Macroeconomics Answers

Consider an open economy with a fixed exchange rate at time t. Suppose that initially financial market participants believe that the government is committed to maintaining the fixed exchange rate. Suppose at time t+1 the central bank announces a devaluation. The exchange rate will remain fixed, but at a new level, where the new fixed exchange rate is below the initial fixed exchange rate. At the new level of fixed exchange rate, assume that financial market participants believe that there will be no further devaluation and that the government will remain committed to maintaining the exchange rate.

a) Assume that the financial market participants to expect another devaluation at time t+2. How does the expectation affect the nominal exchange rate, real exchange rate, domestic interest rate and domestic output? Explain in suitable diagram and equation.

Consider an open economy with a fixed exchange rate at time t. Suppose that initially financial market participants believe that the government is committed to maintaining the fixed exchange rate. Suppose at time t+1 the central bank announces a devaluation. The exchange rate will remain fixed, but at a new level, where the new fixed exchange rate is below the initial fixed exchange rate. At the new level of fixed exchange rate, assume that financial market participants believe that there will be no further devaluation and that the government will remain committed to maintaining the exchange rate.

a) Draw an IS-LM-UIP diagram for this economy. Consider the change in the expected exchange rate.

The equilibrium levels of income (Y),real investment and gross national expenditure are determined by the intersection of the AS and AD curves

The table below shows the national income statistics for a country.

Items / RM (Million)

Import / RM 6700

Export / RM 8500

Subsidies / RM 480

Consumption / RM 3400

Indirect taxes/ RM 860

Depreciation/ RM 520

Government Expenditure/ RM 4700

Investment / RM 6900

Factor income received abroad/ RM 2010

Corporate tax / RM 620

Factor income paid to abroad/ RM 1800

From the data, calculate:

a) Gross Domestic Product at market price

b) Gross National Product at market price

c) Gross National Product at factor cost

d) Gross Domestic Product at factor cost

e) National Income

The table below shows the national income statistics for a country.

Items / RM (Million)

Import / RM 6700

Export / RM 8500

Subsidies / RM 480

Consumption / RM 3400

Indirect taxes/ RM 860

Depreciation/ RM 520

Government Expenditure/ RM 4700

Investment / RM 6900

Factor income received abroad/ RM 2010

Corporate tax / RM 620

Factor income paid to abroad/ RM 1800

From the data, calculate:

Gross Domestic Product at market price

Gross National Product at market price

Gross National Product at factor cost

Gross Domestic Product at factor cost

National Income

a ) Describe TWO (2) causes of inflation.

b) Explain THREE(3) effects of unemployment to economics

c) List FOUR (4) characteristics of money.

d) Keynes’ view of money demand in the economy is affected by three main objectives.

Explain THREE (3) purposes of demand for money according to Keynesian Theory.

A) Explain TWO (2) uses of national income data.

b) Discuss THREE (3) problems in calculating national income .

Answer the question below based on the information given

. All data are in RM million

. Government expenditure function : 100

Investment function : 500

Consumption function : 200 + 0.6Yd

Tax function : 10 Export function : 0.2Y

Import function : 100

(i) Calculate the consumption and savings function after tax.

(ii) Calculate the national income equilibrium by using Injection = Leakage approach.

(iii)Calculate the national income equilibrium by using Aggregate Demand = Aggregate Supply.

(iv)Calculate the total consumption at the national income equilibrium.

(d) Explain two reasons why a government may privatise an industry. [4] 

(e) Analyse how a successful airline industry can promote economic growth. [6] (f) Discuss whether the Indian government should increase the tax on airline fuel. [7] 

(g) Discuss whether more people will apply to be pilots for Indian airlines in the future. [7] 

Calculate the real wage(W/P) if the value of the markup, u=0.1

Using examples, explain why cost–benefit analysis is central to the decision making process in the allocation of public goods