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Teco102 - Macroeconomics Principles 1
Teco102 - Macroeconomics Principles 1
Student’s Name
Institution Affiliation
Date of submission
TECO102 – MACROECONOMICS PRINCIPLES 2
QUESTION 1
Use the following economic data to calculate private saving, public saving and
national saving.
a) Household saving =100, business saving=200, government purchases of goods
service=50, government transfers and interest payments=50, Tax collection=75.
Private savings=Y-T-C
Where:
Y=National income
T=tax pay
C=consumption
National income =house savings +business savings-+government goods and services -transfers
+taxes
=100+200+50-50+75
=375
Private savings =375-75-50
=250
Public savings
Savings =Y-C-G=I
375-50
=325
National savings
This is the:
Public savings -private savings
=325-250
=75
T=tax pay
C=consumption
3000-2250-600
=150
Public savings
Public savings= tax revenue - government spending
600—50
=550
National savings
This is the:
National savings= Private savings + public savings.
=150+550
=700
750-500
=250
National savings
Public savings +private savings
=250+250
=500
QUESTION 2 [4 marks]
Following table are the data for the U.S. economy (β=2) in four selected years. Using
Okun’s law, fill in the missing data in the table.
QUESTION THREE
V = P Y / M = Y / (M/P)
Where:
V=money velocity
PY= is the price level and the real GDP
Price level
Price level= (Real GDP/Money supply)*Money velocity
2007 2008
Money supply 950 1000
Velocity 8.5 8.5
Real GDP 12500 12500
Price level (12,500/950)*8.5= (12500/1000)*8.5=
111.8421 106.25
Inflation rate
Changes in price level -
TECO102 – MACROECONOMICS PRINCIPLES 5
Inflation rate will change since the price level will change to 97.36.
QUESTION FOUR
Question 4a; Find the numerical equation relating planned aggregate expenditure (PAE) to
output (Y) and to real interest rate (r).
Solution: Planned aggregate expenditure refers to the amount of government and net exports
spending on consumer investment[ CITATION Rob16 \l 1033 ]. In most cases, at Equilibrium the
planned aggregate expenditure is usually at bar with the actual expenditure within the economic
range.
We can therefore say that the plan aggregate expenditure amount is equal to productivity
(Output)
PAE= Cd+Ip+C+Nx
PAE=36,000+0.5y-60,000r
Question 4b; the real interest rate is 0.133, find short-run equilibrium output
Solution: An equilibrium interest rate is usually interrelated to a certain point of demand and
money supply[ CITATION Kil15 \l 1033 ]. A short-term competitive equilibrium supply is equal to
the total amount of price that consumers demand.
At equilibrium PAE=y
Therefore, 36,000+0.5y-60,000r=y
36,000+0.5y-60,000r=0.5y
When r=0.133,
0.5y=36000-60000(0.133)
=0.5y=28,020
Y=56,040
Question 4c: Potential output, y*, equals 40,000. What real interest rate should be Reserve
Bank set to bring the economy to full employment?
Therefore, 0.5y=36,000-60,000r
When y=40,000
0.5(40,000) =36,000-60,000r
=-16,000/60,000 =-60,000/60,000r
16,000/60,000 =r
r=0.2666
r =0.267
TECO102 – MACROECONOMICS PRINCIPLES 7
References
Kiley, M.T., 2015. What can the data tell us about the equilibrium real interest rate? Available at
SSRN 2665710.
Budgeting, 15(1), pp.125-145.
Hall, R., & Lieberman, M. (2009). Microeconomics: Principles and Applications. Cengage
Learning.