Macroeconomics Assignment on Unemployment, Aggregate Expenditure, Equilibrium Price and National Savings

This assignment covers topics like Okun's Law, Planned Aggregate Expenditure, Equilibrium Price, and National Savings. It includes calculations and equations related to macroeconomics.

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ECO202
INDIVIDUAL ASSIGNMENT

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Table of contents
Q1...............................................................................................................................................3
Q2...............................................................................................................................................3
Q3...............................................................................................................................................4
Q4...............................................................................................................................................5
Reference....................................................................................................................................7

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Q1
Year Actual Unemployment
Rate (%)
Natural Unemployment
Rate (%)
Potential
GDP
Real GDP
2001 5.8 5 8000 7872
2002 5 5 8100 8100
2003 4 4.5 8184 8266
2004 4 5 8250 8415
According to the okuns law for 1% increase in the actual rate of unemployment, the real GDP
of the economy will rise by 2% above the protential GDP of the economy (Agénor and
Montiel, 2015).
Q2
a)
The equation of the planned aggregate expenditure is
PAE= C+I+G+(X-M) (Heijdra, 2017)
=> 14400+0.5(Y-T)-40000r+ 8000-20000r+7800+1800
Putting the value of T in the equation,
PAE= 157600+0.5Y-60000r
b)
The short run aggregate output of the economy is,
Y= 157600+0.5Y-60000r
Now given that the real interest rate of the economy is 0.133
0.5Y= 28000-60000r (Taylor, 2016)
0.5Y= 20020
Y= 149620/ 0.5= 40040
c) Now the potential output is 40000

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Now in order to bring the economy to full employment, the interest rate should be,
40000(0.5)= 28000-60000r
=> 20000= 28000-60000r
=> r= 8000/60000= 0.133
Therefore the government needs to maintain the same interest rate in order keep the economy
closer to full employment rate.
Q3
a)
According to the information provided, Demand for the car is D=12 000-200P
And the supply for the car is, S=7000+50P
Now as the economy is closed the equilibrium price and the production is where the demand
and the supply is equal (Stock and Watson, 2016),
12000-200P= 7000+50P
=> 5000=250P
=> P= 5000/250
P= 20
Now putting the value of P in the equation of demand (Johnson, 2017)
12000-200*20
12000-4000
= 8000
Therefore the equilibrium price and the quantity of the car market is 20 and 8000
respectively.
b)
Now the economy opens up and the world price is Pw= 18

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At that price the demand for the car is
12000-200*18= 8400
At that price the domestic market will supply
7000+50*18= 7900
The rest of the cars, that is (8400-7900) =500 will be imported from the world market.
Clearly, the domestic firms will oppose the opening up of the market due to the fact that,
reduced world market will reduce the revenue of the domestic sellers.
(8000*20)> (7900*18)
c)
Now if 1 unit tariff is charged on the import,
The effective price for the cars will be 19 units
At that price the domestic suppliers will provide
7000+50*19= 7950 cars
Therefore the import will be (8400-7950) =450
Thus the import will be reduced by = 50 units.
The import on the tariff will favour the sellers of the market and customers will oppose it.
Q4
a) Private saving has the equation of
Household savings+ Business savings (Waemustafa and Sukri, 2015)
20+40= 60
The public saving is
Tax- transfer (Uribe and Schmitt-Grohé, 2017)
15-10=5

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The national savings = public savings+ private savings
60+5=65
b)
Government budget surplus = tax-G-TR (Kuhn and Rios-Rull, 2016)
10= 120-G-40
G=70
Thus the government spending is 70
Now in this case, the private saving is
Y-T+TR-C
600-120+40-450= 70
The public saving is
Tax- G-TR
120-70-40= 10
Thus the national savings is
(public saving+ private saving) (Goodwin et al. 2015)
= 70+10= 80

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Reference
Agénor, P.R. and Montiel, P.J., 2015. Development macroeconomics. Princeton University
Press.
Goodwin, N., Harris, J.M., Nelson, J.A., Roach, B. and Torras, M., 2015. Macroeconomics in
context. Routledge.
Heijdra, B.J., 2017. Foundations of modern macroeconomics. Oxford university press.
Johnson, H.G., 2017. Macroeconomics and monetary theory. Routledge.
Kuhn, M. and Rios-Rull, J.V., 2016. 2013 Update on the US Earnings, Income, and Wealth
Distributional Facts: A View from Macroeconomics. Quarterly Review, Federal Reserve
Bank of Minneapolis, April, pp.1-75.
Stock, J.H. and Watson, M.W., 2016. Dynamic factor models, factor-augmented vector
autoregressions, and structural vector autoregressions in macroeconomics. In Handbook of
macroeconomics (Vol. 2, pp. 415-525). Elsevier.
Taylor, J.B., 2016. The staying power of staggered wage and price setting models in
macroeconomics. In Handbook of Macroeconomics (Vol. 2, pp. 2009-2042). Elsevier.
Uribe, M. and Schmitt-Grohé, S., 2017. Open economy macroeconomics. Princeton
University Press.
Waemustafa, W. and Sukri, S., 2015. Bank specific and macroeconomics dynamic
determinants of credit risk in Islamic banks and conventional banks. International Journal of
Economics and Financial Issues, 5(2).