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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.
Country A and country B both have the production function Y = F(K, L) = K1/2L1/2.
Does this production function have constant returns to scale? Explain.
What is the per-worker production function, y = f(k)? [Hint: use the solow model]
Consider the following IS–LM model: C = 150 + 1/2YD T = 300 G = 300 I = 150 + 1/3Y − 10 000ρ ρ = i + x (M/P) d = 2Y − 20 000i M/P = 2600 a. Imagine the external finance premium (x) is zero. Derive the IS relation. b. Derive the LM relation. c. Solve for the equilibrium real output and interest rate. d. What is the cost of bank loans and the equilibrium level of investment? e. Now suppose that firms’ capital drops following a severe slump in stock prices and banks charge an external finance premium (x) on loans to firms equal to 0.5%
Suppose that the production function is given by 𝑦=0.5√𝐾√𝐿
a) Derive the steady-state levels of output per worker and capital per worker in terms of the saving rate, s, and the depreciation rate, δ.
b) Derive the equation for steady-state output per worker and steady-state consumption per worker in terms of s and δ.
