Topi

ctwo
1.Wr
it
enot
eont
hef
oll
owi
ng
(
a)Wager
igi
dit
y
(
b)TheI
Scur
veVSt
heLM cur
ve
(
c)Theor
yofLi
qui
dit
yPr
efer
ence
(
d)Adapt
iveexpect
ati
onsandi
nfl
ati
oni
ner
ti
a
(
e)I
nter
tempor
albudgetconst
rai
nti
nIr
vingFi
sherconsumpt
iont
heor
y
2.“
Therearenopubl
icpol
icyt
oreducef
ri
cti
onalunempl
oyment
”.Doyouagr
ee?
Di
scuss.
3.Aneconomyhast
hef
oll
owi
ngspeci
fi
cat
ions:
C=200+0.
75Yd
I=200–25r
G=200
T=200
Md=0.
5Y–100r
Ms=900
P=2
(
a)Deri
vetheISandLM equat
ionsandcomput
etheequi
li
bri
um l
evelofi
ncome
andint
erestr
ate.
(
b)Gr
apht
heI
SandLM cur
vesf
orrr
angi
ngf
rom 0t
o8.
(
c)Supposethegover nmentexpenditur
er i
sesfr
om $200bnto$250bnand
nominalmoneysuppl yisrai
sedfrom $900bnt
o$1100bn.Whatisthesi
ze
oftheshi
fti
ntheI SandLM cur ves?Whataret
henewequil
ibr
ium l
evel
sof
i
ncomeandi nt
erestrate?
(
d)Wit
htheinit
ialval
uesf
ormonet
aryandf
iscalpol
icy,der
iveanequat
ionf
or
t
heaggregatedemandcur
ve.
(
e)Whathappenstotheaggr
egat
edemandcur
vei
n(e)i
ffi
scalandmonet
ary
pol
icychangesasi
n(c)
.
4.Supposetheempl
oymentst
atusofahypot
het
icalcount
ryf
or2008wasgi
venas
fol
lows:

CATEGORY Number(
Mil
li
ons)
Employedworker
s 133.
4
Unemployedworker
s 5.
9
 Adul
tpopul
ati
on 208
Cal
cul
atet
hef
oll
owi
ng:
5.SupposethattheTanzani
agovernmentrai
sestaxesbyTshs.100bil
li
on.I
fthe
marginalpr
opensi
tytoconsumeis0.
6,whathappenst
othefol
lowi
ng?

(
a)Publ
icsavi
ng

(
b)Pr
ivat
esavi
ng

(
c)Nat
ionali
ncome

(
d)I
nvest
ment

6.Thefoll
owingarelabourstat
ist
icsf
orahypot
het
icalcount
rygi
venf
ort
heyear
2009.Thefi
guresar
eallin000s.

(
a)Cal
cul
atet
heunempl
oymentr
atef
ort
hiseconomy(
answeri
s7.
69)

(
b)Supposethatsomeinvest
orsbui
ldanumberoff act
ori
esi nt
hecount
ryand
ther
eisaneconomi cboom.Thef act
oriescreate20,000new j
obs,al
lof
whicharefi
lledbyadul
tswhower epreviousl
yunempl oyedandl
ooki
ngfor
work.Cal
culatet
henewunemploymentr ate.(
Answeris4.6%)

(
c)Now supposet hei nvestor
ssuddenl yleaveforfearthatthegover nment
wouldnationali
zet heirfact
oriesandt heboom tur
nsintoadeepr ecession,
resul
ti
nginaf allinempl oymentt o520,000.Al
ltheworker
st hatarelai
dof f
giveuphopeoff i
ndinganot herjob,andthentheydeci
detor et
ir
eandmove
toothercountry.Sot henumberofpeopl eunemployedbutlookingforwork
remainsat30,000asi nPart(b).Whatisthenewunemploymentr ate?

(
d)Compare youranswertothe answers you f
ound i
n part
s( a)and (
b).
Thi
nking about thi
s compari
son, comment on t he strengt
hs and
weaknessesoftheunempl
oymentrat
easameasur eoft hestr
engthoft
he
l
abourmar ket
.

