THE COPPERBELT UNIVERSITY

School of Humanities and Social Sciences

Department of economics

TUTORIAL 1: MEASUREMENT OF ECONOMIC PERFORMANCE

Q1. Suppose you are provided with the following information about an economy comprised of
just two firms, a shrimp farm that produces raw shrimp and a seafood restaurant:

SHRIMP FARM SEAFOOD RESTAURANT

Revenues (shrimp) Revenues (fried shrimp)
From Sales to Households $10,000 From Sales to Households $50,000
From Sales to Foreigners $10,000
From Sales to Seafood
Restaurant $10,000
Expenses (wages) $10,000 Expenses
Wages $15,000
Shrimp $10,000
Profits $20,000 Profits $25,000

(a) Calculate GDP using the FINAL GOODS APPROACH. Show work.

(b) Calculate GDP using the VALUE-ADDED APPROACH. Show each step of your
calculations.

(c) Calculate GDP using the INCOME APPROACH. Show each step of your calculations.

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Q2. The table below shows CHINA’s NOMINAL AND REAL GDP for the years 1974 through
years 1976.

YEAR NOMINAL GDP REAL GDP

(Billions of Yuan) (Billions of constant
1987 Yuan)
1974 279.6 397.6
1975 298.1 430.3
1976 289.0 408.4

(a) What is the difference between what NOMINAL GDP tells us and what REAL GDP (constant
YUAN) tells us? Explain by referring to the way real GDP is calculated in principle compared
with the way nominal.

(b) GDP is calculated (HINT: Think about prices and quantities).

(c) Calculate the GDP growth rates for CHINA for 1974 to 1975 and for 1975 to 1976. SHOW
YOUR WORK.

(d) Find the GDP deflator for each of the three years. SHOW YOUR WORK.

(e) Find the rates of inflation for 1974 to 1975 and for 1975 to 1976. SHOW YOUR WORK.

Q3. Suppose you are provided with the following information about an economy. There are 100
million working-age individuals in the economy. Of these 100 million, 50 million are currently
working, 10 million are looking for work, 10 million stopped looking for work 2 months ago,
and the remaining 30 million do not want to work.

(a) Calculate the number of unemployed individuals, the size of the labor force, the
unemployment rate, and the labor force participation rate.

(b) Now suppose that of the 10 million individuals looking for work, 5 million stop looking for
work. Given this change, calculate what will happen to the size of the labor force, the
unemployment rate, and the labor force participation rate. Did the unemployment rate
and participation rate move in the same direction? Explain.

(c) Ignore part (b). Start with the original numbers. Suppose firms experience an increase
in the demand for their products and they respond by increasing employment.
Specifically, 2 million of the previously unemployed individuals now have jobs. Given this
change, calculate what will happen to the following: (1) the size of the labor force; (2)
the number of employed individuals; (3) the number of unemployed individuals; (4) the
unemployment rate; and (5) the labor force participation rate.

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TUTORIAL 2: THE GOODS MARKET

Q1. Suppose the consumption function in the United States economy is represented by the
following equation:

C = 200 + .5 YD, where YD = Y – T and T = 200.

(a) What is the level of consumption in this economy if Y D = 0? Briefly explain how individuals
“pay for” this consumption when YD = 0.

(b) Given the above parameters, calculate the level of consumption if Y = 1200.

(c) Suppose Y increases to 1300. What happens to the level of Y D as Y increases to 1300
(i.e. calculate the change in YD)?

(d) What happens to the level of consumption when Y rises to 1300 (i.e. calculate the change
in consumption)?

(e) Using the change in YD and the change in consumption you calculated, what is the
marginal propensity to consume (MPC) for this economy? Is this the same as the
parameter of the consumption function that represents the marginal propensity to
consume?
(f) Write out the saving function for this economy. (HINT: S = Y D – C. Substitute for C from
the information above and simplify the right side of the equation).

(g) What is the level of saving when YD = 0? Explain how and why this occurs.

(h) What is the marginal propensity to save for this economy? How do you know?

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Q2. Suppose the U.S. economy is represented by the following equations.

Z=C+I+G C = 300 + .5 YD T = 400 I = 200

YD = Y – T G = 1000

(a) Given the above variables, calculate the equilibrium level of output (Y).

(b) Using the graph below, illustrate the equilibrium level of output for the economy.

Aggregate Demand (Z)

45O
Y

(c) Now assume that consumer confidence increases causing an increase in autonomous
consumption from 300 to 400. What is the new equilibrium level of output?

