Macroeconomics Answers

State True, False or Uncertain. If an aggregate production function exhibits diminishing marginal product and constant returns to scale then a doubling of the labour force leads to a doubling of aggregate output.

State True, False or Uncertain. In the short run, changes in GDP can be thought of as stemming from changes in the employment rate of labour, while in the long run, changes in GDP can be thought of as stemming from changes in the labour force and/or changes in labour productivity (output per employed worker).

The Nottinghamshire Research Observatory in England calculated that students who attend Nottingham Technical University spend about £2,760 each in the local economy for a total of £50.45 million. In total, the impact of their spending on the local economy is £63 million. Calculate the size of the student spending multiplier.

Assume that workers, employers and investors all believed that inflation in the coming year would equal the annualized rate of inflation experienced in the past 6 months. Also assume that workers had been receiving nominal wage gains of 5% during a several year period where the annual inflation rate was 2%. Now assume that a decline in the unemployment rate below NAIRU creates conditions where workers push for an annual real wage increase of 4%. Also assume that labor productivity growth declines to 1% per year as unemployment is squeezed below normal frictional & structural levels.

a) What rate of nominal wage growth will workers seek at the new low unemployment rate?

b) How fast will firms have to raise prices given your answer in (a) in order to protect profit margins?

c) If the rate of inflation in (b) occurs and the Fed allows AD to grow fast enough to maintain the unemployment rate below NAIRU for another year, what rate of nominal wage growth will workers
seek in the following year?

d) If the rate of inflation in (b) had persisted for 6 months or more, how large an increase in the federal funds rate would be needed to increase the level of real interest rates in the economy?

Suppose the consumption function of a society is:C=600+0.85Y where C=Total Consumption;Y=Personal disposable income.Identify the following:1)Autonomous consumption.2)Marginal propensity to consume;3)When Y=1000,what will be the induced consumption?4)If income is increased to 3000,what will happen to the total consumption?5)What is the autonomous consumption when income is 1000?

c. Given that money supply is KSh 1400 millions, autonomous consumption is KSh120 million, while the responsiveness of consumption to changes in disposable income is estimated to be 80% by the ministry of planning. Aggregate autonomous investment is ksh 200 million investment while one % increase in interest rate changes investment by KSh10 millions. The government collected KSh 200 million as tax revenue and wishes to increase expenditure by 10% above the revenue collected. The transactionary and precautionary demand for money function is expressed as mt/p=0.1y while the speculative money demand ms/p is -100r . compute the equilibrium national income, consumption and investments.

) An open macroeconomic model for a hypothetical economy is represented as follows:
Y= C0 +Io+Go+X0-M, M=mo+m1yd,C=co+c1yd, T=tY and Yd=Y-T
a. Show that equal change in tax and government expenditure are expansionary to the economy
b. Derive the equilibrium level of savings in the economy above
c. Derive the investment multiplier

The full effect of fiscal policy may not be realized if not matched with changes in monetary policy, explain using the IS/LM model

Using appropriate model, illustrate the effect of an expansionary fiscal policy in an open economy operating in free exchange rate regime .Assume perfect capital mobility. What is the effect if the government uses monetary policy alternatively?

(a) An open macroeconomic model for a hypothetical economy is represented as follows

Y= C0 +Io+Go+X0-M, M=mo+m1yd,C=co+c1yd, T=tY and Yd=Y-T

1.Show that equal change in tax and government expenditure are expansionary to the economy
2.Derive the equilibrium level of savings in the economy above
3.Derive the investment multiplier