7.Consi
dert
heeconomywi
thaconst
antr
etur
nst
oscal
epr
oduct
ionf
unct
iongi
ven
by:

andwageswandr
Y = KL, ent
alr
ater

(
a)Der
ivet
hedemandf
orl
abourandcapi
talf
ort
hiseconomy

(
b)Fi
ndt
heaver
agepr
oduct
ivi
tyf
orcapi
tal
andl
abour
.

8.Consi
dert
heeconomydescr
ibedbyt
hef
oll
owi
ngequat
ions:

Y=C+I+G

Y=5,
000

G=1,
000
 T=1,
000

C=250+0.
75(
Y-T)

I=1,
000–50r

(
a)I
nthi
seconomy,
comput
epr
ivat
esavi
ng,
publ
icsavi
ngandnat
ionalsavi
ng.

(
b)Fi
ndt
heequi
li
bri
um i
nter
estr
ate

(
c)Now supposethatGri
sest
o1,
250.Comput
epr
ivat
esavi
ng,publ
icsavi
ng
andnati
onalsavi
ng.

9.The2009dat ainthet
ablebel
owisf
ormalesandf
emal
esages16andabovei
na
hypot
het
icalcount
ry(f
igur
esar
einmil
li
on)

MALE FEMALE
NOTI
NLABOURFORCE 45 35
UNEMPLOYED 5 5
EMPLOYED 85 65

i
. Fi
ndt
het
otaladul
tpopul
ati
onandt
het
otaladul
tlabourf
orce

i
i. Calcul
atet
headul
tunempl
oymentr
ateandadul
tlabour
-f
orcepar
ti
cipat
ion
rat
e.

10.Assumet hatGDP( y)is6,000.Consumption(c)isgi

venbytheequat
ionC=600
+0.6(Y–T) .I
nvest
ment( I
)isgivenbytheequationI=2,
000–100r ,whereri
s
therealrateofint
erestinper cent
.Taxes(T)are500andgovernmentspendi
ng
(G)isalso500.

(
a)Whatar
eequi
li
bri
um val
uesofC,
Iandr
?

(
b)Whatar
etheval
uesofpr
ivat
esavi
ng,
publ
icsavi
ng,
andnat
ionalsavi
ng?

(
c)I
fgovernmentspendi
ngrisesto1,
000,whatarethenewequi
li
bri
um val
ues
ofpr
ivat
esavi
ng,publ
icsavingandnat
ionalsavi
ng?

11.Assumeapr
oduct
ionf
unct
ionofani
magi
nar
ycount
ryi
sgi
venby:

Y =10K0.4L0.6

Supposet
hecount
ry’
sGDPi
sTshs.10bi
ll
ion,
andi
tsl
abourf
orcei
s100,
000.

i
. Cal
cul
atet
hecount
ry’
sMPLandMPK

i
i. Fi
ndt
het
otali
ncomepai
dtowor
ker
s
 i
ii
. Whati
stheaver
agei
ncomeperwor
ker
?

12.Duringeconomi cdepressi
oni nEur opeandNor thAmer i
caint he1920s,John
Maynar dKeynespost ul
atedt hatthesoluti
onl i
eswi t
hpeopl eincreasi
ngt heir
expenditurerat
herthanincreasingsaving,andf orthegovernmentt oincrease
expenditurerat
hert
hanpur suebal ancedbudget.Compar ethistotheeconomi c
problemsi nTanzaniaint heear l
y1980s;t hepr oposedsol ut
iontoTanzani a
wasf orpeopletoreduceexpendi tureandt heGover nmentt oreducebudget
defici
tinfavourofbalancedbudget .Useyoureconomi cknowl edgetoexpl ai
n
the diff
erencesint he nature ofeconomi c probl
emsi n Europe and Nor t
h
Amer icain1920sandi nTanzani ain1980s,andexpl ainwhyKeynespr oposed
soluti
oncoul dnothavesol vedt heeconomi ccr i
sisthatTanzani afacedi n
1980s.

