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Model Questions Required, Macroeconomics

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1)
Assume that the production function for New Zealand is given by Y = AK0.57L0.43, where Y is real GDP (in 2000 constant dollars), K is real capital stock, L is labour. The parameter A is equal to 3. Assume further that in 2009 the capital stock was 476,992 and the labour employed was 2,193 and both capital and labour were paid their marginal products. In your answer, carry your calculations to 2 decimal places.
(a) What was the expected level of output in 2009?
(b) Does this production function exhibit constant returns to scale? Demonstrate by example.
(c) How was the total income shared between capital and labour? Comment on the relative shares.

2)
New Zealand GDP – Selected Years
GDP – Expenditure version
2008
2009
2013
2014
Nominal GDP ($NZ millions)
186,111
187,704
215,315
229,718
Real GDP ($NZ millions 2009/10 chain-weighted)
192,492
188,509
204,415
209,328

Based on the data in the table above, what happened to nominal output, real output and prices in the economy between 2008 and 2009 and between 2013 and 2014? Express your answers as proportional changes.


3)
Assume that the long-run aggregate supply curve is vertical at Y = 3,000 while the short-run aggregate supply curve is horizontal at P = 1.0. The aggregate demand curve is Y = 3(M/P) and M = 1,000.
(a) If the economy is initially in long-run equilibrium, what are the values of P and Y?
(b) Now suppose a supply shock moves the short-run aggregate supply curve to P = 1.5. What are the new short-run P and Y?
(c) If the aggregate demand curve and long-run aggregate supply curve are unchanged, what are the long-run equilibrium P and Y after the supply shock?
(d) Suppose that after the supply shock the central bank wanted to hold output at its long-run level. What level of M would be required? If this level of M were maintained, what would be long-run equilibrium P and Y?


4)
(a) The principal method used by the Federal Reserve of the US to change the money supply is through open-market operations. Use the aggregate demand–aggregate supply model to illustrate graphically the impact in the short run and the long run of a Federal Reserve decision to increase open-market purchases. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; v. the short-run equilibrium values; and vi. the long-run equilibrium values. State in words what happens to prices and output in the short run and the long run.
(b) The advent of interest-earning checking accounts in the early 1980s led many households to keep a larger proportion of their income in checking accounts. Use the aggregate demand–aggregate supply model to illustrate graphically the impact in the short run and the long run of this change in money demand. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; v. the short-run equilibrium values; and vi. the long-run equilibrium values. State in words what happens to prices and output in the short run and the long run.


5)
Assume that the consumption function is given by C = 200 + 0.5(Y – T) and the investment function is I = 1,000 – 200r, where r is measured in percent, G equals 300, and T equals 200.
(a) What is the numerical formula for the IS curve? (Hint: Substitute for C, I, and G in the equation Y = C + I + G and then write an equation for Y as a function of r or r as a function of Y.) Express the equation two ways.
(b) What is the slope of the IS curve? (Hint: The slope of the IS curve is the coefficient of Y when the IS curve is written expressing r as a function of Y.)
(c) If r is one percent, what is I? what is Y? If r is 3 percent, what is I? what is Y? If r is 5 percent, what is I? what is Y?
(d) If G increases, does the IS curve shift upward and to the right or downward and to the left?


6)
Assume that an economy is characterized by the following equations:
C = 100 + (2/3)(Y – T)
T = 600
G = 500
I = 800 – (50/3)r
Ms/P = Md/P = 0.5Y – 50r
(a) Write the numerical IS curve for the economy, expressing Y as a numerical function of G, T, and r.
(b) Write the numerical LM curve for this economy, expressing r as a function of Y and M/P.
(c) Solve for the equilibrium values of Y and r, assuming P = 1.0 and M = 1,200. How do they change when P = 2.0? Check by computing C, I, and G.
(d) Write the numerical aggregate demand curve for this economy, expressing Y as a function of G, T, and M/P.

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