. A country has a total value of imports and exports of 150 billion Birr and 100 billion Birr, respectively in a given fiscal year. If the country has a total investment worth of 75 billion Birr in the same year, how much is the total domestic saving in that year?

20. The Great Depression of the 1930s was characterized by deflation and significant involuntary unemployment, and a decline in output. The recession that has been observed in 1970s and early 1980s was characterized by increase in both prices and unemployment, and a decline in output. How does the AS-AD model explain this? What are the most

likely policy remedies that could be applied in each case?

19. Suppose the government of a typical developing country increased the salary of civil servants at a time when there is bumper harvest due to timely rainfall. What will happen to prices? show using your knowledge of AD-AS framework.

18. "An economy has a Keynesian property in the short-run and a classical

property in the long-run." how and why?

17. In the year 2008, the world economy experienced a recession.

(a) What was the major cause of the recession?

(b) What similarities can you observe with the recession of 1930s?

(c) Many countries such as the US, Germany, Japan, and China have taken bail-out measures to help the economy recover. Demonstrate the results of the actions using your knowledge of IS-LM framework.

(d) What impact had the recession on developing countries? Through what channels does the recession affect these countries?.

16. Suppose the supply side of an economy is characterized by:

A production function: Q = 3LK; where Q = output, L = labor, and

K= capital

Labor demand: LD = 10 - 2W/P , where W = nominal wage, P = price

Labor supply: LS = 4P/W ; and

Capital stock is fixed at K = 4.

(a) Derive the aggregate supply curve.

(b) Which cases (intermediate Keynessian, extreme Keynesian, classical) does the supply curve represent?

(c) How would your answers to (a) and (b) change if nominal wage

was fixed at 3?

15. "The amount of labor supplied can be reduced when the real wage

increases." Do you agree? how?

Consider a hypothetical closed economy with the following functions: C = 50 + 0.75(Y-T); I = 100 – 2r; G = 120; T = 140; Ms = 440; P = 2; (M/P)d = 0.5Y – 1.5r; 

A. Write down the IS function. 

B. Write down the LM function.

C. Determine the equilibrium levels of income and interest rate.

D. What happens to equilibrium r if money supply is raised from 1,000 to 1,200? 

E. If the central bank wishes to raise the interest rate to 7 percent, what money supply should it set? F. If government purchases increase by 224, what is the impact of this change on the IS curve? and What is the impact of the change on the equilibrium level of income?

Under what circumstances might it be possible to reduce inflation without causing a recession?

12. In the current Pakistan's scenario what fiscal policy do you suggest to achieve high economic growth

with price stability? Justify your answer.