28 Jun CONSUMPTION IS A SMALL AND WEALTHY COUNTRY WITH AN OPEN ECONOMY.
Consumption is a small and wealthy country with an open economy.
The local currency called F. You have been informed flowing key numbers for the economy of consumption billion F:
Investments 100
Public consumption 230
Capital income 50
Working Income 550
Net export 0
1-What is the value of private consumption?
2- It takes an unexpected growth in private consumption, which makes it larger
than the value of production . What sizes in the formula for the expenditure side in gross domestic product (GDP) is most likely that will change in the short runand why?
3- Government of consumption are aware that this imbalance between production and consumption can not continue in the long run. What measures would you suggest, and why?
4 -Discuss what the government can do in order to keep unemployment
at a low level.
Question 2
Suppose the supply and demand for a commodity is given by:
P = 10 + Xs
And
P=100 ½ XD
. Where P is the price the commodity has been sold for, Xs is supplied quantity and XD is demand quantity.
1 -Determine the market equilibrium for this commodity. Illustrate in a figure.
2 -What happens to supply, price and turnover if production costs fall?
(Do not calculate exact values, but explain and illustrate in the figure.)
3 -Assume that the current good is an inferior good and that the good has multiple substitutes. What happens to the demand for this good when:
(a) The income in the society increases?
(b) Prices of substitutes (alternative goods) going up?
4 .Consider the equilibrium of a). Suppose that the government imposes a maximum price of 50 in the current market. Illustrate in figure what effects
this have. Why is illegal sales a common problem when it introduced
maximum prices?
Question 3
A product is sold in a domestic market. There is free competition in this market. The production of the product is characterized by increasing long-run marginal costs (long-run marginal costs).
1 -Explain the economic consequences of introducing a tax on this product.
2- Explain the economic impacts of international trade when the domestic price is higher than the world market price.
3 -Explain the economic impacts of an upper limit on the import /
export when the domestic price is higher than the world market price.
Question 4. We have a linear regression model:
Yt = ß0 + ß1 x1t + ß2 x2t + ?t t = 1,…….., T
where Yt is the dependent variable,
x1t and x2t are independent variables,
?t is the error term, t = 1; ……… ,T indexes observations and ß0; ß1 and ß2 are unknown parameter to be estimated.
1 -Give an interpretation of ß1 when x1 is a continuous variable.
2 -Give an interpretation of ß2 when x2 is one dummy variable, i.e x2= 0 or
x2= 1
3 -The parameters of this model can be estimated by using least squares
method (OLS ordinary least squares). Explain what is meant by “OLS is
BLUE “. (BLUE Best Linear Unbiased Estimator)?
4- Explain briefly the assumptions that OLS is BLUE.
5 -regression model in double log-form is:
ln Yt = ß0+ ß1 ln x1t + ß2 ln x2t + ?t t = 1,……., T
Give an interpretation of ß1 when x1 is a continuous variable.
Question5
1-What is the present value of $ 5 000 in seven years when the discount rate is 6%?
2-Suppose you deposit $ 5 000 in the bank. How much can you raise after 10 years when discount rate is 5% for the first four years and then rises to 7% annually?
3 -A used car costs $ 120 000. car can be sold for $ 10 000 after six years. What
is the annual cost (depreciation and interest costs) if the discount rate is 9%?
4- A securities provide a payout of $ 30 000 each year for 6 years. Suppose first
amount comes in one year. What is the sale value of the security if the discount rate is 7 %?
5- When buying stereo can choose between paying now and get 1.5% discount
or to get a deferment of payment of 3 months. Provide a discussion of what is
the most profitable option.
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