Macroeconomics Answers

a. You are given the following information about the commodity and Money markets of a closed economy without government intervention.

  The commodity market

    Consumption function:

    C = 50 + 2/5Y

    Investment function:

    I = 790 – 21r

  The Money Market

    Precautionary and Transactions demand for money

    M_DT = 1/6 Y

    Speculative demand for money

    M_DS = 1200 -18r

    Money supply

    M_S = 1250

Required i.           Determine the equilibrium levels of income and interest rate for this economy.                                                   (5 Marks)ii.           Using a well labelled diagram, illustrate the equilibrium condition in part (i) above. (5 marks)

how gdp is determine in a 4 sector economy explain using aggregate expenditure and aggregate output approach

Consider the following general version of the Keynesian cross:

Y = C + I + G

C = a + b(Y − T)

I = c − dr

Assume that taxes (T) are not fixed but depend on income in the following

way:

T = T ¯ + tY

where T > ¯ 0 and 0 < t < 1 are parameters of the tax system.The parameter t is the marginal tax rate: if income rises by $1, taxes rise by t$1.

Furthermore, a > 0,0 < b < 1, c > 0, d > 0.

(a) How does this tax system change the way consumption responds to

changes in GDP?

(b) In the Keynesian cross, how does this tax system alter the governmentpurchases multiplier?

(c) Find the IS equation from this Kenesian cross mode. How does this

tax system alter the slope of the IS curve?

According to supply-side theorists, the aggregate supply curve will shift to the right when _____

Which one of the following will give rise to a rightward shift of the AD curve? A. Households decide to increase their saving rate. B. There is a sharp and sustained increase in share prices on the JSE. C. Personal tax rates are increased. D. The SARB increases the repo rate. E. Real government spending is lowered. 

If two countries have differing opportunity costs of production for two goods, then _____

The government of an open economy determines that the current equilibrium level of income in the economy is lower than the fullemployment level of income and wishes to close this gap. The Minister of Economic Affairs hears that you have just studied the Keynesian model of the macroeconomy and approaches you for advice. Which one of the following suggestions would be inappropriate in this context?

A. Create a more favourable environment for investment spending. B. Spend more on infrastructural projects (for example the construction of new roads). C. Encourage households to save a larger proportion of their annual income. D. Reduce the rate of taxation. E. Try to reduce imports by encouraging households and firms to purchase locally manufactured consumer and capital goods.

Consider a country with a flexible exchange rate, and which initially has a current account surplus of zero. Then, suppose there is anticipated increase in future total factor productivity. (a) Determine the equilibrium effects on the domestic economy in the case where there are no capital controls. In particular, show that there will be a current account deficit when firms and consumers anticipate the increase in future total factor productivity. (b) Now, suppose that the government dislikes current account deficits, and that it imposes capital controls in an attempt to reduce the current account deficit. With the anticipated increase in future total factor productivity, what will be the equilibrium effects on the economy? Do the capital controls have the desired effect on the current account deficit? Do capital controls dampen the effects of the shock to the economy on output and the exchange rate? Are capital controls sound macroeconomic policy in this context? Why or why not

Define an indifference curve. Explain how a consumer attains equilibrium under the indifference curve approach. Also decompose the price effect into income effects and substitution effect when price of commodity measured along X-axis decreases.

Is it possible to consume so much of the same good that it turns into a bad? If so, give an example