Tutorial5 RE1704 AY22 23

RE1704 Principles of Real Estate
Economics
Tutorial 5
Department of Real Estate

National University of Singapore
1
Practice Questions from Lecture 10
2
Chapter 34- Problem 1. Explain how each of the following developments would affect the supply of money,
the demand for money, and the interest rate. Illustrate your answers with diagrams.
a. The Fed’s bond traders buy bonds in open-market operations.

Answer: When the Fed’s bond traders buy bonds in open-market operations, the money-supply curve shifts
to the right from MS 1 to MS 2, as shown in Figure 1. The result is a decline in the interest rate.
Figure 1
3
b. An increase in credit-card availability reduces the amount of cash people want to hold.
Answer: When an increase in credit card availability reduces the cash people hold, the money-demand curve
shifts to the left from MD 1 to MD 2, as shown in Figure 2. The result is a decline in the interest rate.
Figure 2
4
c. The Federal Reserve reduces banks’ reserve requirements.

Answer: When the Federal Reserve reduces reserve requirements, the money supply increases, so the
money-supply curve shifts to the right from MS 1 to MS 2, as shown in Figure 1. The result is a decline in the
interest rate.
1
𝑚𝑜𝑛𝑒𝑦 𝑚𝑢𝑙𝑡𝑖𝑝𝑙𝑖𝑒𝑟 =
𝑟𝑒𝑠𝑒𝑟𝑣𝑒 𝑟𝑎𝑡𝑖𝑜
Figure 1
5
d. Households decide to hold more money to use for holiday shopping.

Answer: When households decide to hold more money to use for holiday shopping, the money-demand curve
shifts to the right from MD 1 to MD 2, as shown in Figure 3. The result is a rise in the interest rate.
Figure 3
6
e. A wave of optimism boosts business investment and expands aggregate demand.

Answer: When a wave of optimism boosts business investment and expands aggregate demand, money
demand increases from MD 1 to MD 2 in Figure 3. The increase in money demand increases the interest rate.
Figure 3
7
Chapter 34- Problem 7. Suppose economists observe that an increase in government spending of $10
billion raises the total demand for goods and services by $30 billion.
a. If these economists ignore the possibility of crowding out, what would they estimate the marginal
propensity to consume (MPC) to be?
Answer: If there is no crowding out, then the multiplier equals 1/(1 – MPC ). Because the multiplier is 3
(=30/10), then MPC = 2/3.
marginal propensity to consume (MPC)— the fraction of extra income that a household consumes rather than
saves.
8
Chapter 34- Problem 7. Suppose economists observe that an increase in government spending of $10
billion raises the total demand for goods and services by $30 billion.
b. Now suppose the economists allow for crowding out. Would their new estimate of the MPC be larger or
smaller than their initial one?
Answer: If there is crowding out, then the MPC would be larger than 2/3. An MPC that is larger than 2/3
would lead to a larger multiplier than 3, which is then reduced down to 3 by the crowding-out effect.
Multiplier effect: each dollar spent by the government can raise the aggregate demand for goods and services
by more than a dollar, government purchases are said to have a multiplier effect on aggregate demand.
G à Y=C+G+I+NX à C=MPC(Y-T) à Y=C+G+I+NX à C=MPC(Y-T) à Y=C+G+I+NX

… once again and so on
Crowding-out effect: the offset in aggregate demand that results when expansionary fiscal policy raises the
interest rate and thereby reduces investment spending
9
Chapter 34- Problem 11. Consider an economy described by the following equations:
Y = C+I+G
C = 100 + 0.75(Y − T)
I = 500 – 50 r
G = 125
T = 100
where Y is GDP, C is consumption, I is investment, G is government purchases, T is taxes, and r is the interest
rate. If the economy were at full employment (that is, at its natural rate), GDP would be 2,000.
a. Explain the meaning of each of these equations.

