Macroeconomics Answers

According to Keynesian economists, closing a short-run expansionary gap of $5 million means government purchases will need to be:

A. increased by $5 million.

B. decreased by $5 million.

C. increased by more than $5 million.

D. decreased by less than $5 million.

Birdland has autonomous consumption of 600. Additional data for Birdland:

mpc = 0.70

net taxes = 50

government purchases = 100

planned investment = 100

net exports = 40

Given all of this information, induced expenditures = _____:

A. 0.70Y.

B. 990 + 0.30Y.

C. 0.80Y.

D. 805 + 0.70Y.

The mpc = 0.75 and disposable income goes up by $100. This means consumption will go up by _____.

A. $13.33

B. $25

C. $75

D. $133

Susie’s Radio Store has expected sales of $2,000,000 and plans to produce $2,500,000 worth of goods. To meet production, the business purchases $100,000 of new equipment. Actual sales for the year wind up being $1,800,000. For Susie’s Radio Store actual investment equals ______ and planned investment equals ______.

A. $600,000; $200,000

B. $800,000; $600,000

C. $500,000; $800,000

D. $650,000; $500,000

Banks in New Transylvania have a desired reserve ratio of 10 percent of deposits and no excess reserves. The currency drain ratio is 50 percent of deposits. Now suppose that the central bank increases the monetary base by $1,200 billion.

i. How much do the banks lend in the first round of the money creation process?

ii. How much of the initial amount loaned flows back to the banking system as new

deposits?

iii. How much of the initial amount loaned does not return to the banks but is held

as currency?

iv. Why does a second round of lending occur?

v. Calculate money multiple in this example?

vi. What is the final increase in the quantity of money?

When the economy was slowly recovering from recession, in 2011, the NDP called for government spending on infrastructure and green energy and said that corporate tax cuts did not give sufficient stimulus.

i. Was the NDP’s proposed infrastructure spending a fiscal stimulus? Would such spending be a discretionary or an automatic fiscal policy?

ii. Explain whether, and if so how, spending on infrastructure and green energy would create jobs. Use graphs to illustrate your answer.

iii. What would have a larger effect on aggregate demand: Corporate tax cuts or an equivalent scale increase in government expenditure on infrastructure and green energy projects?

Q.1.10 When the rand depreciates against the dollar:

(1) The balance on the current account of the balance of payments worsens;

(2) The South African Reserve Bank can influence the exchange rate by raising interest rates to attract foreign capital and thus strengthen the value of the rand;

(3) The South African Reserve Bank can buy dollars to strengthen the value of the rand;

(4) The South African Reserve Bank can take steps to limit the supply of dollars and in this way strengthen the value of the rand relative to the dollar.

Q.1.7 As a result of more Europeans visiting South Africa, we can expect, ceteris paribus:

(1) An appreciation of the rand relative to the euro;

(2) A depreciation of the rand relative to the euro;

(3) An appreciation of the euro relative to the rand;

(4) That it will cost South Africans more to visit Europe.

The following equations describe an economy. (Think of C, I, G, etc as being measured in billions and I as a percentage; a 5 percent interest rate implies i = 5.)

C = 0.8(1 – t)Y

t = 0.25

I = 900 – 50i

G = 800

Md/P = 0.25Y – 62.5i

Ms/P = 500

Derive the equations that describes the IS and LM curves?     

What is the equilibrium level of income and interest rate?  

Give three explanations why the real wage may remain above the level that equilibrates labor supply and labor demand.