1.a.

)Introduction of new technology results in rightward shift Aggregate supply of along a

Aggregate demand curve hence resulting in reduction of prices in classical model which has supply
curve which is perfectly inelastic. As price level falls nominal wages decreases as they are flexible
prices but real wage remains unchanged and also equilibrium level of national income changes

At basic Keynesian model introduction of technology results in shifting of aggregate supply which
is assumed to be upward sloping hence there is a rightward shift of aggregate supply thereby
resulting in decrease in prices there is excess supply in relation to the initial plus hence this causes
prices to go down and as prices go down real wage increases and nominal wages are sticky. The
equilibrium level of national income changes .

At the extreme Keynesian model the aggregate supply is assumed to be perfectly elastic. A
change in technology aggregate supply does not affect aggregate supply and prices which are
assumed to be sticky does not change and also nominal wage.

Ib). The life-cycle hypothesis (LCH) is an economic theory that describes the spending and saving
habits of people over the course of a lifetime. The concept was developed by Franco Modigliani and
his student Richard Brumberg in the early 1950s. The theory is that individuals seek to smooth
consumption throughout their lifetime by borrowing when their income is low and saving when their
income is high.

The LCH assumes that individuals plan their spending over their lifetimes, taking into account their
future income. Accordingly, they take on debt when they are young, assuming future income will
enable them to pay it off. They then save during middle age in order to maintain their level of
consumption when they retire.

The LCH makes several assumptions. For example, the theory assumes that people deplete their
wealth during old age. Often, however, the wealth is passed on to children, or older people may be
unwilling to spend their wealth. The theory also assumes that people plan ahead when it comes to
building wealth, but many procrastinate or lack the discipline to save.

Another assumption is that people the most when they are of working age. However, some people
choose to work less when they are relatively young and to continue to work part-time when they
reach retirement age.

Other assumptions of note are that those with high incomes are more able to save and have greater
financial savvy than those on low incomes. People with low incomes may have credit card debt and
less disposable income. Lastly, safety nets or means-tested benefits for the elderly may discourage
people from saving as they anticipate receiving a higher social security payment when they retire

b.)The theory may not be applicable in Zimbabwe because First of all, it involves a variety of
variables that are difficult to measure, in particular anticipated future income virtually unobservable
in Zimbabwe.

The theory states that people deplete their wealth when their old but however in Zimbabwe the
wealth is passed on to children as inheritance.
The theory is also applicable in high income earners who plan for consumption patterns hence in
Zimbabwe most people have no high income due to high level of unemployment .

However the few who have high incomes can follow the consumption pattern as described by
theory which is rare.

2a ) The current account refers to one part of a nation’s balance of payments accounts - a record of
all international financial transactions with other countries. Budget deficit occurs when government
expenditure exceeds government revenue. Budget deficit may result in government taking actions
which affect current account as it shall be explained below.

Where there is budget deficit this means that there is excess spending by government maybe
through provision of subsidies to firms and also transfer payments hence subsidies reduces cost of
production and also increases profits of firms which may result in firms having more finance to buy
capital or any items from abroad which may not be available in the country hence the firm may
import which may affect current account through causing current account deficit. Also
government granting of transfer payments also result in people having more income to import
more goods from abroad hence causing current account deficit. Budget deficit therefore can cause
current account deficit.

Furthermore lf there is a budget deficit there government may borrow money to the local banks
or abroad in order to finance the deficit or the government may also increase taxes to finance the
deficit. If government increases taxes to finance or remove the deficit this may result in business
increasing their prices and also reduction in disposable income of people. If price increases as a
result of taxation the local goods becomes expensive hence people may import from abroad
resulting in current account deficit hence budget deficit may result in current account deficit. Also if
people are taxed by government through income tax their disposable income reduces which may
result in them not importing from abroad hence there maybe a surplus on current account hence a
budget deficit may result in surplus of current account.

In conclusion the budget deficit may result in government taking actions to finance the deficit. The
actions they take may result in deficit or surplus in current account.

2b. The existence of adjustment costs means a capital loss or an additional cost in the investment
process. Adjustment cost depends on the quantity of investment, It relative to the installed capital
stock, , that is, on the ratio between the new capital to be installed and the capital stock already
installed.

There are two types of adjustment Costs which are external and internal. External adjustment costs
arise when firms face a perfectly elastic supply of capital. This will cause the price of capital to
depend on the velocity of installation and/or on the quantity of new capital. By contrast, the internal
adjustment costs are measured in terms of production losses. When new capital should be installed,
a portion of the investment must be expended in the installation process which is no-costly or,
alternatively, a fraction of the inputs already used in the production, basically labour, must be
devoted to the installation of the new capital. These inputs will be not available to produce during
the installation process, which implies forgone output.
C.)Investment adjustment cost may be applicable in Zimbabwe because as firms invest they
always face some costs of capital loss and other costs in investment process

However others firms in Zimbabwe they don't face a perfectly elastic supply of capital which is in
case of external costs

The acceleration theory of investment is also another theory which can explain investment
pattern in Zimbabwe . The theory states that an increase in investment occurs when there is an
increase in demand hence investment increases to meet increased output hence other firms in
Zimbabwe does do.

However due to lack of technological equipment in Zimbabwe the increase in investment to

meet increased demand is low in Zimbabwe hence the acceleration theory might not occur.
Panashe Honzeri

Econ 204

R188644C