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Quiz 1 Solution [Student version]

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3 views

Quiz 1 Solution [Student version]

Uploaded by

leighphilander4
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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ECO2004S -MACROECONOMICS II (2024)

Quiz 1 (Chapters 1, 2, 3)

Section A: 5 MCQ questions (Total marks 10)


1.) Why is it important to monitor both the CPI and the GDP Deflator? E. One gives a be?er
sense of changes in the cost of living.

2.) Why is it necessary to have a base year when compuFng the GDP deflator? C. To have a
reference point, since it’s an index number.

3.) How can you tell what the base year is when looking at both real GDP and nominal GDP?
C. When nominal GDP equals real GDP.

4.) What sparked the 2008 global financial crisis? B. Risky loans and Fed financial
instruments in the US housing market.

5.) What channels led to the US housing crisis becoming a global financial one? E. Trade and
financial markets.

Section B: 1 written-type questions (Total marks 10)


1.) Consider a closed economy, represented by the demand equaFon (Z) below, the linear
consumpFon funcFon (C), and the exogenously determined levels of investment (I),
government spending (G), and taxes (T). Obtain the funcFonal form for the equilibrium level
of output. What is the linear equaFon for demand for this? Assume 𝑌! = 𝑌 − 𝑇
𝑍 ≡ 𝐶 + 𝐼 + 𝐺
𝐶 = 𝑐" + 𝑐# 𝑌!

Equilibrium Level of Output (Y):


SubsFtute disposable income into the consumpFon funcFon:
𝐶 = 𝑐" + 𝑐# (𝑌 − 𝑇) (1 mark)

SubsFtute the consumpFon funcFon into the total demand equaFon:


Z = 𝑐" + c# (𝑌 − 𝑇) + 𝐼 + 𝐺 (1 mark)

In equilibrium, total demand (Z) equals total output (Y): Z=Y (1 mark)
𝑌 = 𝑐" + 𝑐# (𝑌 − 𝑇) + 𝐼 + 𝐺
𝑌 = 𝑐" + 𝑐# 𝑌 − 𝑐# 𝑇 + 𝐼 + 𝐺 (2)
(1 − 𝑐# )𝑌 = 𝑐" + 𝐼 + 𝐺 − 𝑐# 𝑇 (1 marks)
Dividing both sides by the (1 − c1):
#
𝑌 = 1 $ & [𝑐" + 𝐼 + 𝐺 − 𝑐# T] (3) (2 marks)
!

Students should idenFfy which porFon of the equaFon (3) is autonomous spending.
(1 mark)

Linear Equa:on for Total Demand (Z):


Take the expanded version of equaFon (2), and replace Y with Z, and turn it into a
linear relaFon:
𝑌 = 𝑐" + 𝑐# 𝑌 − 𝑐# 𝑇 + 𝐼 + 𝐺 (1 mark)
𝑍 = 3𝑐" − 𝑐# 𝑇 + 𝐼 + 𝐺4 + 𝑐# 𝑌 (2 marks)

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