Macroeconomics Worksheet: University Name, Semester Details

This document provides a comprehensive solution to a Macroeconomics worksheet. The worksheet covers a range of topics including calculating GDP using the value-added method, analyzing the impact of value-added and sales taxes, and determining labor force participation and unemployment rates. It also delves into the Solow growth model, examining the relationship between capital, labor, and output. The assignment explores the effects of changes in wages and productivity on the Short-Run Aggregate Supply (SAS) curve and the Long-Run Aggregate Supply (LRAS) curve. Furthermore, it analyzes the impact of expansionary fiscal policy. The document also addresses monetary concepts, such as the classification of money, the money multiplier effect, and the balance of payments. Finally, it examines the effects of expansionary monetary policy on exchange rates. The solutions provide detailed explanations and calculations to help students understand the underlying economic principles.

Worksheet for Macroeconomics
Name of the Student:
Name of the University:
Authors Note:

Table of Contents
Question 1..................................................................................................................................3
Question 2a.................................................................................................................................3
Question 2b................................................................................................................................3
Question 2c.................................................................................................................................4
Question 3a.................................................................................................................................4
Question 3b................................................................................................................................4
Question 3c.................................................................................................................................4
Question 4a.................................................................................................................................4
Question 4b................................................................................................................................5
Question 4c.................................................................................................................................5
Question 5..................................................................................................................................6
Question 6..................................................................................................................................6
Question 7a.................................................................................................................................7
Question 7b................................................................................................................................7
Question 8..................................................................................................................................7
Question 9..................................................................................................................................8
Question 10................................................................................................................................8
Question 11................................................................................................................................9
Question 12................................................................................................................................9

Question 1
Income tax is a progressive tax, whereas VAT is a flat tax. The government should levy VAT
as 15% same as income tax to generate the same amount of revenue.
Question 2a
To calculate GDP = Value added by the 3 firms
Firm A  (from Firm B and C) = 250 + 200 =$450
Production by Firm A= 200 x $5 per unit = $1000
Value added from A
 $1,000 - $450 = $550
Firm B  (from Firm A and C) = 100 + 150 =$250
Production by Firm B= 300 x $7 per unit = $2100
Value added from B
 $2100 - $250 = $1850
Firm C  (from Firm A and B) = $50
Production by Firm C= $1000
Value added from C
 $1000 - $50 = $950
GDP = Value added from A + Value added from B + Value added from C
GDP = 550 + 1850 + 950 = $3350
Question 2b
Valued added tax of 10% on each firm
VAT from A = $55
VAT from B = $185
VAT from C = $95
Total Revenue by government = $55 + $185 + $95 = 335 (10% of total value added)

Question 2c
Sales tax = 10% on output
Total output = $3350
Sales tax on output = $3350*10% = $335
 total revenue by government after introduction of sales tax = $335
Question 3a
Labor Force Participation Rate = Labour force / Working Population
155 million/ 244 million = 0.635
Labor Force Participation rate = (0.635*100) = 63.5%
Question 3b
Unemployment Rate = Number of unemployed persons/ Total Labour Force
13 million/ 155 million = 0.0838
Unemployment rate = (0.0838*100) = 8.38%
Question 3c
Employment Population Ratio = Labour force employed/ Total population
(155-13) million/ (155+ 244) million = 142/399 = 0.355
Question 4a
In Solow growth model,
Production function is given by Y =A F (K, L) at constant returns to scale

Y’ = f1 (K)
Y = f0 (K)
K/ L is the capital -labor ratio and y = Y/L is the production function or expressed in terms of
output per worker; y = f(k).
The diagram shows an in increase in L which affects Y when A and K remain constant. As
the curve goes through origin, Y and L is zero. The positive slope depicts Marginal
Productivity of Labour (MPL).
Question 4b
The slope of production function gets flatter for given A and K because as L rises, MPL
declines. This is due to the diminishing MPL.
Question 4c
Technological progress increases the productivity of labour and shifts the production function
above proportionally, which raises capital as well as per capita output in the steady state.
Y’ = f1 (K) is the shift in the production function proportionally.

Question 5
a) SAS will shift up because rise in wages is 4% more than productivity 3%
b) SAS will shift down because rise in wages is 1% less than productivity 3%
c) SAS will shift up because rise in wages is 1% more but productivity declines by 1%
d) There will be no change in SAS curve as the wage increase is the same as productivity
increase by 2%.
Question 6
Long Run Aggregate supply is vertical because at the level of output, the labour and physical
capital are producing at full capacity. The level where long run aggregate supply is the time
when all the resources employed are producing maximum and the economy is in no position
to produce more goods and services at the given real GDP (growth). Hence, the output is
independent of price level.

AD1
AD
Real GDP/ output
Price,
AD,
AS SRAS
LRAS
Y Y1
P
P1
Question 7a
AD will shift to AD1 at full employment level; P will increase to P1 and output will increase
from Y to Y1.
Question 7b
Expansionary fiscal policy would be suggested so that Aggregate Demand could increase,
leading to increased output at higher price level and lower unemployment. It can be done
through government spending or government transfers in the economy.
Question 8
a) Considered as money – Wealth held in a bank account
b) Not considered as money – This is a foreign currency and not be accessed for buying
goods and services in United States.
c) Not considered as money – It is a financial liability for card holders, and it is reflected as
form of loan.

d) Not considered as money – Individuals keep reserves and not banks. Currency kept by
bank is not accounted as money.
e) Considered as money – Currency with individuals to be exchanged for goods and services.
Specifically, for transaction purpose.
f) Not considered as money – Gold is not liquid and is not exchanged for transaction purpose.
g) Not considered as money – Accepted by coupons for specific goods and in only specific
stores and cannot be used for buying any goods or services.
Question 9
a) Money will keep $5 and lend out (100 – 5) = $95
b) Money in the economy = $100 (money with bank) + $95 (lend out money) = $195
c) Money multiplier = 100/5 = 20
d) Money creation = Initial dollar bill * money multiplier = 100 * 20 = $2000
Question 10
a) IBM’s exports of computers to Japan – Current A/C (Credit)
b) IBM’s hiring of a British merchant bank as a consultant – Current A/C (Debit)
c) A foreign national living in the Unites States repatriate’s money - Current A/C (Debit)
d) Ford Motor Company’s profit in Hungary - Current A/C (Credit)
e) Ford Motor Company uses that Hungarian profit to build a new plant in Hungary – Capital
and Financial A/C

L (r, Y)
Real Money
Interest
Rate Ms/ Ps’
Ms/ Ps
m m1
r1
r E
E1
Question 11
a) A US tourist in Latin America – Supplier of US currency exchange with Latin America
currency
b) A German foreign exchange trader who believes that the dollar exchange rate
will fall – Supplier of currency of Germany making financial investments
c) A US foreign exchange trader who believed that the dollar exchange rate will fall –
Supplier of US currency.
d) A Costa Rican tourist in the United States – Demander of US currency
Question 12
Expansionary Monetary Policy on exchange rate
The exchange rate decreases from r to r1, when there is increase in real money from m to m1.