Answer:
Y=C+I+G is the equilibrium condition for GDP in a closed economy (output equals the sum of consumption,
investment, and government spending);
C=100+.75(Y-T) is the equation for consumption which depends on disposable income;
I=500-50r is the equation for investment which depends on the interest rate;
G=125 means that government spending is fixed at 125;
T=100 means that taxes are fixed at 100.
10
Y = C+I+G
C = 100 + 0.75(Y − T)
I = 500 – 50 r
G = 125
T = 100
b. What is the marginal propensity to consume in this economy?

Answer: The marginal propensity to consume is 0.75 because C = 100 + 0.75(Y − T).
c. Suppose the central bank’s policy is to adjust the money supply to maintain the interest rate at 4 percent, so
r = 4. Solve for GDP. How does it compare to the full-employment level?
Answer: When the interest rate, r, is 4 percent,
Y = 100 + .75(Y - 100) + 500 - 50(4) + 125
Y = 100 + .75Y – 75 + 500 – 200 + 125
Y = 450 + .75Y
.25Y = 450
Y = 1800, which is less than the full employment level.
11
Y = C+I+G
C = 100 + 0.75(Y − T)
I = 500 – 50 r
G = 125
T = 100
d. Assuming no change in monetary policy, what change in government purchases would restore full
employment?
Answer: Assuming no change in monetary policy, an increase in government purchases of 50 (to 175) would
restore full employment. Because the marginal propensity to consume is .75, the multiplier is 1/(1-.75) or 4. To
increase GDP from 1800 to 2000, or by 200, government spending would need to increase by 200/4 = 50.
12
Y = C+I+G
C = 100 + 0.75(Y − T)
I = 500 – 50 r
G = 125
T = 100
e. Assuming no change in fiscal policy, what change in the interest rate would restore full employment?
Answer: Assuming no change in fiscal policy, a decrease of 1 percent (from 4 percent to 3 percent) in the
interest rate would restore full employment.
2000 = 100 + .75(2000 - 100) + 500 – 50r + 125
2000 = 2150 – 50r
50r = 150
r=3
13
MCQ --- L10 (chapter 34)
1. If the central bank wants to expand aggregate demand. It can ___ the money supply,
which would ___ the interest rate.
a. increase. increase
b. increase, decrease
c. decrease, increase
d. decrease, decrease
Answer: b.
14
2. If the government wants to contract aggregate demand, it can ____ government
purchases or ____ taxes.
a. increase, increase
b. increase, decrease
c. decrease, increase
d. decrease, decrease
Answer: c.
15
4. With the economy in a recession because of inadequate aggregate demand, the
government increases its purchases by $1,200. Suppose the central bank adjusts the money
supply to hold the interest rate constant, investment spending is fixed, and the marginal
propensity to consume (MPC) is 2/3. How large is the increase in aggregate demand (AD)?
a. $400 b. $800 c. $1,800 d. $3,600
Answer: d.
The increase in aggregate demand includes the multiplier effect.
The multiplier is calculated as:

Multiplier = 1 / (1 - MPC) Multiplier = 1 / (1 - 2/3) = 1 / (1/3) = 3
à the increase in aggregate demand:

