Macroeconomics Answers

Louis and Carrie Anne are students who have set up a summer business in their neighborhood. They cut lawns and clean cars. Louis is particularly efficient at cutting the grasshe requires 1 and 1/4 hours to cut a typical lawn, while Carrie Anne needs 1 and 2/3 hours. In contrast, Carrie Anne can wash a car in 3/4 hour, while Louis requires 1 hour. (a) If they decide to specialize in the tasks, who should cut the grass and who should wash cars? (b) If they each work a ten hour day, how many lawns can they cut and how many cars can they wash if they each specialize in performing the task where they are most efficient? (c) Illustrate the PPF for each individual where lawns are on the horizontal axis and car washes on the vertical axis, if each individual has twelve hours in a day.

You and your partner are highly efficient people. You can earn $18 per hour in the workplace; your partner can earn $15 per hour. (a) What is the opportunity cost of one hour of leisure for you? (b) What is the opportunity cost of one hour of leisure for your partner? (c) Now consider what a PPF would look like: You can produce/consume two things, leisure and income. Since income buys things you can think of the PPF as having these two productsleisure and consumption goods/services. So, with leisure on the horizontal axis and income in dollars is on the vertical axis, plot your PPF. You can assume that you have 14 hours per day to allocate to either leisure or income. [Hint: the leisure axis will have an intercept of 14 hours. The income intercept will have a dollar value corresponding to where all hours are devoted to work.] (d) Draw the PPF for your partner.

Explain the shape of the aggregate supply curve in the short run and also indicate the impact of input and output price adjustment in determining the slope of the short run aggregate supply curve.

From the expenditure side, GDP=? (តាមទស្សនចំណាយ GDP=?)

On January 1, 2019, Joan Campbell borrows $20,000 from Susan Rone and agrees to repay this amount in payments of $4,000 a year until the debt is paid in full. Payments are to be of an equal amount and are to include interest at 12% on the unpaid balance of principal at the beginning of each period. Assuming that the first payment is to be made on January 1, 2020, determine the number of payments of $4,000 each to be made and the amount of the final payment.

What is the future value on December 31, 2026, of 7 annual cash flows of $10,000 with the first cash payment made on December 31, 2019, and interest at 12% being compounded annually?

4. Given the consumption C = 20 + 0.4Yd, and

T = 600 I = 500, G = 600, then;

i. Write the equation of aggregate income and simplify.

ii. Calculate marginal propensity to save and interpret the result.

iii. Find autonomous tax multiplier.

iv. Calculate the change of income when G decrease by 100.

v. Calculate the new equilibrium income when tax equation is given as T = 0.25Y

vi. Calculate the new equilibrium income when I increase to 600.

Suppose the price elasticity of demand for heating oil is 0.2 in short run and 0.7 in the long run

a) if the price of heating oil rises from $1.80 to$2.20 per gallon, what happens to the quantity of heating oil demanded in short run? In the long run?

b) Why might this elasticity depend on the time horizon?

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)What is the CPI in both years?(8)

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

(c) Find nominal and real GDP for 2019 and 2020(6)

(d) Find nominal growth rateand real growth rate between 2019 and 2020.(4)

(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?(3)

(a) Explain how Life-Cycle Hypothesis and the Permanent Income Hypothesis, explain the difference between long run APC and short run APC.(8)

(b) With a help of a diagram discuss how the permanent income theory of consumption explains the difference between the cross-section and time-series estimates of the Keynesian aggregate consumption function.(12)

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 = 100 + 0.75𝑌𝑑

T = 50 + 0.5𝑌

I = 200

X = 200

𝑀 = 50 + 0.25𝑌

𝐺 = 150

Where:Y is domestic income

Y is private disposable income

C is aggregate consumption

T is government tax revenue

I is investment spending

X represents exports

M represents imports of goods and service

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

(b)Illustrate aggregate spending and equilibrium level of income on a diagram(4)

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

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

(e) Determine the value of the economy’s multiplier, which is applicable to government spending, and interpret it.(5)