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? Calculateequilibrium 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? Calculateequilibrium output for this economy. Show how you obtained your figure.(2 marks)
(c) Suppose the government introduces an expansionary fiscal policy by increasing governmentpurchases 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 lessthan 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? Calculateequilibrium 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. Calculatethe 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 ofoutput less than what was calculated?(1 marks)
Consider the following model for supply and demand of workers (100,000’s) in the aggregate labourmarket, 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 youranswer on a diagram.
(2 marks)
(b) Suppose that the labour force increases by 100,000 (potential) workers and that the real wageremains fixed to its level in part (a). Calculate the levels of employment, unemployment and thelabour 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 aggregatelabour 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 youranswer 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 realwage after the imposition of this tax and illustrate your answer on a diagram. Explain who pays thetax.(3 marks)
The country of New West Dubbo is experiencing lower energy costs due to new technology inextracting energy sources such as gas and oil. Use the supply and demand model (and a diagram) ofthe labour market to explain the effect on labour demand and supply and the levels of employmentand 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 salariesuntil they retire. Use the supply and demand model (and a diagram) for saving and investment toexplain the likely effects of this scheme on national saving, investment and the real interest rate inNew Holland. Explain the effects on employment of the saving scheme. (You can assume that NewHolland is a closed economy).(5 marks)
The government of Old Flanders is planning to borrow heavily to finance spending on scientificresearch and development, education and defence. Use the supply and demand model (and adiagram) 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 effectsof the scheme on employment.(5 marks)
The country of New Holland is experiencing lower energy costs due to new technology in extractingenergy sources such as gas and oil. Use the supply and demand model (and a diagram) for savingand investment to explain the likely effect on national saving, investment and the real interest ratein New Holland when its economy is closed. Explain the effects of the new technology onemployment.(5 marks)
Explain the three different approaches that can be used to calculate GDP. Briefly indicate why allthree 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.
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
$Bill
(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 figurefor National Saving.(1 mark)
(c) Use the above data to calculate Private Saving in 2010. Explain how you arrive at your figurefor 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 capitalequipment. What condition would need to be satisfied for the firm to be willing to invest in the newcapital?(5 marks)
Explain why the labour demand curve for an individual firm is downward sloping and indicate themain factors that cause the curve to shift. Will the same factors that cause a shift in an individualfirm’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)
