Macroeconomics Answers

1. How can the five principles of economics help in decision making?

These are the five 5 principles; opportunity cost, marginal principle, law of diminishing returns, principle of voluntary returns and real/nominal principle.

2. Identify a real business scenario wherein your selected principle worked.

Which of the following statements is incorrect.

Select one:

A. If the population in South Africa grows at 5% per year, and the economic growth rate is 3% per year, a decline in the real GDP per capita occurs.

B. Stabilization policies refers to fiscal policy and monetary policy.

C. An increase in nominal GDP can result from an increase in the quantity produced of goods and services and or/the increase in the prices of goods and services produced.

D. An increase of 20% in the price of lamb meat is an example of inflation.

i.                   Draw the circular flow diagram                                                             

ii.                 List all the injections and withdrawals                                                       

iii.               Explain how withdrawals and injections may impact an economy.                                                                                                                          

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4. Assume that GDP is $6000, personal disposable income is $5100, the gov’t deficit is $200, consumption is $3800 and the trade deficit is $100.

What is the size of:

a.      Private saving

b.      Investments

c.      Government spending

Suppose you are given the following closed economy model:

C = 200 + 0.78Yd

T = 0.18Y

I = 50

G = 800

i. Calculate the equilibrium level of income and consumption. (5 Marks)

ii. Calculate the government expenditure multiplier and interpret the result. (4 Marks)

iii. Find the fiscal deficit/surplus and interpret the result. (3 Marks)

iv. Suppose government purchases increase to 1000, what is the new equilibrium income and consumption? (4 Marks)

v. What is the new fiscal deficit/surplus after government spending increases to 1000?

C=300+0.75Y, I=400, G=300,T=100

determine the equilibrium level of the income using expenditure and injection-leakage approach

Which of the following statements is/are incorrect in explaining the tax being treated as leakage in the circular flow of income between household and firms?

a) Tax is the part of income that is received by households but then paid to government.

b) Tax is taken out of the circular flow of income.

c) Households can spend it on goods and services.

d) Tax is an amount that is withdrawn or leaked from the circular flow of income.

You win $100 in a basketball pool. You have

a choice between spending the money now or

putting it away for a year in a bank account that

pays 5 percent interest. What is the opportunity

cost of spending the $100 now?

You win $100 in a basketball pool. You have 

a choice between spending the money now or 

putting it away for a year in a bank account that 

pays 5 percent interest. What is the opportunity 

cost of spending the $100 now?

Three managers of the Magic Potion Company

are discussing a possible increase in production.

Each suggests a way to make this decision.

Harry: We should examine whether our

company’s productivity—gallons

of potion per worker—would rise

or fall.

Ron: We should examine whether our

average cost—cost per worker—

would rise or fall.

Hermione: We should examine whether

the extra revenue from selling

the additional potion would be

greater or smaller than the extra

costs.