Macroeconomics Answers

using appropriate diagrams show the impact of a fiscal contraction on output, interest rate and price level under classical and keynesian supply conditions.

Consider an economy in medium run equilibrium. Examine the medium run impact of an increase in petroleum prices on the level of output and the rate of unemployment in this economy.

an increase in monetary growth leads to decrease in nominal interest rates in the short run, but to an increase in nominal interest rates in the medium run. Explain.

how does the slope of IS-LM curve affect the impact of monetary and fiscal policy on output and rate of interest.

Using AS-AD framework, analyze the impact of an increase in money supply (one time) on output and price level both in short run and medium run

1. When the value of a good’s price elasticity of demand is greater than 1,

(a) A reduction in price causes a reduction in total revenue.

(b) An increase in the price causes a decrease in total revenue.

(c) An increase in the price causes an increase in total revenue.

(d) An increase in price causes no change in total revenue.

(e) None of the above.

1) The government decides there is no relationship between drinking and health problems. It lowers the excise taxes on gin. Ceteris paribus can be expected to cause the equilibrium quantity of gin sold to:

a) Increase.

(b) Decrease.

(c) Not change.

(d) Decrease at an increasing rate.

(e) There is not enough information to answer this question.

2) Sometimes coffee growers in Brazil have destroyed some or their entire coffee crop in order to keep it from going to market. This suggests that:

(a) They believed that there was an international shortage of coffee.

(b) They believed that coffee was an inferior good.

(c) They believed that the demand for coffee was inelastic.

(d) They believed that they faced an inelastic supply curve for coffee.

(e) None of the above.

In the real business cycle model, suppose the government spending increases temporarily.

1. Determine the effect on labour market, holding the interest rate constant? [5 pts]

2. Explain what impact this temporary increase in government spending has in the goods market, holding the interest rate constant? Illustrate with graphs. [10 pts]

3. Suppose that the interest rate increases in response to this temporary increase in government spending. How will it affect the labour market and the goods market? Illustrate with graphs. [5 pts]

4. Argue that the price level could go up or down. Specify the conditions under which the price level goes up. Illustrate graphically. [ 6pts]

5. Determine whether investment and average labor productivity increases or decreases. [2 pts]

6. Are these predictions consistent with the business cycle facts? (Draw a table) [7 pts]

In the coordination failure model, suppose that there is a permanent increase in government spending.

1. Determine how this will affect output and employment. Illustrate graphically by drawing both the labor market and the output market. [15 pts]

2. Will real output become more or less volatile over time? [5 pts]

Consider the following numerical example using the Solow growth model. Suppose that

F (K, N) = zK1/2N1/2

Furthermore, assume that 5% of the capital is lost each period due to depreciation, the population grows by 1% each period, the consumer in this economy saves 20% of his income and the total factor productivity is z = 2. The unit period is one year.

1. Find the steady state per-capita quantity of capital (k*), production (y*) and consumption (c*). [5 pts]

2. Find the steady state quantity of capital per worker that maximize consumption per worker in this model. [4 pts]

3. Derive the golden rule steady state per-capita consumption (c**), production (y**) and saving (s**). [6 pts]