Macroeconomics Answers

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

Which of the following statements is/are correct?a.The initial impact of a change in taxation is on the goods market.b. A change in government spending only influences the goods market and has no impact on the financial market. c. The initial impact of a change in the interest rate is on the financial market after which it influences the goods market. d. If the investor confidence in the economy worsens, the impact will be first on the financial market, and then the goods market.

Which of the following statements are correct? a.The nominal value of a good is its value in terms of money while the real value is its value in terms of some other good, service, or bundle of goods. b.The nominal quantity of money is the quantity of money expressed in terms of its purchasing power in terms of goods.c.A decline in the general price level results in a decrease in the real quantity of money and fewer goods and services can be bought. d.If the nominal quantity of money is R500 and the price level is R20, then the real quantity of money is 25. e.Given the price level, the nominal quantity of money divided by the price level defines the real quantity of money.

Which of the following statements is/are correct?a.The IS curve represents the combinations of the level of output and income and the interest rate where the financial market is in equilibrium.b.The IS curve represents the combinations of the level of output and income and the interest rate where the goods market is in equilibrium. c.To derive the IS curve, we change the level of output and income to determine the effect on the interest rate.d. In deriving the IS curve, we assume that an increase in interest rate decreases the level of investment spending, shifts the ZZ curve downwards,and reduces the level of output and income

Assume that you are an agricultural economist and you 

have been specialized in production economics as well. 

Farmers in the area complain that they run the farm 

business at a loss. Therefore, they seek your advice to make 

their production profitable and finally maximize profit. As 

you are an expertise in the area of production economics, 

how do you advise them to solve their problem? Use 

graphical illustrations when and where necessary.