ΔAD = Multiplier x ΔG ΔAD = 3 x $1,200 = $3,600
16
5. If the central bank in the preceding question instead holds the money supply constant and allows the
interest rate to adjust, the change in aggregate demand resulting from the increase in government
purchases will be
a. larger.
b. the same.
c. smaller but still positive.
d. negative.
Answer: c.
Government purchases ↑ à aggregate demand ↑ which puts upward pressure on the interest rate.
17
Chapter 18- Problem 2. Show the effect of each of the following events on the market for labor in the
computer manufacturing industry.
a. Congress buys personal computers for all U.S. college students.
Answer: If Congress were to buy personal computers for all U.S. college students, the demand for computers
would increase, raising the price of computers and thus increasing the value of the marginal product
of workers who produce computers. This is shown in Figure 4 as a shift in the demand curve for labor from D1
to D2. The result is an increase in the wage from w1 to w2 and an increase in the quantity of labor from L1 to L2.
Note:
The demand for labor of a competitive firm
is given by its value of MPL: 𝑷×𝑴𝑷𝑳.
Figure 4
18
b. More college students major in engineering and computer science.
Answer: If more college students major in engineering and computer science and assuming this trend does
not affect the demand for computers, the supply of labor in the computer industry rises. This is shown in
Figure 5 as a shift in the supply curve from S1 to S2. The result is a decrease in the wage from w1 to w2 and an
increase in the quantity of labor from L1 to L2.
Figure 5
19
c. Computer firms build new manufacturing plants.
Answer: If computer firms build new manufacturing plants, this increases the marginal product of labor
and the value of the marginal product of labor for any given quantity of labor. This is shown in Figure 6
as a shift in the demand curve for labor from D1 to D2. The result is an increase in the wage from w1 to w2 and
an increase in the quantity of labor from L1 to L2.
Note:
the supply of other factors of production
increases to raise MPL.
The demand for labor of a competitive firm is
given by its value of MPL: 𝑃×𝑀𝑃𝐿.
Figure 5
20
Chapter 18- Problem 4. Smiling Cow Dairy can sell all the milk it wants for $4 a gallon, and it can rent all
D APPLICATIONS
the robots it wants to milk the cows at a capital rental price of $100 a day. It faces the following production
schedule:
esident proposes a new law Number off Total
healthcare costs: All Americans are Robots Product
apple daily.
0 0 gallons
s apple-a-day law affect the
1 50
uilibrium price of apples?
2 85
law affect the marginal product and
3 115
marginal product of apple pickers?
4 140
law affect the demand and
5 150
ge for apple pickers?
6 155
each of the following events on
r in thea.computer
In whatmanufacturing
kind of market structurea. In what
doeskind
theoffirm
market
sellstructure does the
its output? Howfirmcan
sell you tell?
its output? How can you tell?
personal Answer: for all U.S.the firm canb.sell
computersBecause In what
all ofkind
theofmilk
market structure
it wants todoes the firm
at the market price of $4 per gallon, Smiling
. Cow Dairy operates in a perfectlyrent robots? How
competitive can youmarket.
output tell?
udents major in engineering and c. Calculate the marginal product and the value of
ce. the marginal product for each additional robot.
b. In what kind of market structure
build new manufacturing plants. d. Howdoesmanythe firmshould
robots rent the
robots? How can you tell?
firm rent?
Explain.
is the only input used by a
Answer: Because the firm can rent all the robots it wants to at the market price of $100 per day, Smiling
ve firm.Cow
The firm’s 5. The nation of Ectenia has 20 competitive apple or-
Dairyproduction
rents robots in a perfectly competitive
chards, all market.
of which sell apples at the world price of
ws:
$2 per apple. The following equations describe the
bor Units of Output production function and the marginal product of labor 21
D APPLICATIONS
schedule:
apple daily.
0 0 gallons
1 50
2 85
3 115
4 140
5 150
6 155
r in thec.computer
Calculate the marginal product
manufacturing a. In(MP)
what kind
and ofthemarket
valuestructure
of the does
MP forthe firm
eachsell
additional robot.
personal Answer:
computersThe
for alltable
U.S. below shows the
b. In MPkind
what andof VMP
marketfor robots:
structure does the firm
. rent robots? How can you tell?
# Robots
c. CalculateTotal
theOutput
marginal product and MPthe value of VMP
udents major in engineering and 0 0 gallons ---- ----
1 50 50 gallons $ 200
build new manufacturing plants. d. How many robots should the firm rent?
2 85 35 140
Explain.
is the only input used by a 3 115 30 120
ve firm. The firm’s production 5. 4 The nation of Ectenia
140 has 20 competitive
25 apple or- 100
ws: 5 chards, all of which
150 sell apples at the world
10 price of 40
6$2 per apple. The 155following equations 5describe the 20
D APPLICATIONS
schedule:
apple daily.
0 0 gallons
1 50
2 85
3 115
4 140
5 150
6 155
r in thed. How many
computer robots should the
manufacturing a. firm
In what kindExplain.
rent? of market structure does the firm sell
Answer: The firm should rentb.robots
personal computers for all U.S. In whatup toofthe
kind point
market wheredoes
structure VMP theisfirm
equal to the wage. Therefore, it should
. rent 4 robots. rent robots? How can you tell?
# Robots
c. Calculate Total
theOutput
marginal product and MPthe value of VMP
udents major in engineering and 0 0 gallons ---- ----
1 50 50 gallons $ 200
build new manufacturing plants. d. How many robots should the firm rent?
2 85 35 140
Explain.
is the only input used by a 3 115 30 120
ve firm. The firm’s production 5. 4 The nation of Ectenia
140 has 20 competitive
25 apple or- 100
ws: 5 chards, all of which
150 sell apples at the world
10 price of 40
6$2 per apple. The 155following equations 5describe the 20
Chapter 18- Problem 7. Leadbelly Co. sells pencils in a perfectly competitive product market and hires
workers in a perfectly competitive labor market. Assume that the market wage rate for workers is $150 per
day.
a. What rule should Leadbelly follow to hire the profit-maximizing amount of labor?
Answer: Leadbelly should hire workers up to the point where VMP is equal to the wage of $150 per day.
b. At the profit-maximizing level of output, the marginal product of the last worker hired is 30 boxes of pencils
per day. Calculate the price of a box of pencils.
Answer: Since VMP is equal to $150 at the profit-maximizing level of output, and VMP = MP × P, the price of
pencils must be $5 per box.
24
day.
c. Draw a diagram of the labor market for pencil workers (as in Figure 4 of this chapter) next to a diagram
of the labor supply and demand for Leadbelly Co. (as in Figure 3). Label the equilibrium wage and quantity
of labor for both the market and the firm. How are these diagrams related?
Answer: As Figure 8 shows, the market wage is determined in the labor market ($150 per day). The firm
takes this wage as given and chooses its level of labor where VMP is equal to $150 per day.
Figure 8 25
day.
d. Suppose some pencil workers switch to jobs in the growing computer industry. On the side-by-side
diagrams from part (c), show how this change affects the equilibrium wage and quantity of labor for
both the pencil market and for Leadbelly. How does this change affect the marginal product of labor at
Leadbelly?
Answer: The decrease in the supply of labor will raise the equilibrium wage (see Figure 9). The increase in
wage will reduce the profit-maximizing level of labor hired in both the pencil market and by Leadbelly.
The value of the marginal product of workers will rise to the level of the new wage. Because the price of
pencils has not changed and the value of the marginal product increases, the marginal product of labor must
increase (VMP=MP*P). This change in the marginal product of labor is consistent with diminishing marginal
product and a lower level of labor.
Figure 9 26
2. If firms are competitive and profit-maximizing, the demand curve for labor is determined by
a. the opportunity cost of workers’ time.

