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Long Assignmentw25

The document outlines a long assignment for an economics course, covering topics such as nominal and real GDP, labor market equilibrium, investment-saving in a closed economy, general equilibrium in a small open economy, and uncovered interest rate parity. Each section includes specific questions and calculations related to these economic concepts, with a total of five main topics and various sub-questions. The assignment is due on February 28, 2025, and is to be submitted through the Brightspace Assignment tool.

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10 views3 pages

Long Assignmentw25

The document outlines a long assignment for an economics course, covering topics such as nominal and real GDP, labor market equilibrium, investment-saving in a closed economy, general equilibrium in a small open economy, and uncovered interest rate parity. Each section includes specific questions and calculations related to these economic concepts, with a total of five main topics and various sub-questions. The assignment is due on February 28, 2025, and is to be submitted through the Brightspace Assignment tool.

Uploaded by

zaidali.leo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Long Assignment 1

ECON 2P22
Winter 2025
Due date 02/28/2025 through Brightspace Assignment tool

1. [Nominal and real GDP] (20 marks)


An economy produces three goods: cars, computers, and oranges. Production units and
prices per unit for years 2020 and 2021 are as follows:

2020 2021
Quantity Price Quantity Price
Cars 10 $2,000 12 $3,000
Computers 4 $1,000 6 $500
Oranges 1,000 $1 1,000 $1

(a) (5 marks) What is nominal GDP in 2020 and in 2021?


(b) (5 marks) Using 2020 as the base year (i.e., using 2020 prices), what is real GDP in
2020 and 2021? By what percentage does real GDP increase from 2020 to 2021?
(c) (5 marks) Using 2021 as the base year (i.e., using 2021 prices), what is real GDP in
2020 and 2021? By what percentage does real GDP increase from 2020 to 2021?
(d) (5 marks) True or false: "The growth rate of real GDP depends on which year is
used as the base year." Justify your answer.

2. [Equilibrium in the labor market] (25 marks)


Suppose that the production function is

Y = 9K0.5 N 0.5

The capital stock is


K = 25

The labor supply curve is


NS = 100[(1 − t)w]2

where w is the real wage rate, t is the tax rate on labor income, and hence (1 − t)w is the
after-tax real wage rate.

(a) (5 marks) Derive the marginal product of labor (MPN).


(b) (5 marks) Assume that the tax rate on labor income, t = 0. Find the equation of
the labor demand curve (ND). Calculate the equilibrium levels of the real wage
and employment, the level of full-employment output, and the total after-tax wage
income of workers. [ Labor market clearing condition: NS = ND ].
(c) (5 marks) Repeat question (b) under the assumption that the tax rate on labor in-
come t = 0.6.
(d) (5 marks) Suppose that a minimum wage of w = 2 is imposed. If the tax rate on
labor income, t = 0, what are the resulting values of employment and the real wage?
(e) (5 marks) What happens to the equilibrium in the labor market? Does the intro-
duction of the minimum wage increase the total income of workers, as a group?

3. [Investment-Saving in closed economy] (20 marks)


An economy has full-employment output (Ȳ) of 600. Government purchases, G, are 120.
Desired consumption and desired investment are
C d = 360 − 200r + 0.10Y, and I d = 120 − 400r, where Y is output and r is the real interest
rate.

(a) (5 marks) Find an equation relating desired national saving Sd to r and Y.


(b) (5 marks) Find the real interest rate that clears the goods market. Assume that
output equals full-employment output.
(c) (5 marks) Government purchases rise to 144. How does this increase change the
equation describing desired national saving? Show the change graphically.
(d) (5 marks) What happens to the market-clearing real interest rate?

4. [General equilibrium in a small open-economy] (25 marks)


Consider the following classical economy:

Desired consumption C d = 300 + 0.5Y − 200r


Desired investment I d = 200 − 300r.
Government purchases G = 100
Net exports NX = 150 − 0.1Y − 0.5e
Real exchange rate e = 20 + 600r
Full-employment output Ȳ = 900

In this economy, the real interest rate does not deviate from the foreign interest rate.

(a) (5 marks) Find the equation for the IS curve


(b) (5 marks) What are the equilibrium values of the real interest rate, the real exchange
rate, consumption, investment, and net exports?
(c) (5 marks) Now, suppose that full-employment output increases to 940. What are
the equilibrium values of the real interest rate, the real exchange rate, consumption,
investment, and net exports?
(d) (5 marks) Suppose that full-employment output remains at 940 and that govern-
ment purchases increase to 132. What are the equilibrium values of the real interest
rate, the real exchange rate, consumption, investment, and net exports?

2
(e) (5 marks) Suppose that only the exchange rate is modified and becomes e = 20 +
500r. What are the equilibrium values of the real interest rate, the real exchange
rate, consumption, investment, and net exports?

5. [Uncovered interest rate parity condition] (10 marks)


Consider an open economy with a domestic interest rate of it , an exchange rate with
its foreign trading partner of Et , and where the foreign interest rate is it∗ . The markets
e .
expectation of the future exchange rate is Et+1
The uncovered interest rate parity (UIRP) states that

Et
1 + it = (1 + it∗ ) e (1)
Et+1

(a) (2 marks) Interpret the UIRP in Equation 1. Why this condition should hold in the
international financial markets?
(b) (4 marks) Using Equation 1, derive the expressions for it , it∗ , Et and Et+1
e .

(c) (4 marks) Use the expressions derived in question (b) to fill in the blank entries in
the following table with the values that would yield interest rate parity

it it∗ e
Et+1 Et
8% 9% 98 −
− 8% 98 100
7% 5% − 98
7% − 100 105

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