13.Manypeopl eat tr
ibutecur rentTanzani adr ugpr oblemst ot
hel ow incomesi n
minimum wagej obs.Theyr easont hatpeopl ewor kingformi nimum wage
cannotsuppor ttheirfami l
iesadequat elydespi tewor king40hour sormor eper
week.Thus, peopleei t
herselldr ugstoi ncreaset heirlivingstandardort heyuse
drugsoutofdespai r.Recogni zingt his,peopleof tensuppor tincr
easi ngt he
minimum waget ohel psol vet heTanzani adr ugpr oblem.Assumet hatlow
i
ncomesf ormi ni
mum wagef ami li
esar eatl eastonecauseoft hecurrentdr ug
problem.Anal ysewhet herincreasesi nmi nimum wageswoul dbet hemost
effecti
vewayt ocombatt heTanzani adr ugpr oblem byanswer i
ngthef ollowing
questions(i
.e.,assumet hecauseoft hepr oblem hasbeenpr operl
yi dentif
ied
soyoucananal yset hepr oposedsol uti
onr athert handebat i
ngt hecauseoft he
problem).

14.Whati
sabusi
nesscycl
e?Descr
ibei
tsmai
nphases.

15.“
Int
helong-r
unrealvar
iabl
esar
eaf
fect
edbyachangei
nmoneysuppl
y”Doyou
agr
ee?Discuss.

16.Explai
nwhyt heaggr
egatedemandcur vesl
opesdownwar
d,usi
ngquant
it
y
theoryofmoney(
QTM),andt
herealbal
anceef
fect(
RBE)
.

17.Usingadi agr
am t
oil
lustr
ateyouranswer
,discusshow aposit
iveshockt
o
aggregat
edemandcouldaff
ectout
put
,employmentandpr
ices.

18.Supposet
hemodel
ofaneconomyi
sgi
venasf
oll
ows:

C=100+0.
8Yd

Yd=Y–T

I=100

G=100
 T=100

Fi
ndt
hef
oll
owi
ngexpendi
tur
emul
ti
plerand∆Yi
i f∆G=50.

19.Supposet
hemoneydemandf
unct
ioni
sgi
venby:

()
Md
P
=1000-
100r,wher
eri sthei
nter
estr
atei
nper
cent
.Themoneysuppl
y,M i
s
1000andthepr
icel
eveli
s2.

a)Gr
apht
hesuppl
yanddemandf
orr
ealmoneybal
ances

b)Whati
stheequi
li
bri
um i
nter
estr
ate?

c)Assumethatt
hepricel
eveli
sf i
xed.Whathappenstotheequi
li
bri
um i
nter
est
rat
eift
hesupplyofmoneyisrai
sedfrom 1000to1200?

d)Ift
heCentr
alBankwishest
orai
set
hei
nter
estr
atet
o7per
cent
,whatmoney
suppl
yshouldi
tset
?

20.Whatarethethreemajormodel
sofaggr
egat
esuppl
y?Explai
ntheeventsthat
causetheaggregat
esupplycur
vet
obeupwardsl
opingaccor
dingt
ot hethree
modelsofaggregat
esuppl
y.

21.Supposet
heCent
ralBankpursuesexpansi
onar
ymonet
arypol
icy,di
scusst
he
short
-r
unandl
ong-
runeff
ect
soft hi
spoli
cyonaggr
egat
edemandi heAD-
nt AS
fr
amework.

22.I
nthest i
ckypr
icemodel(SPM),descr
ibet
heAScurveinthef
oll
owi
ngspeci
al
cases.Howdoesthesecasescomparetot
heSRAScurve.

(
a)Nof
ir
mshavef
lexi
blepr
ices(
s=I
)

(
b)Thedesi
redpr
icedoesnotdependonaggr
egat
eout
put
.

23.Supposemoneysuppl
yanddemandf
ormoneyf
unct
ionar
egi
venas:

Ms =$250bn

Md =100 +0.
5Y-
2500r

(
a)Fi
ndt
heLM f
unct
ion

(
b)Fi
ndt
heshi
fti
ntheLM cur f∆Ms =50
vei

24.Consi
dert
hef
oll
owi
ngeconomy.

