UNIVERSITY OF GHANA

DEPARTMENT OF ECONOMICS

ECON313: MACROECONOMICS I, 2022/2023

MAIN CAMPUS
PROBLEM SET #1
Due: Thursday, 2nd March 2023

QUESTION ONE
A classical economy is described by the following equations:
1 2
(1) Production function: Y  (10 K 0.5 N  N ), K  K  4.
4
W
(2) Labour supply function: N S  4  20(1  t ) , t  0.2
P
(3) The proportion of income that is held in the form of money (k) is 0.25 and money supply
(M) is 297 units.
(4) Demand for loanable funds function: I  100  5r
(5) Supply of loanable funds function: S  30  9r

Where,
Y is real output or income, K is the capital stock, N is employment, Ns is the labour supply, W/P is
the real wage, W is the nominal wage, P is the price level, M is the money supply, and r is the
interest rate.
(a) Find the equilibrium values of the following variables:
W
i. real wage ( )
P
ii. employment (N)
iii. real output (Y)
iv. the price level (P)
v. money wage (W)
vi. real interest rate.
(b) Redo part (a) above if the Bank of Ghana increases the money supply by 50 percent.
(c) In order to increase real output above the level obtained in part a(iii) above, the
government has proposed the following expansionary fiscal measures:

i. The marginal tax rate is to be reduced from 0.20 to 0.10.

ii. There is to be a bond-financed increase in government expenditure of 28 units.
For each of the above policy measures, find the new equilibrium levels of the following
variables:
W
1. real wage ( )
P
2. employment (N)
3. real output (y);
4. the price level (P);
5. real interest rate.
(d) Use your answers in parts (b) and (c) above to discuss the relative effectiveness of the two
broad policy measures. Are your results classical in nature? Explain.

Examiners: Dr. Alfred Barimah & Prof. Ebo Turkson Page 1of 2
QUESTION TWO
Using appropriate diagrams, explain and show why classical economists viewed money as
a “veil”. In which situation did the classical economists view money as important? Explain

QUESTION THREE
Use appropriate diagrams to analyze:
(a) the effects of a pure fiscal policy (for an example, a bond-financed increase in
government expenditure) in the classical system.
(b) the effects of a ten percent reduction in the marginal tax rate in the classical system

Examiners: Dr. Alfred Barimah & Prof. Ebo Turkson Page 2of 2