Macroeconomics Answers

1. A small open economy is characterized by having the following information,

Indicator In million dollars

Transfer Payments 54

Interest Income 150

Depreciation 36

Wages 67

Gross Private Investment (I) 124

Business Profits 200

Indirect Business Taxes 74

Rental Income 75

Net Exports (X-M)

18

Net Foreign Factor Income 12

Government Purchases (G) 156

Household Consumption (C) 304

A. Calculate GDP using expenditure approach

B. Calculate GDP using Income approach

C. Is there any difference between the two approaches of calculating GDP? Why?

In the countries of Xerxes and Arias both nominal and real gross domestic product are the same. Because each dollar an Xerxes is used more often then Arias, ____ in Xerxes

In the article “An early contribution to theoretical literature”, JC Harsanyi

cogently argues that economic decisions free of bias can be obtained by

placing decision makers in a position of ignorance. What is the further

opinion about the distribution of income according to Harsanyi?

Interpret and explain the diagram below, which illustrates the effect of airline

regulations by the civil aeronautics board. Indicate what effect the regulation will

have on airlines’ sales, output and profit, and also what consumers are losing or

gaining in the process.

Define an isoquant and then explain what decreasing returns of scale

implies. What happens to the isoquants on an isoquant map in such an

instance?

Explain what the income consumption curve is in terms of individual and

market demand.

By using a relevant diagram, illustrate and explain how the market

demand curve is derived. A brief explanatory discussion of the graph is

required with reference to price and quantity.

In general, changes in price and quantity depend on the amount by which the

demand and supply curves shift, in which direction they shift and the shape of

each curve. With this statement in mind, illustrate by drawing a single graph the

new price and quantity at a new equilibrium when both curves shift to the right,

but the shift in the demand curve is larger than the shift in the supply curve.

What do you understand price elasticity of supply to be? Indicate if the

coefficient is usually positive or negative and why. (3)

3.4 With reference to price elasticity of demand, answer the following

questions:

3.4.1 Indicate what the two (2) main determinants are that price elasticity

of demand depends on. (2)

3.4.2 With the aid of a diagram (draw the diagram), illustrate and explain

what a linear demand curve is, where exactly the top of the curve is

and where the bottom of the curve is, and how elasticity values

(coefficients) vary on the curve from being infinitely (perfectly)

elastic to unit elastic and finally to completely (perfectly) inelastic.

A change in wages causes a _____

A. change in the marginal product curve for labour.

B. shift in the marginal physical product curve for labour.

C. shift in the derived demand curve for labour.

D. shift in the marginal revenue curve for labour.

E. movement along the demand curve for labour.