C=200+0.
75(
Y-T)

I=20–25r
 G=T=100

()
Md
P
=Y-
100r

Ms =1000

(
a)Whati
sanI
Scur
ve?Whati
sanLM cur
ve?

(
b)Fi
ndtheequil
ibr
ium i
nter
estr
ateandt
heequi
li
bri
um l
evelofi
ncomei
mpl
ied
bytheI
S-LM model.

(
c)Supposethatthegovernmentexpendi
tur
eincreasesby50,byhow much
doestheIScurveshift
?Findthenew equil
ibr
ium levelofi
ncomeandt
he
newequil
ibr
ium l
evelofi
nter
estr
ate.

(
d)Supposethatnow i
nsteadmoneysuppl
yincr
easesby200.Byhow much
doestheLM cur
veshif
t?Findt
henewequi
li
bri
um.

25.Whatdoest
heADcur
veshow?Whatcausesi
ttosl
opedownwar
d?

26.I
ntheKeynesi
ancr
oss,
assumet
hatt
heconsumpt
ionf
unct
ioni
sgi
venby:

C=200+0.
75(
Y-T)
,pl
annedi
nvest
menti
s100,gover
nmentexpendi
tur
eand
t
axesar
ebot
h100.

a) Gr
aphpl
annedexpendi
tur
east
hef
unct
ionofi
ncome.

b) Whati
stheequi
li
bri
um l
evelofi
ncome?

c) I
fgover
nmentexpendi
tur
eincr
easest
o125,
whati
sthenewequi
li
bri
um
i
ncome?

d) Whatlevelofgover
nmentexpendi
tur
eisneededt
oachi
eveani
ncome
of1,
600?

27.Whati
sthenat
uralr
ateofunempl
oyment
?

28.Whatist he di
ff
erence bet
ween f
ri
cti
onalunempl
oymentand st
ruct
ural
unempl
oyment
?

29.Give t
hree r
easons why t
he r
ealwage may r
emai
n above t
he l
evelt
hat
equi
li
bratesl
aboursuppl
yandl
abourdemand.

30.Supposet hehypotheti
calcount
ryhad 1000 peoplei nt helabourforcein
Januar
y2008.Supposet hat9worker
slosttheirj
obsthroughquit
sorlayoffsi
n
the month ofJanuar y.The count
ry start
ed the yearwi t
h 100 wor ker
s
unemployed,10ofwhichdidfi
ndajobinthecourseofJanuary2008.

(
a)Whatwast
heunempl
oymentr
ateatt
hebegi
nni
ngof2005?
 (
b)Howmanypeopl
ewher
eempl
oyedatt
hebegi
nni
ngof2006?

(
c)Whati
sthej
obf
indi
ngr
ate?

(
d)Whati
sthesepar
ati
onr
ate?

(
e)Wast
hel
abourmar
keti
nJanuar
y2008atast
eady-
stat
e?

31.“
Inf
lati
onisalwaysandeverywhereamonetar
yphenomenon”sowr ot
eMilt
on
Fri
edman,theAmericaneconomistwhowont heNobelPri
zeineconomi
csin
1976.Suppor
tthi
sstatementbyuseoft
hequanti
tyt
heoryofmoney.

32.UsetheKeynesi
ancrossandthetheoryofl
iqui
dit
ypr
efer
encet
oexpl
aint
he
theor
yofshor
t-
runeconomi
cfl
uctuat
ions.

33.a)Expl
ainthe under
lyi
ng r
easons and nat
ure oft
he f
oll
owi
ng t
ypes of
unemployment
:

I
. Fr
ict
ionalunempl
oyment

I
I. St
ruct
uralunempl
oyment

b)Whataret he appr
opr
iat
e poli
cy measur
es t
o dealwi
th each t
ype of
unempl
oymentmenti
onedabove?

34.I
nvest
mentspendingpl
aysakeyr
olei
nthel
ong-
rungr
owt
haswel
lasi
ntheshor
t-
runbusi
nesscycl
e.
(
a)Usi
ngasimpl
eneo-
classi
calmodelexpl
aint
hedet
ermi
nant
sofbusi
nessf
ixed
i
nvest
ment
.

