Macroeconomics Answers

A1-5. Suppose an economy is described by following aggregate expenditure (AE) model: C = 40 + 0.75YD I = 60

where C is consumption (0.75 is the marginal propensity to consume) YD is disposable income, and I is investment spending.

1. (a) Derive an expression for AE as a function of Y. Calculate the equilibrium level of Y and illustrate in a diagram with AE on the vertical and Y on the horizontal axis. [5]
2. (b) Calculate the level of consumption. Express the components of aggregate expenditure (C, and I) as percentages of GDP (to one decimal place). Derive the saving function and solve for the equilibrium level of saving. [5]
3. (c) What is the value of the multiplier in this model? [5]
4. (d) Suppose there is an investment boom that leads to an increase in investment of 25. Calculate the new level of GDP. Illustrate in your diagram. Briefly explain why the old level of national income is new longer the equilibrium level. [5]

Suppose that U&I Inc. is a Canadian company that every year sells $10B of product, $6B to domestic and $4B to foreign consumers. Yearly, it buys $1B of imported parts, pays its workers $5.5B, pays rent of $0.5B, makes a $2B interest payment, and earns profits of $1B. U&I’s operations add $9B yearly to GDP whether measured using the value added, expenditure, or income approach. True, False, or Uncertain? Explain.

Suppose two countries with the same population each start with 10 unemployed workers and 90 employed workers. Subsequently 5 workers in country A find jobs and become employed, while in country B, all 10 of the unemployed become discouraged and leave the labour force. Because country B’s rate of unemployment falls from 10% to 0%, while country A’s only falls from 10% to 5%, we can say that the labour market outcome in Country B is superior to that in Country A.

Given the functions: ATC= x-6+(30/x) and AR =10+(15/x), where x represents output, find TC, TR, and the output level when net revenue is zero.

Q. Given the demand and supply equations: Q_x^d=s-kP_x-jM, Q_x^s=-h+bP_x + cW where M represents income and W represents the wage rate:

·  Calculate the impact of a change in income on the equilibrium price and quantity.

·  Will this impact be larger or smaller if the value of k is decreased?

Draw diagram(s) indicating all results

Given the functions: ATC= x-6+(30/x) and AR =10+(15/x), where x represents output, find TC, TR, and the output level when net revenue is zero.

Suppose the table below shows the prices and quantities of the output produced by an economy in two years. If Year 1 is the base year, then the inflation rate in the GDP deflator is 5%.

Good a Good b

Pa Qa Pb. Qb

Year 1 $10.00 100 $4.00 500

Year 2 $9.50. 120 $4.40. 450 

(a) Suppose the economy is at potential output and the BP curve is shifted to the left, for example, by migrants into the country sending money earned in the country back home to their families at a higher rate. Suppose policy makers wish to maintain employment at potential output and avoid inflation but are willing to tolerate changes in the interest rate. What policy prescription would you recommend? Assume: (i) a fixed exchange rate and (ii) a flexible exchange rate. Assume a BP curve is steeper than the LM curve in both cases.                                                                                                                                                                           

(b) How would your answer to question 5 (a) differ if the policy makers, in addition to minimizing inflation and maintaining employment at potential output, they also want to keep the interest rate at its original level? Explain.

The modified Phillips curve is a relation between the change in the inflation rate and the level of the unemployment rate. Explain the logic of this curve and how it differs from the original Phillips curve. Using this Phillips curve, is the unemployment rate zero when the rate of inflation is neither rising nor falling? Why do Central Banks focus so much on whether inflation expectations are well anchored? Explain.        

Suppose an economy is described by following aggregate expenditure (AE) model:

C = 40 + 0.75YD    

I = 60

C is consumption (0.75 is the marginal propensity to consume)

 YD is disposable income, 

 I is investment spending.

If there is an investment boom that leads to an increase in investment of 25. Calculate the new level of GDP and explain why the old level of national income is no longer the equilibrium level.