UNIVERSITY OF THE PHILIPPINES SCHOOL OF ECONOMICS

ECONOMICS 100.1 Introduction to Macroeconomic Theory and Policy Exercise No. 3 Prof. Esguerra / Mariano AY 2011-2012 1 st Semester

1. Aggregate Demand and Aggregate Supply Analysis Determine whether there will be increase or decrease in equilibrium aggregate output and general price levels for each of the following conditions.
Condition Large cut in personal taxes A super typhoon struck the whole country causing flooding on major agricultural areas An arms-reduction agreement reducing the defense spending Foreign investors flocking into the country due to the low interest rates implemented by the central bank Reduction in government taxation of inputs Reduction in money supply by the central bank Decrease in total fertility rate by 5% Increase in research and development (R&D) among major companies Decrease in remittances from abroad due to a financial crisis that laid-off many overseas workers OECD countries controlling the supply of oil which causes oil price hike European Union, United States and Australia provided foreign grants for local government projects The United Nations International Court of Justice granted the sovereignty of the country to new territorial islands which were claimed by China before Price Output

1 2 3 4 5 6 7 8 9 1 0 1 1 1 2

2. National Accounts
Item Changes in private inventories Construction of buildings Corporate profits Depreciation Durable goods expenditure Expenditure on services Exports of non-factor services Imports of non-factor services Interests Billions of Pesos 49.7 205.7 746.5 763.4 134.4 593.9 12.3 56.8 100.8 Item Investments in breeding stocks, orchard development and afforestation Merchandise exports Merchandise imports National defense spending Non-durable goods expenditure Procurement of durable equipments Production taxes Proprietors incomes Billions of Pesos 88.5 364.9 544.7 400.3 756.2 135.5 156.9 250.7 Item Public education expenditures Public health expenditures Public infrastructure spending Rents Salaries of professional workers Transfer Payments Wages of government employees Wages of nongovernment employees Billions of Pesos 98.3 74.8 678.9 123.7 412.3 322.6 200.6 437.6

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a.

Compute for the following: i. Personal consumption iv. Net exports expenditure ii. Government expenditure v. Compensation iii. Investment and capital vi. Property Income formation b. Compute GDP using the expenditure and income approach. (Note that for either approach GDP should be the same.) c. Compute for Net domestic product. 3. Macroeconomic Identities a. You are given the following facts about the economy: C=P1000, ST=100, G=300, X=0. The government budget is balanced. What is the value of GDP? b. Suppose that: private savings is 200, budget deficit = 50, trade deficit = 10. What is the level of gross domestic investment? c. If GDP=1000, G=250, C=500, X=100 and budget deficit=40, what is private savings? d. If GDP=500, C=350, private savings=20, I=150, and the budget deficit=120, what is government spending? e. Suppose that: private savings is 100, budget surplus = 70, gross domestic investment = 150. What is net exports? Is the economy experiencing a trade surplus or a trade deficit? 4. Consumption and Saving a. Suppose that a certain familys weekly expenditure on consumption (C) is governed by this rule: Spend Php1,000 plus one-half of weekly DI. i. If it is assumed that the consumption and saving functions are linear, what would be the equations? ii. For the following values of DI, what are the levels of consumption and savings? (Remember: S must be the difference between DI and C; at low income levels, therefore, S will be a negative amount.) DI = 0, 1000, 2000, 3000, 4000, 5000 b. Suppose that an economy has the following consumption spending schedule: DI (in billion C (in billion Php) Php) 500 430 920 682 750 580 485 421 640 514 i. Describe the behavior of the consumers in the economy by deriving the consumption and savings function. Identify the autonomous consumption, MPS and MPC and interpret. ii. What is the break-even point?

c. Refer to Figure 1.
Figure 1. i. The left-hand diagram says that if GDP were equal to 0E, consumption spending would be ____ (hint: what line?). With GDP at 0E, saving would equal to ____ (hint: what line?).

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ii. If GDP were to fall to 0A, however, then C spending would be equal to ____ (hint: what line?), and S would be equal to ____ (hint: what line?).

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