Macroeconomics Answers

Why is macro policy more difficult than the simple model suggests?

2.      Austrian economist Murray Rothbard has argued that government intervention during 1929 made what could have been a 1-year recession set off by the stock market crash into a 12-year depression. He believed that by creating confusing signals, government intervention kept investors from gaining knowledge of what investments to avoid. a. Is Rothbard’s explanation of the Depression consistent with the AS/AD model? b. If one agrees with Rothbard, how would one’s proposed policies to deal with recessions differ from those presented in the book? (Austrian)

Two researchers, Mamelodi and Phatane report the results of an investigation into the 

factors affecting the quantity Yt of wheat produced in Thohoyandou, Limpopo province 

of South Africa, using annual data from 1995 to 2015. The following regression was 

run and the estimated equation was found to be:

Yt = 993.633 + 0.0461It + 0.706 Dt + 48.22Rt

(1368.4) (0.273) (0.945) (11.28) 

Standard error of estimates are in parenthesis

Adjusted R2 = 0.56

Where It, Dt, and Rt were hectares of irrigated area, hectares of dry land area and 

rainfall respectively.

a) Estimate t-value for each of the predictor variables in the model

[9 marks]

b) Briefly explain why Mamelodi and Phatane may have concluded that the result 

did not make sense.

a)      Use the p value approach to find out whether energy contributes negatively to mineral exploitation at the 5% level. Hint: specify the 5+1 steps. (6 marks)

b)     Use formula in Appendix to calculate adjusted R². (2 mark)

c)      What does adjusted R-squared imply? (2 marks)

d)     Interpret the coefficient on ln(energy). (2 marks)

e)      Are coefficients’ signs on explanatory variables within your expectation? Answer this question with a brief explanation. (9 Marks)

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f)      The researcher suspect that export and energy are jointly insignificant. Describe step-by-step procedure the researcher should carry out to determine if the variables are jointly insignificant.  (5 Marks)

) For each of the following pairs of goods, which good would you expect to have more elastic demand and why?

a. required textbooks or mystery novels

b. Beethoven recordings or classical music recordings in general

c. subway rides during the next 6 months or subway rides during the next 5 years

d. root beer or wate

The supply-side effects of fiscal policy in the AD-AS model shows, that an increase in the marginal tax rate on labour income will do the following:

Increases potential GDP because people work more as they have less disposable income.

Increase the incentive to work.

Increase the equilibrium quantity of labour as firms demand more workers at the lower wage.

Decreases potential GDP.

An expansionary fiscal policy would most likely cause which of the following changes in output and interest rates?

Both output and interest rate will decrease.

Output will increase and interest rate falls.

Both output and interest rate will increase.

Output will fall and the interest rate increases.

Considering automatic stabilizer, which of the following is likely to increase the South African government’s existing budget deficit?

1. A decrease in real GDP.
2. A lower unemployment rate.
3. A decrease in the price level.

I, II and III.

II only

II and III only

I only

Which of the following are fiscal policy measures that might be used to reduce a South African budget deficit?

• I. Increasing taxes
• II. Decreasing government spending 
• III. Increasing interest rates

I and II only.

I and III only.

I, II, and III.

II only.

An expansionary fiscal policy might include __________ government spending and/or __________ 

taxes, while a contractionary fiscal policy might include __________ government spending and/or 

__________ taxes.

A. increasing; increasing; decreasing; decreasing

B. decreasing; decreasing; increasing; increasing

C. decreasing; increasing; increasing; decreasing

D. increasing; decreasing; decreasing; increasing

Which of the following, are fiscal policy measures, that might be used to reduce a South African 

budget deficit? 

I. Increasing taxes.

II. Decreasing government spending.

III. Increasing interest rates.

A. I and II only.

B. II only.

C. I and III only.

D. I, II, and III.