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ECON 1102 Tutorial Test S1 2014 (Mid-Term sample paper)

Question # 00023841
Subject: Economics
Topic: Macroeconomics
Due on: 08/22/2014
Posted On: 08/22/2014 04:15 AM

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The following equations describe planned spending for a closed economy.

( )

(a) Write out the equation for the private saving function for this economy.

(1 mark)

(b) What is exogenous (autonomous) expenditure and what is the value of the multiplier? Calculate

equilibrium output for this economy. Show how you obtained your figure.

(2 marks)

(c) Calculate the size of the budget surplus at equilibrium output.

(1 mark)

(d) What is the size of the balanced budget multiplier for this economy?

(1 mark)

The following equations describe planned spending for a closed economy.

( )

(a) Write out the equation for the private saving function for this economy.

(1 mark)

(b) What is exogenous (autonomous) expenditure and what is the value of the multiplier? Calculate

equilibrium output for this economy. Show how you obtained your figure.

(2 marks)

(c) Suppose the government introduces an expansionary fiscal policy by increasing government

purchases by 40. Calculate the new equilibrium output.

(1 mark)

(d) Explain how the actual effect of the expansionary fiscal policy in (c) may be a level of output less

than what was calculated?

(2 marks)

The following equations describe planned spending for a closed economy.

( )

(a) Write out the equation for the private saving function for this economy.

(1 mark)

(b) What is exogenous (autonomous) expenditure and what is the value of the multiplier? Calculate

equilibrium output for this economy. Show how you obtained your figure.

(2 marks)

(c) Show in a diagram and explain the effect of an increase in the marginal tax rate to 0.3. Calculate

the new equilibrium output.

(2 marks)

(d) Explain how the actual effect of the increase in the marginal tax rate in (c) may be a level of

output less than what was calculated?

(1 marks)Consider the following model for supply and demand of workers (100,000’s) in the aggregate labour

market, where w is the real hourly wage.

Supply curve:

Demand curve:

(a) Calculate and state the equilibrium real wage and level of employment and illustrate your

answer on a diagram.

(2 marks)

(b) Suppose that the labour force increases by 100,000 (potential) workers and that the real wage

remains fixed to its level in part (a). Calculate the levels of employment, unemployment and the

labour force after the change and illustrate your answer on a separate diagram. Explain.

(3 marks)

Consider the following model for supply and demand of worker hours (1,000,000’s) in the aggregate

labour market, where w is the real hourly wage.

Supply curve:

Demand curve:

(a) Calculate and state the equilibrium real wage and level of employment and illustrate your

answer on a diagram. Explain.

(2 marks)

(b) Suppose a tax of $2 is levied on every hour worked. State the level of employment and the real

wage after the imposition of this tax and illustrate your answer on a diagram. Explain who pays the

tax.

(3 marks)

The country of New West Dubbo is experiencing lower energy costs due to new technology in

extracting energy sources such as gas and oil. Use the supply and demand model (and a diagram) of

the labour market to explain the effect on labour demand and supply and the levels of employment

and unemployment, and the real wage.

(5 marks)

The country of Kingsland is considering the introduction of a compulsory retirement saving scheme.

Under this scheme all workers are required to save ten per cent of their annual wages and salaries

until they retire. Use the supply and demand model (and a diagram) for saving and investment to

explain the likely effects of this scheme on national saving, investment and the real interest rate in

New Holland. Explain the effects on employment of the saving scheme. (You can assume that New

Holland is a closed economy).

(5 marks)

The government of Old Flanders is planning to borrow heavily to finance spending on scientific

research and development, education and defence. Use the supply and demand model (and a

diagram) for saving and investment to explain the likely effects of this scheme on national saving,

investment and the real interest rate in New Holland when its economy is closed. Explain the effects

of the scheme on employment.

(5 marks)The country of New Holland is experiencing lower energy costs due to new technology in extracting

energy sources such as gas and oil. Use the supply and demand model (and a diagram) for saving

and investment to explain the likely effect on national saving, investment and the real interest rate

in New Holland when its economy is closed. Explain the effects of the new technology on

employment.

(5 marks)

Explain the three different approaches that can be used to calculate GDP. Briefly indicate why all

three approaches should give the same estimate for GDP.

(3 marks)

Is GDP a good measure of a country’s economic welfare? Discuss.

(5 marks)

Consider the following National Accounts data for the calendar year 2010. $Bill

Private Consumption 1200

Imports 600

Government Purchases 600

Gross Taxation Receipts 800

Exports 500

Government Transfer Payments 300

Beginning-of-year Inventories 200

Net Interest Payments on Government Debt 40

End-of-year Inventories 100

Sales of Existing Houses and Flats 600

Business Fixed Investment 500

(a) Use the above data to calculate GDP for 2010. Explain how you arrive at your figure for GDP.

(1 mark)

(b) Use the above data to calculate National Saving in 2010. Explain how you arrive at your figure

for National Saving.

(1 mark)

(c) Use the above data to calculate Private Saving in 2010. Explain how you arrive at your figure

for Private Saving.

(1 mark)

Explain why the CPI may give a biased measure of the “true” rate of inflation or cost of living?

(5 marks)

Identify and briefly explain the various economic costs associated with inflation.

(5 marks)

What factors might cause households to under-save relative to some rationally optimal level?

