Macroeconomics Answers

Macroeconomics models are simplified explanations or theories of how the economy works . discuss the importance of economic models

On average, a hectare produces 50 tons of bananas. For sake of simplicity, lets assume that they are only 100 hectares of bananas. Total production is then 5000 tons. Assume that disease will destroy 10% of the initial area in a year. It means that in year 0 production will be 5000 tons. In year 1 , production is 4500 tons. In year 2, production is 3500 tons .Assume the initial price is $1. Assume demand elasticity is -0.5 and supply elasticity is 1. Calculate KA for each year. Note that K will be calculated based on the change of total quantity produced instead of the change in yield. You will find a negative KA which is the vertical shift generated by the disease. How does this look graphically ? Draw the graph. 2. Calculate change in consumer and producer surplus change. Note that it is not positive. Assume that the discount rate is zero. 

Consider a perfectly competitive industry where each firm has a long-run cost function:

C(q) = q³ – 20q² +120q

Long-run average costs are minimised at an output level of 10 units. The industry demand curve is given by:

Q = 1000 – 40p

where Q represents industry output and p represents the equilibrium price of industry output.

Required:

In the long-run equilibrium, this industry will sustain how many firms?

a. The following information is from the national income accounts for country X

Y = C+I+G+(X-M)

C = 20+0.8Yd

T = 30

G = 22

X = 20

M = 4+0.3Y

Yd = Y-T

I=30

informs the above model, list all the endogenous and exogenous variables

Determine the equilibrium values for all the endogenous variables

An open economy with a government sector is in equilibrium. Assume the following:  Marginal propensity to save = 0.4

Marginal propensity to tax = 0.2

Marginal propensity to import = 0.2

Showing your method of working, calculate by how much the equilibrium level of national income would fall, if injections in the economy are reduced by $60m.

a.     The following information is from the national income accounts for country X

Y = C+I+G+(X-M)

C = 20+0.8Yd

T = 30

G = 22

X = 20

M = 4+0.3Y

Yd = Y-T

I=30

1. informs the above model, list all the endogenous and exogenous variables
2. Determine the equilibrium values for all the endogenous variables   

You are the economic adviser to a country experiencing hyperinflation. Politicians debating the proper course of stabilization have advocated various positions, listed in statements (a) through (e). Discuss each statement in turn.

a) ‘This crisis will not end until workers begin to pay their fair share of taxes.

b) ‘The central bank has demonstrated that it cannot responsibly wield its power to create money, so we have no choice but to adopt a currency board.’

c) ‘Price controls are necessary to end this madness.’

d) ‘Stabilisation will be successful only if there is a large recession and if there is a substantial increase in unemployment.’

e) ‘Let’s not blame the central bank. The problem is fiscal policy, not monetary policy.’ 

Assume that money demand takes the form 𝑀 𝑃 = 𝑌[1 − (𝑟 + 𝜋 𝑒 )] where Y = 1000 and r = 0.1.

a. Assume that, in the short run, 𝜋 𝑒 is constant and equal to 25%. Calculate the amount of seignorage for each rate of money growth, ΔM/M, listed below. i. 25% ii. 50% iii. 75%

b. In the medium run, 𝜋 𝑒 = 𝜋 = ΔM/M. Compute the amount of seignorage associated with the three rates of money growth in part (a). Explain why the answers differ from those in part (a). 

2. An individual receives a total of ¢19,200 as annual income. The transaction cost of going to the bank each time to withdraw money is fixcd at ¢10 in addition to an interest rate of 16% on financial assets. Using Baumol's inventory-theoretic approach to the demand for money:

a. Find the amount of money this individual would have to withdraw in order to minimize cost. (3 marks)

b. How many trips should this individual make to the bank in a year? (2marks)

c. On average, how many trips should this individual make to the bank every month ? (2 marks)

d. What is the implication of an increase in interest rate on this iindividual's average cash holding?

Although Friedman and Keynesians agree on the slopes of the Philips Curve in the short run and the long run, they disagree on using activist aggregate demand policies to hold unemployment below its long run average, even in the short run. Briefly discuss. (12 marks)