The following equations describe planned spending for a closed economy.

( ) (a) Write out the equation for the private saving function for this economy. (1 mark) (b) What is exogenous (autonomous) expenditure and what is the value of the multiplier? Calculate equilibrium output for this economy. Show how you obtained your figure. (2 marks) (c) Calculate the size of the budget surplus at equilibrium output. (1 mark) (d) What is the size of the balanced budget multiplier for this economy? (1 mark) The following equations describe planned spending for a closed economy. ( ) (a) Write out the equation for the private saving function for this economy. (1 mark) (b) What is exogenous (autonomous) expenditure and what is the value of the multiplier? Calculate equilibrium output for this economy. Show how you obtained your figure. (2 marks) (c) Suppose the government introduces an expansionary fiscal policy by increasing government purchases by 40. Calculate the new equilibrium output. (1 mark) (d) Explain how the effect of the expansionary fiscal policy in (c) may be a level of output less than what was calculated? (2 marks) The following equations describe planned spending for a closed economy. ( ) (a) Write out the equation for the private saving function for this economy. (1 mark) (b) What is exogenous (autonomous) expenditure and what is the value of the multiplier? Calculate equilibrium output for this economy. Show how you obtained your figure. (2 marks) (c) Show in a diagram and explain the effect of an increase in the marginal tax rate to 0.3. Calculate the new equilibrium output. (2 marks) (d) Explain how the effect of the increase in the marginal tax rate in (c) may be a level of output less than what was calculated? (1 marks)

Explain.000’s) in the aggregate labour market. Explain the effects on employment of the scheme. Use the supply and demand model (and a diagram) for saving and investment to explain the likely effects of this scheme on national saving. Use the supply and demand model (and a diagram) for saving and investment to explain the likely effects of this scheme on national saving. (5 marks) The government of New Holland is planning to borrow heavily to finance spending on education and defence.000. Use the supply and demand model (and a diagram) of the labour market to explain the effect on labour demand and supply and the levels of employment and unemployment. Explain. Explain the effects on employment of the saving scheme. (You can assume that New Holland is a closed economy). investment and the real interest rate in New Holland when its economy is closed. (3 marks) Consider the following model for supply and demand of worker hours (1. (5 marks) The country of New Holland is considering the introduction of a compulsory retirement saving scheme.000’s) in the aggregate labour market. Supply curve: Demand curve: (a) Calculate and state the equilibrium real wage and level of employment and illustrate your answer on a diagram. Supply curve: Demand curve: (a) Calculate and state the equilibrium real wage and level of employment and illustrate your answer on a diagram. Under this scheme all workers are required to save ten per cent of their annual wages and salaries until they retire. where w is the real hourly wage. and the real wage. Explain who pays the tax. State the level of employment and the real wage after the imposition of this tax and illustrate your answer on a diagram. (2 marks) (b) Suppose a tax of \$2 is levied on every hour worked. (2 marks) (b) Suppose a minimum wage law that outlaws an hourly wage below \$7 per hour. where w is the real hourly wage. (3 marks) The government of New Holland is experiencing lower energy costs due to new technology in extracting energy sources such as gas and oil.Consider the following model for supply and demand of workers (100. investment and the real interest rate in New Holland. Calculate the levels of employment and unemployment after the enactment of the law and illustrate your answer on a diagram. (5 marks) .

Briefly indicate why all three approaches should give the same estimate for GDP. Explain how you arrive at your figure for National Saving. Explain how you arrive at your figure for Private Saving. Use the supply and demand model (and a diagram) for saving and investment to explain the likely effect on national saving. Explain how you arrive at your figure for GDP.The government of New Holland is experiencing lower energy costs due to new technology in extracting energy sources such as gas and oil. (5 marks) Explain the three different approaches that can be used to calculate GDP. (1 mark) (b) Use the above data to calculate National Saving in 2010. Private Consumption 1200 Imports 600 Government Purchases 600 Gross Taxation Receipts 800 Exports 500 Government Transfer Payments 300 Beginning-of-year Inventories 200 Net Interest Payments on Government Debt 40 End-of-year Inventories 100 Sales of Existing Houses and Flats 600 Business Fixed Investment 500 \$Bill (a) Use the above data to calculate GDP for 2010. investment and the real interest rate in New Holland when its economy is closed. Explain the effects on employment of the new technology. (5 marks) Consider the following National Accounts data for the calendar year 2010. (3 marks) Is GDP a good measure of a country’s economic welfare? Discuss. (1 mark) (c) Use the above data to calculate Private Saving in 2010. (5 marks) What factors might cause households to under-save relative to some rationally optimal level? (2 marks) . (1 mark) Explain why the CPI may give a biased measure of the “true” rate of inflation or cost of living? (5 marks) Identify and briefly explain the various economic costs associated with inflation.

