UNIVERSITY OF CAPE COAST COLLEGE OF

HUMANITIES AND LEGAL STUDIES

SCHOOL OF BUSINESS
DEPARTMENT OF FINANCE
2022/2023 ACADEMIC YEAR – SECOND
SEMESTER
Course Code and SBU 308 – Applied Macroeconomics
Title
Tutorial Questions Set 2
Area of Coverage The Measurement of Economic Activity

1. Consider an economy that produces and consumes bread and wine. In the following table are
data for two different years.

2010 2020
Goods Quantity Price Quantity Price
Wine 100 GHS 50,000 120 GHS 60,000
Bread 500,000 GHS 10 400,000 GHS 20
Using 2010 as the base year, compute the following statistics for each year: nominal GDP, real GDP
and the implicit GDP deflator. What is the change in value of economic activity between the two
years?

2. Assume an economy consumes only two commodities, apple juice and grape juice. In year 1,
apple juice cost GHS 1 each, grape juice cost GHS 2 each but the consumers in the economy
bought only 10m units of apple juice. In year 2, each apple juice cost GHS 2, each grape juice
cost GHS 1, and consumers in the economy buys 10m units of grape juice. Assume that the
economy began the year with no fruit juice in stock but had 300,000 units of apple fruit juice in
stock and 200,000 units of grape juice in stock at the end of the year. However, at the end of the
second year, the economy had 700,000 units of apple fruit juice in stock and 800,000 units of
grape juice in stock.
a. Compute the economies nominal spending on fruit juice in each year. How does it change
from year 1 to year 2?
b. Using year 1 as the base year, compute economies real spending on fruit juice in each year.
How does it change from year 1 to year 2?
c. Compute the GDP deflator. How does the deflator change from year 1 to year 2? Comment
on your answer?
3. An economy produces three goods: cars, computers, and oranges. Quantities and prices per unit
for years 2009 and 2010 are as follows:
2010 2020
Goods Quantity Price Quantity Price
Cars 10 GHS 2,000 12 GHS 3,000
Computers 4 GHS 1,000 6 GHS 500
Oranges 1000 GHS 1 1,000 GHS 1
a. What is nominal GDP in 2010 and in 2020? By what percentage does nominal GDP change
from 2009 to 2010?
b. Using the prices for 2010 as the set of common prices, what is real GDP in 2010 and in
2020? By what percentage does real GDP change from 2010 to 2020?

4. The following equations refer to the goods market of an economy in billions of GHS:
C = 480 + 0.5YD
I = 110
T = 70
G = 250
a) Solve for the equilibrium national income.
b) Find equilibrium disposable income (YD).
c) Find equilibrium consumption (C).
d) Calculate the private savings, public savings, and investment spending.

5. Assume a simple Keynesian model, where Government spending is GHS725 m; Autonomous

investment is GHS320 m but a unit increase in interest rate will make investment fall by GHS12
m; and savings (in millions of GHS) is given by the function: S = -250 + 0.2Yd. Net taxes (in
millions of GHS) is given by the tax function: T = -50 + 0.25Y.
Required:
i. Calculate the equilibrium national income at 1% interest rate.
ii. Now assume that autonomous investment increases by GHS80 m or government expenditure
decreases by GHS25 m, compute the new level of equilibrium national income in both situations.
iii. Now suppose that autonomous investment falls by GHS80 m, compute the new level of
equilibrium income and the budget deficit/surplus at that level of income.
iv. Based on your answer in (iii) above, suppose that the government raises lump-sum taxes or
transfers by the amount of the deficit or surplus in order to balance the budget, what will be the
new level of equilibrium income? Will the budget be balanced? Explain.

6. If the saving function is S = -100 + 0.25Yd, Investment (I) is 200, government expenditure is
200, export is 100, autonomous import is 200 and autonomous taxes are 20.
Required:
a. What will be the equilibrium level of output?
b. Now suppose that we have a proportional tax rate of 0.25 of income instead of the
autonomous, net exports, investment as well as government expenditure remain the same,
what will happen to aggregate output?
c. Now suppose that marginal propensity to import is 0.2, exports, government expenditure,
investment, proportional taxes and autonomous imports remain the same, what will happen
to aggregate output?
d. Compute the government multipliers in questions a, b and c and comment on them.