Macroeconomics Answers

1.The government raises taxes by €100 billion. If the marginal propensity to consume is 0.6, what happens to the following? Do they rise or fall? By what amount?

a) Public saving

b) Private saving

c) National saving

d) Investment

 If the public debt is a debt that we owe to ourselves, then there are obviously no problems connected with such as debt.” Critically evaluate the statement. 

a) Given the following simple Keynesian Model: Y = C + I + G + X-M, 

where 

Consumption schedule is given as C= 100 +0.75Y

Investment (I) = 50

Government (G) = 100

and Net Export (X-M) = 20

i. Calculate the Equlibrium Level of Income [4 Marks]

ii. Calculate the size of Consumption at the Equilibrium Level

By using AD-AS Model, discuss the impact of prevailing COVID-19 situation on Pakistan’s economy in terms of; {Note: make neat and clean diagram to explain the followings}

a. Real GDP                                      

b. General Price Level

c. Inflation

d. Unemployment

e. Briefly suggest Fiscal Policy or Monetary Policy Measures or Mix of Both to minimize the effects of this pandemic situation?

QUESTION 1 [30]

An open economy is described by the following system of macroeconomic equations, in which

all macroeconomic aggregate are measured in billions of Namibian dollars, N$:

Y = C + I + G + X – M

C = 160 + 0.6 Yd

T = 100 + 0.25Y

X = 80

I = 150

G = 150

M = 22 + 0.25Y

Where: Y is domestic income

Yd is private disposable income

C is aggregate consumption spending

T is government tax revenue

I is investment spending

X represents exports

M represents imports of goods and services

1.1

(a) Determine the equilibrium level of income/ output. (5)

(b) Illustrate the aggregate spending curve and equilibrium level of income on a diagram. (3)

(c) Determine the surplus/ deficit in the government budget at equilibrium. (4)

(d) Determine trade balance at equilibrium. (4)

(e) Find the multiplier applicable to autonomous tax and interpret it. (4)

3.2 Suppose that the residents of Windhoek spend all of their income on cauliflower,

broccoli and carrots. In 2019 they buy 100 heads of cauliflower for N$2000, 50 bunches

of broccoli for N$750 and 500 carrots for N$500. In 2020 they buy 75 heads of

Cauliflower for N$2250, 80 bunches of broccoli for N$1200 and 500 carrots for N$1000.

Suppose that the base year is 2019.

(a) Find nominal GDP and real GDP for 2019 and 2020. (4)

(b) What is the CPI in both years? (6)

(c) What is the inflation rate? ( 4)

(d) Find real growth rate (2)

(e) Which do you think has a greater effect on the CPI: a 10 percent increase in the

price of chicken or a 10 percent increase in the price of cars? Why? (4)

Use an appropriate diagram based explain why the MEC-curve might overstate the

additional investment that could be generated in an economy with a one-percent

reduction in the rate of interest.

(5)

A closed economy was observed in two different years to be operating with levels of

output at: (a) aggregate supply was equal aggregate demand for goods and services but

planned domestic investment was greater than planned domestic saving ( b) aggregate

supply was equal aggregate demand for goods and service but planned domestic

investment was less than planned domestic saving. Use a diagram to explain the forces

that would move the economy towards a stable equilibrium in each case.

( 10)

What are bureaucrats and how do they contribute to government failure? Please use relevant South African examples.

From a macroeconomic perspective, the role played by government capital investment can be briefly illustrated with the aid of a Solow-type aggregate production function (Black, Calitz & Steenkamp, 2015). Elaborate on this statement.