b. the value of the marginal product of labor.
c. offsetting income and substitution effects.
d. the value of the marginal product of capital.
Answer: b.
Marginal decision rule: If the extra output that is produced by hiring one more unit of labor adds
more to total revenue than it adds to total cost, the firm will increase profit by increasing its use of
labor.
27
3. A bakery operating in competitive markets sells its output for $20 per cake and hires labor at $10 per
hour. To maximize profit, it should hire labor until the marginal product of labor is
a. 1/2 cake per hour.

b. 2 cakes per hour.
c. 10 cakes per hour.
d. 15 cakes per hour.
Answer: a.
To maximize profit, the bakery should hire labor until the marginal product of labor (MP) is equal to the
wage rate (W) à The profit-maximizing condition is MP x P = W, where P is the price of the cake.
From the question: P = $20 and W = $10.
à MP x $20 = $10
Dividing both sides by $20, we get: MP = 0.5
28
4. A technological advance that increases the marginal product of labor shifts the labor- ________
curve to the ________.
a. demand, left
b. demand, right
c. supply, left
d. supply, right
Answer: b.
A technological advance à MPL ↑ à labor demand ↑
29
6. A storm destroys several factories, thereby reducing the stock of capital. What effect does this
event have on factor markets?
a. Wages and the rental price of capital both rise.