(
b)Br
ief
lyexplai
nwhatcausest
hei
nvest
mentschedul
etoshi
fti
ntheneo-
classi
cal
modelof:

i
. Busi
nessf
ixedi
nvest
ment

i
i. Resi
dent
iali
nvest
ment
.

35.Expl
aint
hef
oll
owi
ngconcept
s;
(
a)Labourf
orcesur
veyandCl
aimantcountmet
hod

(
b)Endogenousandexogenousvar
iabl
es

(
c)Commodi
tymoney

(
d)Tobi
n’sqr
ati
oofi
nvest
mentdeci
sion

(
e)I
nvent
oryi
nvest
mentandt
her
easonsf
orhol
dingi
nvent
ori
es.

36.Assume a cl
osed cl
assi
caleconomy wher
e out
put
,consumpt
ion,i
nvest
ment
,
 gover
nmentexpendi
tur
esandt
axesar
egi
venbel
ow;

Y=5000

C=2500+0.
75(
Y-T)

I=1000–500r

G=1000,
T=1000

(
a)Fi
ndt
heequi
li
bri
um i
nter
estr
ateandi
nvest
menti
nthi
seconomy.

(
b)Whatar
epr
ivat
esavi
ngs,
publ
icsavi
ngsandnat
ionalsavi
ngs?

(
c)Ifthegovernmentdoublesit
sexpendi
tur
e,cal
culat
eand di
scussthe
eff
ectsofsuchanexpansi
onar
ypol
icyonthevar
iabl
esgi
veni
n(i)and(
ii
)

37.Supposeahypotheti
calcountr
yhas100mi l
li
onpeopl e,ofwhom 50mi l
li
onare
worki
ngage.Ofthese50mi l
li
on,20mil
li
onhavejobs.Oftheremai
nder,10mi l
li
on
areacti
vel
ysear
chingforj
obs,10mil
li
onwouldli
kejobsbutarenotsearchi
ng,and
10mill
iondonotwantjobsatal
l.

i
. Whati
slabourf
orce?

i
i. Cal
cul
atet
heunempl
oymentr
ateandt
hel
abourf
orcepar
ti
cipat
ionr
ate?

38.“
Theeffect
sofanexogenousincr
easeininvestmentdemandinthel
ong-r
unmodel
oftheeconomyresul
tsintwodiff
erentoutcomesunderdif
fer
entassumpti
onson
savi
ng”.Doyouagr
ee?Explai
nandill
ustr
ateyouranswer.

39.Supposet
hemoneydemandf
unct
ioni
s:

()
Md
P
=1000-100r,whereri
sthei
nter
estr
atei
nper
cent
.Themoneysuppl
yM i
s1000
andthepri
celeveli
s2.

(
a)Grapht hesuppl
yanddemandf
orr
ealmoneybal
ances.Whati
stheequi
li
bri
um
i
nterestrat
e?

(
b)Assumethatthepri
celeveli
sf i
xed.Whathappenstotheequi
li
bri
um i
nter
est
rat
eift
hesupplyofmoneyisr
aisedfrom 1000t
o1200?

(
c)I
ftheBankofTanzania(BoT)wi
shest
orai
set
hei
nter
estt
o7per
cent
,what
moneysuppl
yshoul
ditset
?

40.Expl
ainthef
ourtheori
esofaggr
egat
esupply.Onwhatmar
ketimperf
ecti
onsdoes
each ofthe t
heory ofaggr
egat
e suppl
yr el
y?Whatdo the t
hree t
heor
ies of
aggregat
esuppl
yhaveincommon?

41.Expl
aint
heKeynes’
sthr
eeconj
ect
uresaboutt
heconsumpt
ionf
unct
ion?
42.I
nt hemodelofbusi
nessfi
xedinvest
ment
,underwhatcondi
ti
onswi
llf
ir
msf
indi
t
profi
tabl
etoaddt
othei
rcapi
talst
ock?

43.“
Therear
enopubli
cpol
ici
est
oreducef
ri
cti
onalunempl
oyment
”.Doyouagr
ee?
Pl
easedi
scuss.