Macroeconomics Answers

“Market inefficiency is necessary but not sufficient condition for government intervention”.
Discuss four reasons in view of this assertion.

Analyse the special properties of the Cob-Douglass production function, and how might
the function be used to calculate the sources of growth?

Outline the key propositions of the ‘new’ (endogenous) growth theory.
(b) Explain briefly two strengths and two limitations of the endogenous growth theory in
practice.

Why were the classical economists after Adam Smith pessimistic about the growth and
development process?

Critically examine the myths associated with the concept of comparative advantage.

The IS-LM model is a simplification of the interrelationship between
selected economic variables. The model consists of a number of en-
dogenous 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, unemploy-
ment 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.
(10 marks)
(b) In the labour market, explain how the rate of unemployment is
related to the bargaining power and nominal wages.
(5 marks)
(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.
(15 marks) Note: Please use diagrams to aid your explanation.

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.

(c) Use the following information (in rupees):
Income (Y) = 1,00,000
Nominal Money Supply (M) = 80,000
Price Level (P) = 20
Calculate the money growth rate required to
finance the budget deficit of Rs.10,000 in an
economy. 4

b) State whether the following statements are
TRUE or FALSE. Give reason(s) in support
of your answer. 5
i. Higher the marginal propensity to consume,
higher is the size of multiplier
ii. If investment is very sensitive to interest rate,
then we have a flat IS curve