Macroeconomics Answers

1. Assume that an economy is based on three industrial sectors: agriculture (A), building (B), and energy (E). The technology matrix M and final demand matrices (in billions of dollars) are
b. How much of each of B’s output dollars is required as input for each of the three sectors?

If the marginal propensity to consume equals 0.75, what change in government spending financed by borrowing from the private sector could eliminate the gap identified in part (a)

5. The imaginary nation of Washingtonia prohibits the import of foreign-made pharmaceuticals. What effect does this have on the well-being of people in Washingtonia who consume pharmaceuticals? Who benefits from this trade restriction?

4. Purchasing power parity and the law of one price are two related concepts.
a. Explain what is meant by the law of one price. Also explain why a person or nation could profit if this law does not hold.
b. Offer three reasons why the law of one price might not hold for some goods.
c. Explain what is meant by purchasing power parity. Also explain how purchasing power parity relates to the law of one price.

3. For a number of years, the U.S. dollar was losing value relative to other currencies around the world.
a. Explain what sort of monetary policy would help to increase the value of the dollar and why it would have this effect. What effects does this policy have on unemployment and the merchandise trade balance?
b. Describe a fiscal policy that would help increase the value of the dollar and why it would have this effect. What effects does this policy have on unemployment and the merchandise trade balance?

2. Government fiscal policy and international trade seem to be linked. Let’s investigate their relationship.
a. Say a government is currently running a budget deficit and decides to cut taxes, increase spending, or both. Explain how this will affect interest rates in the country.
b. Given the change in interest rates from part A, what will happen to the value of this country's currency? Explain why.

1. Using a certain quantity of resources, workers in the fictitious country of Iguania can produce four bottles of penicillin or 12 loaves of bread. Using the same resources, workers in another fictitious country, Chamelia, can produce six bottles of penicillin or eight loaves of bread.
a. Calculate the opportunity cost of producing each good in each country.
b. Which country has comparative advantage in the production of which type of good?

Each of the following events will result in either an import or export to be recorded in the current account or the capital account of Vidinland, an imaginary small country in eastern Europe. For each one, say whether it will be a current account import, a current account export, a capital account inflow, or a capital account outflow.
A. Boyan, a prominent resident of Vidinland, purchases a brand-new Swedish automobile.
B. Pete, a resident of the U.S., purchases 1,000 cases of fine wine from Vidinland.