Macroeconomics Answers

Q.1 Consider the following information about a hypothetical economy:

1. Y = A (0.025K − 0.5N) N

2. A=2/3

3. K=2000

4. N^s=-18+(18/5)w

5. C=200+(2/3)(Y-T)-300r

6. T=-75+(1/4)Y

7. I =100−100r

8. G=100

9. L = 0.5Y − 200i

10. M=6300

11. π^e=0.10

Now using this information, answer the following: 

(c) Derive the equations of the IS, LM and AD curves. Determine the numerical values of the slopes and 

intercepts of these curves and interpret each? 

(d) Determine the equilibrium levels of all endogenous variables under the assumptions of the classical 

macroeconomic framework. 

(e) Beginning from the initial classical equilibrium, suppose that the central bank increases the money supply 

by 420 while price remains fixed at its initial long run equilibrium level. What will be the impact of this 

policy on all endogenous variables in short run and long run? 

(f) Compare the equilibrium positions in (d) and (e) in one graph indicating all points.

Q.1 Consider the following information about a hypothetical economy:

1. Y = A (0.025K − 0.5N) N

2. A=2/3

3. K=2000

4. N^s=-18+(18/5)w

5. C=200+(2/3)(Y-T)-300r

6. T=-75+(1/4)Y

7. I =100−100r

8. G=100

9. L = 0.5Y − 200i

10. M=6300

11. π^e=0.10

Now using this information, answer the following: 

(a) Briefly explain the meaning of each equation in the above model. What are the values of d Y C , r I , LY and 

S Nw . Give economic interpretation of each. 

(b) Add all relevant identities and equilibrium conditions to complete the model. Write down the endogenous 

and exogenous variables.

1 What is industrial sector and write about the industrial sector of Ghanaian economy

2 What is the GDP and write about the GDP of the Ghanaian economy

3 Briefly explain employment in relation to the Ghanaian economy

the government proposed reduced spending in form of a slashed public wage bill. Use the AD-AS framework to explain logically the potential effect of such a policy move on output and prices. [Make reference to what happens to the curves but NO drawings of graphs required].

a.      In the short run

the government proposed reduced spending in form of a slashed public wage bill. Use the AD-AS framework to explain logically the potential effect of such a policy move on output and prices. [Make reference to what happens to the curves but NO drawings of graphs required].

a.      In the medium term

Earlier in 2021, the minister of Finance Tito Mboweni presented the budget. Some economists speculated that since government is on the fiscal consolidation path. Government was going to raise taxes to reduce the budget deficit. However, on the contrary, government proposed reduced spending in form of slashed public wage bill. Use the AD-AS framework to explain logically the potential effect of such a policy move on output and prices. [Make reference to what happens to the curves but NO drawings of graphs required].

1. In the medium term

Earlier in 2021, the minister of Finance Tito Mboweni presented the budget. Some economists speculated that since government is on the fiscal consolidation path. Government was going to raise taxes to reduce the budget deficit. However, on the contrary, government proposed reduced spending in form of slashed public wage bill. Use the AD-AS framework to explain logically the potential effect of such a policy move on output and prices. [Make reference to what happens to the curves but NO drawings of graphs required].

1. In the medium term

Q.1 Consider the following information about a hypothetical economy:

1. Y = A ( ) 0.025K − 0.5N N

2. A=2/3

3. K = 2000

4. N^s=-18+(18/5)w

5. C=200+(2/3)(Y-T)-300r

6. T=-75+(1/4)Y

7. I =100−100r

8. G =100

9. L = 0.5Y − 200i

10. M = 6300

11. 0.10

Now using this information, answer the following: 

(a) Briefly explain the meaning of each equation in the above model. What are the values of d Y C , r I , LY and 

S Nw . Give economic interpretation of each.

(b) Add all relevant identities and equilibrium conditions to complete the model. Write down the endogenous 

and exogenous variables.

The following equations describe an economy (think of C, I, G, etc as being measured in billions and i as a percentage; a 5 percent interest rate implies i = 5) C = 0.8 (1 – t) Y t = 0.25 I = 900 – 50i G = 800 L = 0.25Y – 62.5.i M / P = 500

What is the value of the simple multiplier (with taxes)By how much does an increase in government spending of ∆G increase the level of income in this model, which includes the money market?By how much does a change in government spending of ∆G affect the equilibrium interest rate?3. How does an increase in the tax rate affect the IS curve? How does the increase affect the equilibrium level of income?4. Show that a given change in the money stock has a larger effect on output the less interest sensitive is the demand for money.(b) How does the respond of the interest rate to a change in the money stock depend on the interest sensitivity of money demand?

Business do not maximize output from the given inputs