Macroeconomics Answers

the price of the input is $11 and the price of the product (or output) is $4. Fixed costs are $30

Illustrate, graphically, the determination of interest rate in the classical system. Explain what 

happens where there is a drop in autonomous investment demand. Does it reduce the overall 

demand in the economy?

5

Discuss the effect of a favorable demand shock in the short-run and in the long-run in an (aggregate demand) AD-(aggregate supply)AS model.

1.   The IS-LM model is a simplification of the interrelationship between selected economic variables. The model consists of a number of endogenous variables (those variables whose values are determined inside the model) and a number of exogenous variables (those variables whose values are determined outside the model). The labour markets mostly consider the relationships between prices, expected prices, unemployment among other macroeconomic variables.

(a)    Explain endogenous and exogenous variables in the IS-LM model as well as the labour markets, derive the AD-AS model.

(b)   In the labour market, explain how the rate of unemployment is related to the bargaining power and nominal wages.

(c)    As a policy consultant, use the AD-AS framework to explain how the health of the South African economy can be improved given you diagnosis in question 1.

Note: Please use diagrams to aid your explanation.

1

YEAR 1 (R-Billion) YEAR 2 (R-Billion)

Investment 200 220

Saving 180 190

Export 100 110

Imports 120 140

Government Expenditure 150 160

Taxation 150 160

Equilibrium National Income 1 800 2 000

(a)    Calculate the value of the multiplier for this economy.

(b)   Should the full employment level of income be R-B2 255, by how much should government change its spending to reach this level of income during the next year given the multiplier has not changed.

(c)    Evaluate whether or not this policy approach is effective in real life in achieving the desired level of GDP.

By referring to the figure below identify and discuss the factors that affect the adoption of new irrigation technologies.The discussion should be arranged as per the categories of factors in the conceptual framework (e.g individual factors should all be discussed under the same sub heading)