This document contains answers to questions related to Okun's law, planned aggregate expenditure, equilibrium price and quantity, and savings. It also includes references to the sources used.
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Running head: MACROECONOMICS Macroeconomics Name of the Student: Name of the University: Author’s Note: Course ID:
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1MACROECONOMICS Table of Contents Answer to Question 1:.....................................................................................................................2 Answer to Question 2:.....................................................................................................................3 Requirement a:.............................................................................................................................3 Requirement b:.............................................................................................................................4 Requirement c:.............................................................................................................................4 Answer to Question 3:.....................................................................................................................4 Requirement a:.............................................................................................................................4 Requirement b:.............................................................................................................................5 Requirement c:.............................................................................................................................5 Answer to Question 4:.....................................................................................................................6 Requirement a:.............................................................................................................................6 Requirement b:.............................................................................................................................6 References:......................................................................................................................................7
2MACROECONOMICS Answer to Question 1: According to Okun’s law, 100 x [(Actual GDP – Potential GDP)/ Potential GDP] = -B (Actual unemployment rate – Potential unemployment rate) For 2001, 100 x [(7,872 – 8,000)/8,000] = -1.6 (a – 5) 100 x (-0.016) = -1.6 (a – 5) 100 x 0.01 = a – 5 a = 5 + 1 a = 6 For 2002, (8,100 – 8,100)/8,100 = -1.6 (5 – b) 0 = -1.6 (5 – b) b = 5 For 2003, [(8,266 – c)/c] x 100 = -1.6 (4 – 4.5) [(8,266 – c)/c] x 100 = 0.8 [(8,266 – c)/c] = 0.008 c = 8,200.40 For 2004,
3MACROECONOMICS 100 x [(d – 8,250)/8,250] = 1.6 d – 8,250 = 0.016 x 8,250 d = 132 + 8,250 d = 8,382 Based on the above-computed values, the following table could be completed: YearActual Unemployment Rate (%) Natural Unemployment Rate (%) Potential GDP Real GDP 2001658,0007,872 2002558,1008,100 200344.58,200.408,266 2004458,2508,382 Answer to Question 2: Requirement a: Planned aggregate expenditure is the total of expenses on net exports and consumption investment government (Heijdra 2017). At the point of equilibrium, no difference could be observedbetweenplannedaggregateexpenditureandactualexpenditureinherentinthe economy. Therefore, it could be stated that the planned aggregate expenditure is equal to the output. This could be denoted by PAE = Y. PAE = Cd+ IP+ G + NX PAE = 14,400 + 0.5 (Y – T) – 40,000r + 8,000 – 20,000r + 7,800 + 1,800 The above equation holds true when PAE = Y PAE = 14,400 + 0.5Y – (0.5 x 8,000) – 40,000r + 8,000 -20,000r + 7,800 + 1,800 PAE = 36,000 + 0.5Y – 60,000r
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4MACROECONOMICS Requirement b: It has already been assessed that at equilibrium, PAE = Y 36,000 + 0.5Y – 60,000r = Y Putting the value of r = 0.133 in the above equation, 0.5Y = 36,000 – (60,000 x 0.133) 0.5Y = 28,020 Y = 56,040 Requirement c: When there is full employment, aggregate demand is equivalent to aggregate supply, which implies PAE = Y (Mankiw 2014). Putting the value of Y = 40,000 (0.5 x 40,000) = 36,000 – 60,000r r = 16,000/6000 = 0.267 Answer to Question 3: Requirement a: According to the provided information, D = 12,000 – 200P $ = 7,000 + 50P At equilibrium, demand is equivalent to supply and therefore, 12,000 – 200P = 7,000 + 50P
5MACROECONOMICS 250P = 5,000 P = 20 Putting the value of P = 20 in the demand equation, D = 12,000 – (200 x 20) = 8,000 Hence, the equilibrium quantity demanded and supplied is 8,000 cars and the equilibrium price is $20. Requirement b: As the economy welcomes trade, the global price is obtained as $18. For calculating domestic demand and supply, the price is placed in the demand and supply equations, which are illustrated as follows: D = 12,000 – (200 x 18) = 8,400 S = 7,000 + (500 x 18) = 7,900 At the provided price of $18, the demand is 8,400 units, while the supply is 7,900 units and thus, demand is more than supply by 500 units. Hence, the cars that would be imported are 500. Moreover, the purchasers favour the open economy in opposition to the sellers with the fall in price to 18 units at the time the nation is open to trade. Requirement c: A tariff of one unit per car is imposed by the government. In that case, the import price would be obtained by adding the global price and tariff. Thus, the import price stands at $19 ($18 + $1). At this price level, Domestic demand (D) = 12,000 – (200 x 19) = 8,200 Domestic supply (S) = 7,000 + (50 x 19) = 7,950
6MACROECONOMICS Thus, after the imposition of tariff, demand is 8,200 cars and supply is 7,950 cars. Hence, only 250 cars could be imported and this implies the decline in imports after tariff imposition. As there would be increase in price after tariff imposition, the purchasers would oppose it, while the policy would be supported by the sellers. Answer to Question 4: Requirement a: i. Private saving = Household saving + Business saving Private saving = 20 + 40 = 60 ii. Public saving = T – G – TR Public saving = 15 – 10 = 5 iii. National saving = Private saving + Public saving National saving = 60 + 5 = 65 Requirement b: i. Private saving = (Y – T + TR – C) Private saving = 600 – 120 + 40 – 450 Private saving = 70 ii. Public saving = (T – G – TR) = Budget surplus = 10 iii. National saving = Private saving + Public saving National saving = 70 + 10 = 80
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7MACROECONOMICS References: Heijdra, B.J., 2017.Foundations of modern macroeconomics. Oxford university press. Mankiw, N.G., 2014.Principles of macroeconomics. Cengage Learning.