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TECO102 – MACROECONOMICS PRINCIPLES 1

TECO102 – Macroeconomics Principles

Student’s Name

Institution Affiliation

Date of submission
TECO102 – MACROECONOMICS PRINCIPLES 2

QUESTION 1
Use the following economic data to calculate private saving, public saving and
national saving.
a) Household saving =100, business saving=200, government purchases of goods
service=50, government transfers and interest payments=50, Tax collection=75.
Private savings=Y-T-C
Where:
Y=National income
T=tax pay
C=consumption
National income =house savings +business savings-+government goods and services -transfers
+taxes
=100+200+50-50+75
=375
Private savings =375-75-50
=250
Public savings
Savings =Y-C-G=I
375-50
=325
National savings
This is the:
Public savings -private savings
=325-250
=75

b) GDP=3000, Tax collection=600, Government transfers and interest payments=200,


Consumption expenditures=2250, Government budgets surplus=50
Private savings=Y-T-C
Where:
Y=National income
TECO102 – MACROECONOMICS PRINCIPLES 3

T=tax pay
C=consumption
3000-2250-600
=150
Public savings
Public savings= tax revenue - government spending
600—50
=550
National savings
This is the:
National savings= Private savings + public savings.
=150+550
=700

c) Consumption expenditures=2000, Investment=500, Government purchase=500,


Net exports=0, Tax collection=750, Government transfers and interest
payments=250
Private savings=Y-T-C
Where:
Y=National income
T=tax pay
C=consumption
Y=C+I+G
=2000+500+500+0
=3000
Private savings =3000-750-2000
=250
Public savings
Tax revenue - government spending
TECO102 – MACROECONOMICS PRINCIPLES 4

750-500
=250
National savings
Public savings +private savings
=250+250
=500
QUESTION 2 [4 marks]
Following table are the data for the U.S. economy (β=2) in four selected years. Using
Okun’s law, fill in the missing data in the table.

Year Actual Unemployment Natural Unemployment Potential Real GDP


Rate (%) Rate (%) GDP
1982 9.7 6.8 5584 5182
1991 6.8 5.8 6890 7159
1998 4.5 5.2 8950 8320
2002 3.4 5.2 10342 10218

QUESTION THREE 
V   = P Y / M   = Y / (M/P) 
Where:
V=money velocity
PY= is the price level and the real GDP
Price level
Price level= (Real GDP/Money supply)*Money velocity
2007 2008
Money supply 950 1000
Velocity 8.5 8.5
Real GDP 12500 12500
Price level (12,500/950)*8.5= (12500/1000)*8.5=
111.8421 106.25

Inflation rate
Changes in price level -
TECO102 – MACROECONOMICS PRINCIPLES 5

= (106.25- 111.8421)/ 106.25


=-5.2632%
Question b: What is the rate of inflation between 2007 and 2008 if the money supply in
2008 is 1050 instead of 1000?
2007 2008
Money supply 950 1050
Velocity 8.5 8.5
Real GDP 12500 12500
Price level 111.8421053 101.1905
Inflation rate -10.5263%
Changing money supply to 1050, inflation rate will be -10.52%
Question c: What is the rate of inflation between 2007 and 2008 if the money supply in 2008
is 1100 and output in 2008 is 12600?
2007 2008
Money supply 950 1100
Velocity 8.5 8.5
Real GDP 12500 12600
Price level 111.8421053 97.36364
Inflation rate -14.8705%

Inflation rate will change since the price level will change to 97.36.
QUESTION FOUR
Question 4a; Find the numerical equation relating planned aggregate expenditure (PAE) to
output (Y) and to real interest rate (r).

Solution: Planned aggregate expenditure refers to the amount of government and net exports
spending on consumer investment[ CITATION Rob16 \l 1033 ]. In most cases, at Equilibrium the
planned aggregate expenditure is usually at bar with the actual expenditure within the economic
range.

We can therefore say that the plan aggregate expenditure amount is equal to productivity
(Output)

So, PAE is equal to y

PAE= Cd+Ip+C+Nx

So PAE = Cd=14,400+0.5(Y-T)-40000r, Ip=8,000-20,000r +7,800+1800

PAE= 14400+0.5y-0.5(8000) -40000r+8000-20000r+7800+1800


TECO102 – MACROECONOMICS PRINCIPLES 6

PAE=36,000+0.5y-60,000r

Question 4b; the real interest rate is 0.133, find short-run equilibrium output

Solution: An equilibrium interest rate is usually interrelated to a certain point of demand and
money supply[ CITATION Kil15 \l 1033 ]. A short-term competitive equilibrium supply is equal to
the total amount of price that consumers demand.

At equilibrium PAE=y

That is; the planned expenditure =Actual expenditure

Therefore, 36,000+0.5y-60,000r=y

36,000+0.5y-60,000r=0.5y

When r=0.133,

0.5y=36000-60000(0.133)

=0.5y=28,020

Y=56,040

Question 4c: Potential output, y*, equals 40,000. What real interest rate should be Reserve
Bank set to bring the economy to full employment?

Solution: At a point of full employment, AD =AS, That is PAE=y

Therefore, 0.5y=36,000-60,000r

When y=40,000

0.5(40,000) =36,000-60,000r

Therefore r =-16,000 =-60,000r

=-16,000/60,000 =-60,000/60,000r

16,000/60,000 =r

r=0.2666

r =0.267
TECO102 – MACROECONOMICS PRINCIPLES 7

References

Kiley, M.T., 2015. What can the data tell us about the equilibrium real interest rate? Available at

SSRN 2665710.

Robinson, M., 2016. The coverage of aggregate expenditure ceilings. OECD Journal on

Budgeting, 15(1), pp.125-145.

Besley, T., & Jayaraman, R. (2010). Institutional Microeconomics of Development.


Cambridge, MA: MIT Press.

Dorman, P. (2014). Microeconomics: A Fresh Start. Basingstoke, England: Springer.

Hall, R., & Lieberman, M. (2009). Microeconomics: Principles and Applications. Cengage
Learning.