Macroeconomics Answers

1. Name and to discuss which two types of inflation my commonly referred to in macroeconomics according to the Keynesian approach(2)
2. List two(2) demand side and four(4)) supply-side initiating factors which may be the immediate causes of possible increase in the inflation rate
3. What are the most well-known causes of imbalances in the balance of payments be BoP of a country(9)
4. The monetarists emphasise the inherent stability of the country in the long run. they also further acknowledge that monetary and fiscal policy could have an impact on the short-run. in the long run no large scale government involvement is necessary since the economy is self-stabilizing explain the statement which is based on six classical roots and indicate which of them apply to the monetarist approach

Changes in GDP are reflected in the business cycle, as well as the rate of inflation and the overall balance of payments situation. True or false

a) Suppose that the central bank acts to increase the money supply.

i. In the aggregate demand/aggregate supply diagram, will this monetary policy action work

initially to shift the aggregate demand curve, the short-‐run aggregate supply curve, or the long-‐

run aggregate supply curve? (Note: focusing for now on just the short-‐run effects of the change

in policy, only one of these curves will shift.)

ii. In which direction will the curve you mentioned above shift: to the left or to the right?

iii. When the curve you mentioned above shifts, what will the short-‐run effect on the

economywide level of prices be: with it rise, fall, or stay the same?

iv. When the curve you mentioned above shifts, what will the short-‐run effect on real GDP be:

will it rise, fall, or stay the same?

v. When the curve you mentioned above shifts, what will the short-‐run effect on unemployment

be: will it rise, fall, or stay the same?

2.1 Consider a closed economy that is described by the following model:

C = 280m + 0.72Y

Where:

C = Consumption Y = Income

I = 150m I = Investment

G = 300m G = Government spending

T = 22% t = Tax rate.

2.1.1 Calculate the multiplier. (3)

2.1.2 Calculate the total autonomous spending. (2)

U.S. economic growth had slowed to a crawl, and then to a halt. Companies that had stocked up on recent college grads in the tighter labour markets of 1998-2000 found themselves with more than they knew what to do with in 2002 and 2003. They were not eager to hire more. Bonuses and other “perks” disappeared; job offers became scarcer. With the unemployment rate around 6% in May and June of 2003, the job market was far from the worst ever. But it was nothing like the glory days of 2000.

(iv) Briefly explain and justify what prevailing situation was taking place in the year 2003.

(v) Identify and explain two (2) fiscal policies and two (2) monetary policies that the government may have used to correct this situation.

is the economy experiencing a recessionary out gap of inflationary output gap?

QUESTION TWO

a) Suppose that the central bank acts to increase the money supply.

i. In the aggregate demand/aggregate supply diagram, will this monetary policy action work

initially to shift the aggregate demand curve, the short-‐run aggregate supply curve, or the long-‐

run aggregate supply curve? (Note: focusing for now on just the short-‐run effects of the change

in policy, only one of these curves will shift.)

ii. In which direction will the curve you mentioned above shift: to the left or to the right?

iii. When the curve you mentioned above shifts, what will the short-‐run effect on the

economywide level of prices be: with it rise, fall, or stay the same?

iv. When the curve you mentioned above shifts, what will the short-‐run effect on real GDP be:

will it rise, fall, or stay the same?

v. When the curve you mentioned above shifts, what will the short-‐run effect on unemployment

be: will it rise, fall, or stay the same?

QUESTION ONE (30 Marks)

Consider a closed economy that is characterized by the following equations:

Y = C + I + G

C = 900 + 0.5(Y − T)

I = 750 − 30r

T = 800

G = 1200

Md = Ms

Ms = 1500

Mt = 0.7Y

Msp = −80r

Where Y is the GDP, C is private consumption expenditure, I is the Investment expenditure, G

is government expenditure, T is tax revenues, Ms

is money supply, Mt

is transaction demand

for money, Msp is the speculative demand for money and r is the interest rate (in % points).

a) Derive (Md⁄P) the demand for real money balances equation (where P is the aggregate price level

The recent global development of Russia invading Ukraine has led to USA and European countries imposing sanctions on Russia. Given that Russia is a major player in OPEC, discuss the implication of this in South African economy.

Investigate the current economic statistics of each indicator used to measure each macroeconomic objective