Macroeconomics Assignment Trimester II 2018-19

Problem Set II

1. “Unemployment is inevitable in an economy” Is this statement true? Briefly discuss your answer.
2. Describe the determinants of the natural rate of unemployment. What type of policy that could lowering the
natural rate of unemployment? Explain with examples.
3. Suppose some country had an adult population of about 55.5 million, the labor-force participation rate was
67.5 percent, and the unemployment rate was 4.8 percent. What were the number of people employed and
the number of people unemployed?
4. Why net exports and net capital outflow always equal?
5. Suppose a bottle of wine costs 45 euros in France and 60 dollars in the United States. If the nominal
exchange rate is 1.5 euros per dollar, what is the real exchange rate (French wines per American wine)?
6. Consider a small open economy where domestic interest rate is less than the world interest rate (rD<r*).
Then, what will happen to the trade balance, net capital outflow and real exchange rate if foreign
governments begin to increase income tax? Support your answer with diagrams of a loanable funds market
and a foreign exchange market.
7. Use the quantity theory of money to explain why the aggregate demand curve slope downward.
8. Suppose the Central Bank reduces the money supply by 5 percent. Assume the velocity of money is
constant.
a) What happens to AD curve?
b) What happens to the level of output and the price level in the short run and in the long run?
9. Suppose that the government cut taxes while central bank pursued a tight monetary policy. What would be
the effect of this policy mix to an economy? Explain and draw IS-LM model to support your answer.
10. A close-economy is characterized by following: Consumption function is 755+0.6Yd, Investment function is
1500+0.05Y-2r, Government expenditure is 400 and also collects a lump-sum tax of 100 and 15 percent of
income tax. The economy has money demand function as 650+0.2Y-5r and money supply of 1800 whereas
the price level is 1.
a) Find equilibrium levels of interest rate (r), output (Y), consumption (C) and investment (I) of the
economy.
b) Assuming that there has been an inflation in the economy by 5% due to a negative price shock in the
short-run. Find the new rate of interest (r) and the new equilibrium output (Y) consumption (C), and
investment (I) of the economy in the short-run.
c) From part b), explain the changes/effects of the economy. Also, illustrate the situation using IS-LM and
AS-AD models.
d) Explain what would happen to the economy in the long-run. Using IS-LM and AS-AD models to illustrate
the situation.