(2 marks) Explain the role of the real interest rate in influencing the level of saving and investment in the economy.)} (5 marks) Explain what is meant by frictional unemployment. Briefly discuss how widespread availability of credit cards might affect precautionary saving. (3 marks) Explain what is meant by the natural rate of unemployment. What condition would need to be satisfied for the firm to be willing to invest in the new capital? (5 marks) Explain why the labour demand curve for an individual firm is downward sloping and indicate the main factors that cause the curve to shift. Will the same factors that cause a shift in an individual firm’s labour demand curve also shift the aggregate demand curve for labour? Explain. Is it likely to be desirable for an economy to have zero frictional unemployment? Explain. {Note: A home equity loan allows households to borrow (usually at a relatively low interest rate) against the equity they have in their home. (3 marks) Explain the precautionary motive for saving by a household.Explain the various factors that will influence a firm’s decision to purchase a new piece of capital equipment. (5 marks) Briefly explain the following three motives for saving:  life-cycle  precautionary  bequest Indicate what effect the widespread availability of home equity loans might have on each form of saving. Briefly indicate two factors that might cause the natural rate of unemployment to vary over time. (2 marks) Explain the concept of potential output and why it can differ from actual output? (2 marks) . (Equity refers to the difference between the market value of the home and any mortgage debt. (2 marks) Explain what is meant by substitution bias in the CPI and indicate whether it is likely to cause the CPI to overstate or understate changes in the cost of living.

(2 marks) Identify and briefly explain the main features of the business cycle. How does PAE differ from Actual Expenditure? (2 marks) Discuss the role played by fixed (or sticky) prices in the Keynesian model of income determination. does a one dollar change in exogenous expenditure produce a larger change in short-run output? (5 marks) Explain the role played by the marginal tax rate in determining the size of the multiplier.run. how does a cut in the marginal tax rate affect the size of the multiplier? (3 marks) Suppose a government is concerned about the size of the budget deficit.Identify two factors that might cause a change in the level of potential output. Will this policy have any effect on the level of output? Explain your answer. (2 marks) Use the Keynesian aggregate expenditure model and appropriate diagrams to explain the effect on equilibrium GDP of an exogenous decrease in exports. (2 marks) Explain the concepts of (a) potential output and (b) the output gap. (3 marks) Explain the concept of Okun’s law. Other things equal. in general. (3 marks) Explain what is meant by the multiplier? Why. Discuss the implications of Okun’s law for policymakers? (4 marks) Explain the concept of Planned Aggregate Expenditure (PAE). (3 marks) . but at the same time to increase exogenous taxes by \$20 billion. Briefly explain what would happen if prices were fully flexible in the short. (3 marks) Use the Keynesian aggregate expenditure model and appropriate diagrams to explain the effect on a decrease in income tax rates. It decides to increase government spending by \$20 billion. For each factor briefly explain why they can affect potential output.

(5 marks) Explain the difference between discretionary fiscal policy and automatic stabilisers. Explain how each might be used to close an expansionary output gap. Which one of these will be the main influence on the size of the structural budget deficit? Explain. Other things equal. Explain why the equilibrium level of output can differ from potential output? (2 marks) Explain the role played by the marginal propensity to import in determining the size of the multiplier. which also has a total value of \$20 billion Use the 4-sector Keynesian aggregate expenditure model to explain which of these policies will have the largest effect on planned aggregate expenditure and on the level of output. explain the process by which the economy adjusts to equilibrium. (3 marks) What are the main instruments of fiscal policy? Explain how a change in each can differ in their effect. Indicate how it can provide a link between fiscal policy and public debt. Two alternative policies are under consideration: – An increase in government spending of \$20 billion. (5 marks) Briefly discuss any complications or issues with fiscal policy that are not accounted for by the Keynesian aggregate expenditure model. (3 marks) Show and explain how a decrease in income tax rates would increase the level of output and explain why government revenue may not decrease by as much as predicted by the aggregate expenditure model. (1 mark) (b) Suppose the economy is initially not in equilibrium.(a) Use a diagram to illustrate the concept of short-run equilibrium in the Keynesian aggregate expenditure model. (3 marks) . What role is played by inventories in this process? (2 marks) (c) Use a diagram to explain the difference between potential output and equilibrium output in the Keynesian model. or – A one-time cash payment to all households. how does an increase in the marginal propensity to import affect the size of the multiplier? (3 marks) Explain what is meant by the government budget constraint. (3 marks) A government of Bananarama is considering its fiscal policy response to a decline in exogenous desired expenditure by households and firms which has produced a large contractionary output gap.

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