Macroeconomics Answers

List two (2) demand-side and four (4) supply-side initiating factors which

may be the immediate causes of a possible increase in the inflation rate.

Exercise 1.4 Output and income are in equilibrium when planned expenditures AE are equal to national income, Y, in other words, meaning Y = AE. (a) Suppose the AE function is AE = 165 + 0.8Y. Draw a diagram showing the aggregate expenditure function. (b) In your diagram draw the 45◦ line that shows all points at which national income and aggregate expenditures are equal (Y = AE) (c) Using your diagram, or a numerical example, or an algebraic solution, find equilibrium output and income in this example and show it in the diagram.

Suppose that in an economy with no government the aggregate expenditure function is: AE = 50 + 0.8Y. (a) Draw a diagram showing the aggregate expenditure function, and indicate the level of planned expenditure when income is 150. (b) In this same diagram, show what would happen to aggregate expenditure if income increased to 200. (c) What are the levels of autonomous expenditure and induced expenditure at income levels of 150 and 200. (d) In this same diagram show what would happen if autonomous expenditure increased by 20. 

Suppose the nominal exchange rate is 1,000 Chilean pesos per UK pound. Further, suppose the price of a bushel of UK wine is £5 per bottle and the price of a bottle of Chilean wine is 7,500 pesos. (UK is a domestic country and Chile is a foreign country).

a. What is the real exchange rate between Chile and the UK in terms of wine? b. Does a pound have purchasing power parity in the UK and Chile?

c. Is there a profit opportunity that you could exploit with arbitrage? Where would you buy and where would you sell?

d. If the nominal exchange rate stayed the same, what should happen to the price of wine in the UK and Chile? Explain.