Macroeconomics Answers

(a) Assume the following information represents the National Income Model of an ‘Utopian’ economy.

Y = C + I + G
C = a + b(Y – T)
T = d + tY
I = IO
G = GO

Where a > O; O < b < 1
d > O; O < t < 1

T = Taxes
I = Investment
G = Government Expenditure

i) Explain the economic interpretation of the parameters a,b,d and t. (4 marks)
ii)Find the equilibrium values of income, consumption and taxes. (8 marks)
b) Discuss the three approaches used in measuring the national income of a country and show why they give the same estimate. (8 marks)

In 2005, 1000 kilograms of potatoes were sold for $4/kilogram. Also, 50 barrels of oil were sold for $55 per barrel. In 2015, 1100 kilograms of potatoes were sold for $6/kilogram. Also, 65 barrels of oil were sold for $60 per barrel.
What is the real GDP for 2005 if 2015 is the base year? Show your calculations.

Year Money GDP* Deflator Real GDP**
2013 $ ________ 105 $760 000
2014 $820 000 106 $________
2015 $855 000 ________ $800 000

What is the growth rate of nominal output from 2013 to 2014?

In an open economy with fixed exchange rate, the government does not have autonomy in monetary policy. Do you agree with this statement? Justify your answer.

Bring out the salient features of Ramsey model for decentralized households (your answer should include the assumptions, important equations, phase diagram and its interpretation). In what respect is it different from the Solow model?

As a principle of economics, there is a direct relationship between marginal cost and quantity meaning both variables move in the same direction (also called a positive relationship).

The Federal Reserve of the United States of America would like to decrease interest rates in the economy. What open market operation (OMO) action should the Federal Reserve undertake? Explain the OMO process in detail. What will happen to the cash rate, interest rates, inflation and GDP? Draw by hand the effect of the OMO process using a MD-MS diagram.

On March 9 2015, the European Union (EU) commenced quantity expansion of money, Euro (€). The European Central Bank (ECB) has increased the quantity of money by 60 billion euro every month in the open market in an attempt to support the economy of EU countries. The large increase in the quantity of money is expected to have significant impacts on a range of economic sectors in the EU and global financial markets.

(h) Analyse how the quantity expansion of euro money is likely to affect money supply, interest rate, investment and consumption, and economic growth in the EU. Draw relevant graph(s) for your analysis.

Suppose the government increases the GST. Assume other things are held constant, explain how the increase in the GST will affect the GDP.

There is a reduction in headcount which includes retrenchment,retirement and termination of contracts. Explain 2 economic problems other than labour shortage arising from the ageing population.