b. Wages and the rental price of capital both fall.
c. Wages rise and the rental price of capital falls.
d. Wages fall and the rental price of capital rises.
Answer: d.
A storm that destroys several factories à reduces the stock of capital à a reduction in the supply of
capital à an increase in the rental price of capital.
Demand for labour falls and wages fall.
30
Practice Questions from Lecture 11
31
Chapter 25- Problem 3. Societies choose what share of their resources to devote to consumption and what
share to devote to investment. Some of these decisions involve private spending; others involve government
spending.
a. Describe some forms of private spending that represent consumption and some forms that represent
investment. The national income accounts include tuition as a part of consumer spending. In your opinion, are
the resources you devote to your education a form of consumption or a form of investment?
Answer: Private consumption spending includes buying food and buying clothes; private investment spending
includes people buying houses and firms buying computers. Many other examples are possible. Education can
be considered as both consumption and investment; but usually as consumption of services.
b. Describe some forms of government spending that represent consumption and some forms that represent
investment. In your opinion, should we view government spending on health programs as a form of
consumption or investment? Would you distinguish between health programs for the young and health
programs for the elderly?
Answer: Government consumption spending includes paying workers to administer government programs;
government investment spending includes buying military equipment and building roads. Many other examples
are possible.
Health expenditure on preventive and primary care is investment, while hospitalisation expenditure is
consumption in nature. Government spending on health programs for the young is more likely to be an
investment.
32
Chapter 25- Problem 8. International data show a positive correlation between income per person and the
health of the population.
a. Explain how higher income might cause better health outcomes.

Answer: Individuals with higher incomes have better access to clean water, medical care, and good nutrition.
b. Explain how better health outcomes might cause higher income.

Answer: Healthier individuals are likely to be more productive.
c. How might the relative importance of your two hypotheses be relevant for public policy?
Answer: Understanding the direction of causation will help policymakers place proper emphasis on the
programs that will achieve both greater health and higher incomes.
33
3. Most economists are ________ that natural resources will eventually limit economic growth. As
evidence, they note that the prices of most natural resources, adjusted for overall inflation, have tended to
________ over time.
a. concerned, rise
b. concerned, fall
c. not concerned, rise
d. not concerned, fall
Answer: d.
34
4. Because capital is subject to diminishing returns, higher saving and investment do not lead to higher
a. income in the long run.

b. income in the short run.
c. growth in the long run.
d. growth in the short run.
Answer: c.
35
5. When the Japanese car maker Toyota expands one of its car factories in the United States, what is the
likely impact of this event on the gross domestic product and gross national product of the United
States?
a. GDP rises and GNP falls.

b. GNP rises and GDP falls.
c. GDP shows a larger increase than GNP.
d. GNP shows a larger increase than GDP.
Answer: c.
36
6. Thomas Robert Malthus believed that population growth would
a. put stress on the economy’s ability to produce food, dooming humans to remain in poverty.
b. spread the capital stock too thinly across the labor force, lowering each worker’s productivity.
c. promote technological progress, because there would be more scientists and inventors.
d. eventually decline to sustainable levels, as birth control improved and people had smaller families.
Answer: a.
37

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RE1704 Principles of Real Estate

Department of Real Estate

a. The Fed’s bond traders buy bonds in open-market operations.

c. The Federal Reserve reduces banks’ reserve requirements.

d. Households decide to hold more money to use for holiday shopping.

e. A wave of optimism boosts business investment and expands aggregate demand.

G à Y=C+G+I+NX à C=MPC(Y-T) à Y=C+G+I+NX à C=MPC(Y-T) à Y=C+G+I+NX

a. Explain the meaning of each of these equations.

b. What is the marginal propensity to consume in this economy?

The multiplier is calculated as:

à the increase in aggregate demand:

a. Congress buys personal computers for all U.S. college students.

b. More college students major in engineering and computer science.

c. Computer firms build new manufacturing plants.

a. the opportunity cost of workers’ time.

a. 1/2 cake per hour.

From the question: P = $20 and W = $10.

A technological advance à MPL ↑ à labor demand ↑

a. Wages and the rental price of capital both rise.

a. Explain how higher income might cause better health outcomes.

b. Explain how better health outcomes might cause higher income.

a. income in the long run.

a. GDP rises and GNP falls.

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