Macroeconomics Answers

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.

• (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.
• (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.

Panama island is a hypothetical small closed economy in the northern part of Nalubia continent. Autonomous consumption in Panama dollars is 2000 and government spending = Taxes = 1000. The investment function is I=2000-25r and the money demand function is (M/P)d=Y-10r. Money supply is 1000 and the price level is 2. Let us assume that marginal propensity to consume is 0.6.

Use the information above to drag and drop answer in correct space provided.

a) IS curve equation is 16.8 and LM curve is 186.2

b) Equilibrium interest rate is 6700 and equilibrium level of national income is Y = 500 – 62.5r

c) Suppose that the government decides to double both the taxes and government spending, new equilibrium interest rate is 23.5 and new equilibrium level of national income is Y =14000 + 10r

The foreign exchange rate is the price of one currency in terms of another currency. With the help of an example graphically determine the foreign exchange rate also discuss the appreciation and depreciation of a currency in terms of another currency.

Using the following national income accounting data, compute depreciation and GDP by the income approach. All figures are in billions.

Profits of corporations and government enterprises before taxes         36

Exports                                                          96

Capital consumption allowances (depreciation)                        X

Government current purchases of goods and services                   96

Net income of farms and unincorporated business                     13

Taxes less subsidies on factors of production                           66

Wages, salaries, and supplementary labour income                     100

Gross Investment                                                 79

Indirect taxes less subsidies                                         18

Interest and investment income                                      60

Personal consumption and expenditures                              82

Imports                                                          18

Part 1: What is the value of depreciation    

Part 2: What the value of GDP using the Income Approach

Using the following national income accounting data, compute GDP by the expenditure approach. All figures are in billions.

Profits of corporations and government enterprises before taxes   56

Exports                                                           96

Capital consumption allowances (depreciation)                       48

Government current purchases of goods and services              122

Net income of farms and unincorporated business                     20

Taxes less subsidies on factors of production                            66

Wages, salaries, and supplementary labour income                  100

Gross Investment                                                  86

Indirect taxes less subsidies                                          18

Interest and investment income                                       60

Personal consumption and expenditures                               82

Imports                                                           18

Part 1: What the value of GDP using the Expanditure Approch 

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 what is the inflation rate in the GDP deflator?

What were Keynes’s three conjectures about the consumption function? Describe the evidence that was consistent with Keynes’s conjectures and the evidence that was inconsistent with them. Explain how do the Permanent-Income hypothesis and the Life Cycle hypothesis resolve the seemingly contradictory pieces of evidence regarding consumption behavior?

The reason to calculate GDP for country

The demand and Supply functions for three goods are given as follows:

D_x=100-3P_x+P_y+3P_z

D_y=80 +P_x-2P_y-2P_z

D_z=120+3P_x-P_y-4P_z

S_x=-10+P_x

S_y=-20=3P_y

S_z=-3+2P_z

Q1: Determine the equilibrium prices and quantities of all three goods.

·         The government decides to:

a.       Impose a 25% tax on X

b.      Impose a 5Rs unit Tax on Y

c.      Gives a 10% subsidy on good Z

·         Analyze the impact of each of these three policies separately on equilibrium prices and Quantities.

·         Also calculate changes in consumer and producer surpluses and the amount of revenue earned by government.

Q2: Repeat this exercise when polices (a, b),(b,c) & (a, b,c) are jointly implemented. Which policy choice is best? Why?

Q: 3 Provide theoretical justification (using diagrams) of all results obtained.

Is there any principal on which aggregate economy works,if yes then explain it