(2 marks)Explain the various factors that will influence a firm’s decision to purchase a new piece of capital

equipment. What condition would need to be satisfied for the firm to be willing to invest in the new

capital?

(5 marks)

Explain why the labour demand curve for an individual firm is downward sloping and indicate the

main factors that cause the curve to shift. Will the same factors that cause a shift in an individual

firm’s labour demand curve also shift the aggregate demand curve for labour? Explain.

(4 marks)

Briefly explain the following three motives for saving:

? life-cycle

? precautionary

? bequest

Indicate what effect the widespread availability of home equity loans might have on each form of

saving. {Note: A home equity loan allows households to borrow (usually at a relatively low interest

rate) against the equity they have in their home. (Equity refers to the difference between the

market value of the home and any mortgage debt.)}

(5 marks)

Explain what is meant by frictional unemployment. Is it likely to be desirable for an economy to

have zero frictional unemployment? Explain.

(2 marks)

What is meant by substitution bias in the CPI and explain whether it is likely to cause the CPI to

overstate or understate changes in the cost of living.

(3 marks)

Explain the precautionary motive for saving by a household. Briefly discuss how widespread

availability of credit cards might affect precautionary saving.

(2 marks)

Explain the role of the real interest rate in influencing the level of saving and investment in the

economy.

(3 marks)

Explain what is meant by the natural rate of unemployment. Briefly indicate two factors that might

cause the natural rate of unemployment to vary over time.

(2 marks)

Explain the concept of potential output and why it can differ from actual output?

(2 marks)Identify two factors that might cause a change in the level of potential output. For each factor

briefly explain why they can affect potential output.

(2 marks)

Identify and briefly explain the main features of the business cycle. Differentiate between the

growth cycle and the classical cycle. Which is more relevant for the Australian economy in the last

20 years?

(3 marks)

Explain the concepts of (a) potential output and (b) the output gap.

(3 marks)

Explain the concept of Okun’s law. Discuss the implications of Okun’s law for policymakers?

(4 marks)

Explain the concept of Planned Aggregate Expenditure (PAE). How does PAE differ from Actual

Expenditure?

(2 marks)

Discuss the role played by fixed (or sticky) prices in the Keynesian model of income determination.

Briefly explain what would happen if prices were fully flexible in the short- run.

(2 marks)

Use the Keynesian aggregate expenditure model and appropriate diagrams to explain the effect

on equilibrium GDP of an exogenous decrease in exports.

(3 marks)

Use the Keynesian aggregate expenditure model and appropriate diagrams to explain the effect

on a decrease in income tax rates.

(3 marks)

Explain what is meant by the multiplier? Why, in general, does a one dollar change in

exogenous expenditure produce a larger change in short-run output?

(5 marks)

Explain the role played by the marginal tax rate in determining the size of the multiplier. Other

things equal, how does a cut in the marginal tax rate affect the size of the multiplier?

(3 marks)

Suppose a government is concerned about the size of the budget deficit. It decides to increase

government spending by $20 billion, but at the same time to increase exogenous taxes by $20

billion. Will this policy have any effect on the level of output? Explain your answer.

(3 marks)(a) Use a diagram to illustrate the concept of short-run equilibrium in the Keynesian aggregate

expenditure model.

(1 mark)

(b) Suppose the economy is initially not in equilibrium, explain the process by which the

economy adjusts to equilibrium. What role is played by inventories in this process?

(2 marks)

(c) Use a diagram to explain the difference between potential output and equilibrium output in the

Keynesian model. Explain why the equilibrium level of output can differ from potential output?

(2 marks)

Explain the role played by the marginal propensity to import in determining the size of the

multiplier. Other things equal, how does an increase in the marginal propensity to import affect the

size of the multiplier?

(3 marks)

Write down and explain what is meant by the government budget constraint. Indicate how it

can provide a link between fiscal policy and public debt.

(3 marks)

What are the main instruments of discretionary fiscal policy? Explain how a change in each can

differ in their effect. Explain how each might be used to close an expansionary output gap.

(5 marks)

Explain the difference between discretionary fiscal policy and automatic stabilisers. Which one of

these will be the main influence on the size of the structural budget deficit? Explain.

(3 marks)

A government of Galaxia is considering its fiscal policy response to a decline in exogenous desired

expenditure by households and firms which has produced a large contractionary output gap. Two

alternative policies are under consideration:

– An increase in government spending of $20 billion, or

– A one-time cash payment to all households, which also has a total value of $20 billion

Show in a diagram of the 4-sector Keynesian aggregate expenditure model and explain which of

these policies will have the largest effect on planned aggregate expenditure and on the level of

output.

(5 marks)

Briefly discuss any complications or issues with fiscal policy that are not accounted for by the

Keynesian aggregate expenditure model.

(3 marks)

Show in a diagram of the 4-sector Keynesian aggregate expenditure model and explain how a

decrease in income tax rates would increase the level of output. Explain why government revenue

may not decrease by as much as predicted by the aggregate expenditure model.

(3 marks)

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ECON 1102 Tutorial Test S1 2014 Mid-Term Solution Paper

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Preview: on goods and services, the population, which provides those goods and services, receives more money. In terms of the close economy, represented by Y = C(Y - T) + I + G , where an increase in G leads to an increase in Y. Thus, expansionary fiscal policy makes the populace wealthier and increases output, or national income. The Equilibrium Income has increased by 111.(2 marks).....
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