Economics Answers

Consider the Cobb–Douglas production function

Y = β1Lβ2Kβ3 (1)

where Y = output, L = labor input, and K = capital input. Dividing (1) through by

K, we get

(Y/K) = β1(L/K)β2Kβ2+β3−1 (2)

Taking the natural log of (2) and adding the error term, we obtain

ln (Y/K) = β0 + β2 ln (L/K) + (β2 + β3 − 1) ln K + ui

where β0 = ln β1.

a. Suppose you had data to run the regression (3). How would you test the hypothe-

sis that there are constant returns to scale, i.e., (β2 + β3) = 1?

b. If there are constant returns to scale, how would you interpret regression (3)?

c. Does it make any difference whether we divide (1) by L rather than by K?

The demand for tickets to an Ethiopian Camparada film is given by D(p)= 200,000-

10,000p, where p is the price of tickets.If the price of tickets is 12 birr, calculate price

elasticity of demand for tickets and draw the demand curve?

a.     The following information is from the national income accounts for country X

Y = C+I+G+(X-M)

C = 20+0.8Yd

T = 30

G = 22

X = 20

M = 4+0.3Y

Yd = Y-T

I=30

1. informs the above model, list all the endogenous and exogenous variables
2. Determine the equilibrium values for all the endogenous variables   

Suppose the price of Fanta falls from R18 to R14 per bottle, and the quantity demanded rises from 250 to 400 bottles a day.  

1.1.1 Calculate the price elasticity of demand using the point elasticity formula.

You are the economic adviser to a country experiencing hyperinflation. Politicians debating the proper course of stabilization have advocated various positions, listed in statements (a) through (e). Discuss each statement in turn.

a) ‘This crisis will not end until workers begin to pay their fair share of taxes.

b) ‘The central bank has demonstrated that it cannot responsibly wield its power to create money, so we have no choice but to adopt a currency board.’

c) ‘Price controls are necessary to end this madness.’

d) ‘Stabilisation will be successful only if there is a large recession and if there is a substantial increase in unemployment.’

e) ‘Let’s not blame the central bank. The problem is fiscal policy, not monetary policy.’ 

Assume that money demand takes the form 𝑀 𝑃 = 𝑌[1 − (𝑟 + 𝜋 𝑒 )] where Y = 1000 and r = 0.1.

a. Assume that, in the short run, 𝜋 𝑒 is constant and equal to 25%. Calculate the amount of seignorage for each rate of money growth, ΔM/M, listed below. i. 25% ii. 50% iii. 75%

b. In the medium run, 𝜋 𝑒 = 𝜋 = ΔM/M. Compute the amount of seignorage associated with the three rates of money growth in part (a). Explain why the answers differ from those in part (a). 

2. An individual receives a total of ¢19,200 as annual income. The transaction cost of going to the bank each time to withdraw money is fixcd at ¢10 in addition to an interest rate of 16% on financial assets. Using Baumol's inventory-theoretic approach to the demand for money:

a. Find the amount of money this individual would have to withdraw in order to minimize cost. (3 marks)

b. How many trips should this individual make to the bank in a year? (2marks)

c. On average, how many trips should this individual make to the bank every month ? (2 marks)

d. What is the implication of an increase in interest rate on this iindividual's average cash holding?

Although Friedman and Keynesians agree on the slopes of the Philips Curve in the short run and the long run, they disagree on using activist aggregate demand policies to hold unemployment below its long run average, even in the short run. Briefly discuss. (12 marks)

Popeye’s income declines and, as a result, he buys more spinach. Is spinach an inferior or a normal good?

1. The Ghanaian economy typical of most economies in the world consists of individuals and institutions that hold money for different purposes. Given the current fractional reserve banking system being operated in the country where commercial banks out of excess reserves :

a. Derive an expression that shows how money supply is determined in the Ghanaian economy. (10marks)

b. Find the money multiplier and briefly explain the effects of currency to deposit ratio (cr) required reserve ratio (rr) and excess reserves (er) on the money supply process. (5marks)

c. Determine the value of money supply in the economy if total currency in circulation is ¢600 million and a sum of ¢200 million is held the books of the Bank of Ghana reserves. Other relevant estimates include: a currency to deposit ratio of 0.2, required reserve ratio of 0.1 and excess reserve ratio of 0.1 (5marks)