Macroeconomics Assignment: Okun's Law and Equilibrium Price

This assignment covers topics such as Okun's Law, equilibrium price, and national savings. It includes calculations and explanations for finding actual unemployment rate, natural unemployment rate, potential GDP, and more.

Running head: MACROECONOMICS 1
ECON 202 ASSIGNMENT
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Econ 202 Assignment
1. Following table are the data for the Australian economy (β=1.6) in four
selected years. Using Okun’s law, fill in the missing data in the table.
Year Actual Unemployment
Rate (%)
Natural Unemployment
Rate (%)
Potential
GDP
Real GDP
2001 (a) 5 8000 7872
2002 5 (b) 8100 8100
2003 4 4.5 (c) 8266
2004 4 5 8250 (d)
Okun’s law refers to an inverse relationship that exist between unemployment and gross
domestic product (GDP) (Ball, 2017). As unemployment increases by 1% above the natural
level, the gross domestic product decreases by 2-4% from its potential GDP (Coibion, 2017).
a. Find Actual Unemployment Rate using Okun’s Law Formula in 2001:
Real GDP−Potential GDP
PotentialGDP X 100%= -2(Actual unemployment Rate-Natural Unemployment
Rate)
7872−8000
8000 X 100 %=−2 (a−5)
−128
80 =−2 a+10
-1.6 – 10 = -2a
−11.6
−2 =a
a = 5.8%
According to Okun’s Law, the output gap in this case is 1.6%. The potential GDP is 1.6%
above Real GDP, the Cyclical unemployment is -0.8% and since Natural Unemployment is 5%
then the Actual unemployment 5.8%.

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b. Find Natural Unemployment Rate using Okun’s Law Formula 2002:
Real GDP−Potential GDP
PotentialGDP X 100%= -2(Actual unemployment Rate-Natural Unemployment
Rate)
8100−8100
8100 X 100 %=−2(5−b)
0 = - 10 + 2b
10 = 2b
10
2 =b
b = 5%
According to Okun’s Law the output gap is equal to zero. The potential GDP equals the Real
GDP Level of $8100. The cyclical unemployment equals to zero, hence the Natural
unemployment equals to Actual unemployment of 5%.
c. Find Potential GDP using Okun’s Law Formula 2003:
Real GDP−Potential GDP
PotentialGDP X 100%= -2(Actual unemployment Rate-Natural Unemployment
Rate)
8266−C
C X 100 %=−2( 4−4.5)
(8266- c)100 = -2(-0.5)
826600 – 100c = c
826600 = 101c
826600
101 =C
c = 8184.15
According to Okun’s Law the Cyclical unemployment is 4 - 4.5%= -0.5%. The output gap is
1%, Real GDP is 1% above the Potential GDP. Therefore, the Potential GDP 100/101% X 8266
= 8184.15

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d. Find Real GDP using Okun’s Law Formula 2004:
Real GDP−Potential GDP
PotentialGDP X 100%= -2(Actual unemployment Rate-Natural Unemployment
Rate)
d−8250
8250 X 100 %=−2(4−5)
(d - 8250)100 = -2(1)8250
100d – 825000 = - 16500
100d = 825000 – 16500
d= 808500
100
d = 8085
According to Okun’s Law the Cyclical unemployment is 4 - 5%= - 1%. The output gap is
2%, Potential GDP is 2% above the Real GDP. Therefore, the Real GDP 100/102% X 8250 =
8085
In Conclusion, most economies suffer inefficiencies such as inflation, unemployment and
government laws and hence they cannot realize full employment and utilize maximum resources
and operate at potential gross domestic product, these therefore brings the existence of an output
gap which is the difference between Real GDP and Potential GDP (Arthur, 2018).
2. An economy is described by the following equation
Cd=14400+0.5(Y-T)-40000r, Ip=8000-20000r,
G=7800, NX=1800, T=8000
a. Find the numerical equation relating planned aggregate expenditure (PAE) to
output (Y) and to real interest rate (r).
Planned Aggregate Expenditure = C + I + G + NX (Arthur, 2018).
Where: C is Consumption Demand
I is the Government Planned Investments
G is the Government Expenditure
NX is the Net Exports. They are deducted from the Aggregate Expenditures.
T is Taxes
r is Interest Rates

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Y is the Output (Real GDP)
Given Cd= 14400+0.5(Y-T)-40000r,
Ip = 8000-20000r,
G = 7800
T= 8000
NX= -1800
P A E= Cd + I p+ G+ NX
PAE = (14400 + 0.5(Y-8000)-40000r) + (8000-20000r) +7800 – 1800
= 24,400 - 60000r +0.5Y
b. The real interest rate is 0.133, find short-run equilibrium output.
=24,400 - 60,000(0.133) + 0.5Y
=16,420 + 0.5Y
-16420= 0.5Y
Y = (32,840)
c. Potential output, y*, equals 40,000. What real interest rate should be Reserve
Bank set to bring the economy to full employment?
PAE =Y* Equate and find the real interest rate.
40000 = 24400 - 60000r + 0.5(40000)
40000 = 44400 - 60000r
40000-44400= -60000r
-4400=-60000r
-4400/-60000=r
0.073 x 100
r =7.33%
According to Vines and Wills (2018) in order to bring the economy to equilibrium at full
employment potential, the Reserve Bank must set the real interest rate. This particular case it
must be set at 7.33% .
3. The demand for car in a country is given by D=12 000-200P, where P is the price of
a car. Supply domestic car production is S=7000+50P.
a. Assuming economy is closed; find the equilibrium price and production of cars.

