Macroeconomics Answers

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$:

(a)   Determine the equilibrium level of income/output.                                                                           (4)

The Covid19 crisis and lockdown has been a supply response, the government Use the ADAS model, in conjunction with the IS of the shock and policy response.offered a R500bn stimulus package side shock to the South African economy. In to help cushion the blow.LMBP, to explain the supply and demand dynamics Where will equilibrium income and prices settle? Draw the graphs and explain the complete chain reaction. Total mark out of 30 2

Assume the economy exists for two periods and works as in the monetary intertemporal model seen in the course. Prices are fully flexible. If the intertemporal substitution of leisure were absent:

a) Output demand will be fully elastic

b) Output supply will be fully elastic

c) Labour supply will be fully inelastic

d) Output supply will be fully inelastic

e) Labour demand will not be affected

Q) Assume consumers with standard preferences live for two periods. They receive an income in each period (𝑦 and 𝑦′) and pay lump-sum taxes to the government (𝑡 and 𝑡′). Credit markets are not perfect, and borrowers are charged a higher interest rate than lenders. The government never defaults, and faces the lenders’ interest rate whether it borrows or lends. Which are true?

a) The number of lenders is equal to the number of borrowers

b) A reduction in taxes in the current period without changes in the lifetime burden of taxes increases

current consumption for a lender

c) A borrower is better off if there is a reduction in the interest rate paid by borrowers

d) A borrower is better off if there is a reduction in the interest rate paid by borrowers, but only if the

substitution effect dominates the income effect

e) A reduction in taxes in the current period without changes in the lifetime burden of taxes may

transform a borrower into a lender

Q) In the intertemporal New Keynesian model that we have seen in the course, assume that prices are constant current period, and the central bank sets an interest rate target. Which is true?

a) The central bank always perfectly controls the money demand

b) Shocks always cause the economy to fall below the natural level of output

c) Money supply can be used by the central bank to keep the price level constant in the current period d) Assuming monetary policy does not change, a temporary increase in government spending in the current period has a higher fiscal multiplier than in the flexible prices intertemporal model

e) Assuming monetary policy does not change, a temporary increase in government spending in the current period has a lower fiscal multiplier than in the flexible prices intertemporal model

Assume consumers with standard preferences live for two periods. They receive an income in each period (𝑦 and 𝑦′) and pay lump-sum taxes to the government in each period (𝑡 and 𝑡′ ). The credit market is perfect,

i.e. every borrower repays its debts. Let us suppose that the government increases government spending in

the first period (𝐺 increases, 𝐺′ does not change). At the same time the government reduces taxes in the

first period (𝑡 < 𝑡 ) and increases taxes in the second period (𝑡′ > 𝑡′ ) in such a way that the new 21 21

government intertemporal budget constraint with the new government spending level is satisfied. After these policy changes:

a) Borrowers will definitely borrow more

b) Lenders will definitely save more

c) Nothing changes as Ricardian equivalence holds.

d) Current consumption will be lower

e) Current consumption will be the same

Q) In the Solow growth model, assume all the standard assumptions hold, except that now population is constant (𝑛 = 0) and the depreciation rate 𝑑 is equal to zero. Which is true?

a) There are two steady states

b) Capital and capital per worker grow at the same rate

c) In the steady state, investment is equal to the depreciation rate

d) Aggregate savings are larger than aggregate investment

e) If we start with an initial capital larger than zero, the living standards will keep growing forever

c = 60 + 0.8yd, i=150−10r, g=250, t=200 ms=100, md=40 + 0.1y−10r, write the is and lm schedules for the new model, find the new equilibrium values for income (y1) and the interest rate (r1), show graphically the is and lm schedules and equilibrium point b(y1, r1)

What is product differentiation? What role does it play in the determination of price under monopolistic competition? Discuss.

“There is no unique solution to the problem of determination of price and output under Oligopoly”. Discuss

The Covid-19 crisis and lockdown has been a supply-side shock to the South African economy. In response, the government offered a R500bn stimulus package to help cushion the blow. Use the AD-AS model, in conjunction with the IS-LM-BP, to explain the supply and demand dynamics of the shock and policy response. Where will equilibrium income and prices settle? Draw the graphs and explain the complete chain reaction.