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20 views3 pages

Assignment 1 Ns

Uploaded by

Vir Sethi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Intermediate Macro

Assignment 1
OBL Chapters 1 & 2 & 3 & 4

Definitions

Okun’s law

1. Which of the following statements best describes Okun's law?

a) It relates the inflation rate to the unemployment rate.


b) It examines the relationship between interest rates and economic growth.
c) It quantifies the relationship between changes in real GDP and changes in
employment.
d) It explores the impact of government spending on the overall economy.

Phillips curve

2. What does the Phillips curve illustrate?

a) The relationship between inflation and unemployment.


b) The impact of government spending on economic output.
c) The correlation between interest rates and consumer spending.
d) The connection between exchange rates and international trade.

Calculations

3. Firm 1 produces computer chips, employing workers and using machines to produce
the computer chips. It sells the chips for $150 to Firm 2, which produces laptops. Firm
1 pays its workers $60, leaving $90 in profit to the firm. Firm 2 buys the chips and
uses it, together with workers and machines, to produce laptops. Revenues from
computer sales are $350. Of the $350, $150 goes to pay for chips and $120 goes to
workers in the firm, leaving $80 in profit to the firm.

What is the aggregate output?

a. Highlight the intermediate and final goods in this example


b. Compute the aggregate output by “final goods” definition
c. Compute the aggregate output by “value added” definition
d. Compute the aggregate output by “income” definition
4. Please see below table on quantity of laptops produced in Country A and their unit
prices.

Real GDP
Quantity Price of Nominal (in 2021
Year of laptops Laptops GDP dollars)
2020 100 $800
2021 110 $900
2022 120 $1,100

a. Fill the blank cells

b. What is the percentage growth rate of nominal GDP in 2021 and in 2022?

c. What is the percentage growth rate of real GDP in 2021 and in 2022?

d. Compute the GDP deflator in 2021 and in 2022

e. Compute the rate of inflation in 2022

5. In Country B in 2015, 25 million people were in the labour force but among them 22
millions of them were employed. Compute the unemployment rate in Country B for
the year of interest.

6. Suppose that an economy is characterised by the following behavioural equations (in


billions of euros):

C = 580 + 0.6YD
I = 140
T = 90
G = 320

Solve for the following variables.

a. Equilibrium GDP (Y)

b. Disposable income (YD)

c. Consumption spending (C)

7. Use the economy described in Problem 6.

a. Compute private saving, public saving, and investment spending


b. Solve for equilibrium output. Compute total demand. Explain how it affects
production.

c. Assume that G is now equal to €420 billion. Solve for equilibrium output,
consumption, and disposable income. Why do you think the government will decide
to expand fiscal spending?

8. Suppose that the household nominal income for a country is €100,000 billion. The
𝑑
money demand function is given by 𝑀 = €𝑌(0. 3 − 0. 7𝑖)

a. What is the demand for money when the interest rate is 1%? 2%?

b. Suppose the yearly income is reduced by 10%. In percentage terms, what happens to
the demand for money if the interest rate is 1%? If the interest rate is 2%?

c. What should a central bank do to interest rates if it needs to increase money demand?

9. Consider a bond that promises to pay $1000 in one year.

a. What is the interest rate on the bond if its price today is $700? $750? $800?

𝑑
10. Suppose the money demand of an economy is given by 𝑀 = €𝑌(0. 4 − 𝑖) where
€Y is €50,000. Also, suppose that the supply of money is €9,000.

a. What is the equilibrium interest rate?

b. Suppose the central bank increases the value of equilibrium interest rate, i, in part a to
24%, will there be excess money supply or money demand? What policy should the
central bank consider to reach the new equilibrium interest rate?

11. Consumption
Consider a household whose consumption is described by the following behavioural
equation:
C(Y, T ) = c0 + c1 (Y − T ).
a) What happens to consumption if taxes are reduced by 1? Will it go up or
down, and by how much?

b) If you are an economic policy maker who would like to boost consump-
tion, would you rather increase disposable income of the rich households, poor households,
or everyone? Why? Explain your thoughts.

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