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In a Closed economy at Equilibrium Condition, DEMAND = SUPPLY
12000-200P=7000+50P
12000-7000=50P+200P
5000=250P
P=5000/250
Price= 20
Production of Cars = 7000 + 50(20)
= 7000+ 1000
= 8,000
b. The economy opens to trade. The world price of cars is 18 units. Find the
domestic quantities demanded and supplied, and the quantity of imports or
exports. Who will favor the opening of the car market to trade, and who will
oppose it?
When the World Price of Cars is 18 Units, the Domestic Quantities Demanded
becomes
12000-200(18)
12000- 3600
8400
When the world price of Cars is 18 Units, the Domestic Quantities Supplied becomes
7000 + 50(18)
7000 + 900
7900
Total quantities imported will be 8400-7900
= 500
The domestic Consumers will be in favor of the opening of the car market to trade
because at this price they will be willing to import more quantities cars as compared to
high cost of production and prices of cars locally. On the other hand, the Domestic
producers will be against the opening of the car market to trade because at this price it
would lead to reduction in production and consequently lead to reduced profits.
c. The government imposes a tariff of one unit per car. Find the effects on domestic

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quantitative demanded and supplied, and on the quantity of import or export. Who
will favor the imposition of the tariff and who will oppose it?
Government tariff imposition has an effect on the price and it increases the price of car
from 18 to 19 units.
Domestic Quantities Demanded = 12000-200(19)
12000-3800
8200
Domestic Quantities Supplied = 7000 + 50(19)
7000 + 950
7950
Total Quantities Imported = 8200- 7950
=250
The Domestic Producers will favor the imposition of a tariff duty this is because it
reduces the number of quantities imported hence encourages the domestic production thereby
leading to increase in sales volume and profit margins. On the contrary, the domestic consumers
will be against tariff imposition because this would interfere with their importation power and
other logistics hence they would prefer buying locally produced and available cars (Slopek,
2018).
4. Use the following economic data to calculate private saving, public saving
and national saving.
a. Household saving =20, business saving=40, government purchases of goods
service=10, government transfers and interest payments=10, Tax collection=15,
GDP=220.
Private Savings = House hold savings + Business Savings (Suri, 2018).
= 20 + 40
= 60
Public Savings = Tax Collections – Government transfers and interest Payments
(Morimoto, 2017).
=15 -10
= 5

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National Savings = Private Savings + Public Savings
= 60 + 5
= 65
b. GDP=600, Tax collection=120, Government transfers and interest payments=40,
Consumption expenditures=450, Government budgets surplus=10
GDP=Consumption Expenditures + Tax collections + Private Savings – Transfer payments
(Government Transfer and Interest Payments)
Y = C + T + Sp + TR
Private savings = Y – C –T + TR
= 600-120-450+40
= 30 + 40
= 70
Public Savings = Tax collection – (Private Savings – Transfer Payments) also called Government
Spending.
=120-70-40
=10
Public Savings is also equal to Government Budget Surplus which is 10
National Savings = Private Savings + Public Savings (Abasimi, 2018).
= 70 + 10
= 80

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References
Abasimi, I. &. (2018). Determinants of National Saving in Four West African Countries.
International Journal of Economics and Finance, 67-73.
Arthur, W. B. (2018). Self-reinforcing mechanisms in economics. In The economy as an evolving
complex system. CRC Press.
Ball, L. L. (2017). Okun's Law: Fit at 50. Journal of Money, Credit and Banking, 1413-1441.
Coibion, O. G. (2017). The cyclical sensitivity in estimates of potential output (No. w23580).
National Bureau of Economic Research.
Morimoto, K. H. (2017). Debt policy rules in an open economy. Journal of Public Economic
Theory, 158-177.
Slopek, U. D. (2018). Export Pricing and the Macroeconomic Effects of US Import Tariffs.
National Institute Economic Review, R39-R45.
Suri, A. &. (2018). Analysis of Trends in Gross Domestic and Household Savings and its
Components in India. Studies in Business and Economics, 181-193.
Vines, D. &. (2018). The financial system and the natural real interest rate: towards a ‘new
benchmark theory model. Oxford Review of Economic Policy, 252-268.

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