(d) How much does income change as a result of this event? What is the multiplier for this
economy?

(e) Graphically illustrate (in the above graph) the effects of the change in autonomous
consumption on the aggregate demand line and equilibrium Y. Clearly indicate in your
graph the initial and final equilibrium levels of output.

(f) Briefly explain why this increase in output is greater than the initial increase in autonomous
consumption.

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TUTORIAL 3: THE FINANCIAL MARKET

Q1. Use the graph provided to answer the following question.

Interest rate (i) MS = M1

i”

i’

MD

(a) Given the money demand and money supply, explain what type of situation exists when
the interest rate equals i”. At this interest rate, how much money do individuals want to
hold? At this interest rate how much money actually exists?

(b) Based on your analysis in part a, what must happen to the interest rate for financial market
equilibrium to occur? What happens to money demand and money supply as the interest
rate (i) changes?

(c) Given the money demand and money supply, explain what type of situation exists when
the interest rate equals i’. At this interest rate, how much money do individuals want to
hold? At this interest rate how much money actually exists?

(d) Based on your analysis in part c, what must happen to the interest rate for financial market
equilibrium to occur? What happens to money demand and money supply as the interest
rate (i) changes?

Q2. Suppose that the demand for money is given by the following equation:

MD = $Y (0.25 – 0.8i)

Assume that nominal income ($Y) is $5,000 billion.

(a) Determine the equilibrium level of the interest rate if the money supply is $900 billion.

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(b) Suppose the central bank increases the money supply to $950 billion. Determine the new
equilibrium interest rate.

(c) Suppose we have the original money supply (in part a) and that the level of nominal
income increases to $6,250 billion. Determine the equilibrium interest rate.

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TUTORIAL 4: THE IS-LM MODEL

Q1. Consider the following policy mix. The government wants to decrease its budget deficit,
whereas the central bank increases the money supply.

(a) Explain how the IS- curve can be obtained graphically from the equilibrium condition
on the goods market

(b) Explain how the LM-curve can be obtained graphically from the equilibrium condition
on the money market.

(c) Explain what contractionary fiscal policy means. What effect does contractionary
fiscal policy have on the IS or LM-curve?

(d) Explain what expansionary monetary policy means. What effect does expansionary
monetary policy have on the IS or LM-curve?

Q2. Consider the following economy:

C = 1000 - 50i + 0.6(Y - T)

T = 100 + 0.2Y

I = 200 - 10i

G = 1000

(M/P)S = 600

(M/P)D = 0.2Y - 30i

(a) Write down the IS equation for the economy

(b) Write down the LM equation for the economy

(c) Now suppose the government decides to increase G from 1000 to 1200.

(d) What is the new equilibrium Y and i?

(e) What is the change in equilibrium I as G increases from 500 to 1000? Why does it either
increase or decrease?

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TUTORIAL 5: THE LABOUR MARKET

Q1. Use the WS (wage-setting) and PS (price-setting) relations to examine the effects of the
following events on the natural rate of unemployment and on the real wage. Be sure to
explain the effects of each event on the WS and PS relations and draw a graph.

(a) A reduction in unemployment benefits.

(b) Less stringent anti-trust enforcement.

(c) An increase in the minimum wage.

(d) Suppose that the firms' markup over cost is 10%, and that the wage determination
equation is W=P (1-u). What is the natural rate of unemployment?

Q2. Suppose that the markup of goods prices over marginal cost is 10% and the wage setting
equation is W = P(1 - u); where u is the unemployment rate.

(a) What is the real wage, as determined by the price-setting equation?

(b) What is the natural rate of unemployment?

(c) Suppose that the markup of prices over costs increases to 20%. What happens to
the natural rate of unemployment? Explain the logic behind your answer.

TUTORIAL 6: AGGREGATE DEMAND AND SUPPLY

Q1. The following question is about the basic AS-AD Model:

(a) Concisely explain why the AS curve is upward-sloping.

(b) Concisely explain why the AD curve is downward-sloping.

(c) Suppose the economy under consideration is in an equilibrium where Y = Yn and

P = Pe. However, the central bank decides to use expansionary monetary policy.

(d) Using the AS-AD model, explain briefly the short-run and the medium-run
consequences of this policy on output and the price level.

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Q2. Suppose the economy under consideration is in an equilibrium where and Y =Y n and P=Pe.
However, the central bank decides to use expansionary monetary policy. Using the AS-AD
and the IS-LM model respectively, explain in detail the short-run and the medium-run
consequences of this policy on output, the price level, the interest rate and the
unemployment rate.