Reference no: EM132421740

Question 1

Determine if the following statements are correct and then explain briefly.

a. Policymakers in a closed economy could promote economic growth by encouraging saving.

b. When the government removes the minimum wage law, natural unemployment will fall.

c. If inflation is lower than expected, creditors gain at the expense of debtors.

d. Increase unemployment benefit payment to the unemployed will increase unemployment.

Question 2

a. In a country, the adult population is 1200, 400 people have full-time job, 400 people work as part-time worker, while 200 people are not employed but are looking for job. Calculate the unemployment rate.

b. Three months later, the adult population is still 1200, 400 people have full-time job, 400 people work as part-time worker. But the economic situation in that country continues to perform badly, and 100 people later give up hope and do not find job, while another 100 people are still looking for job. Calculate the latest unemployment rate.

Question 3

In an imaginary closed economy, the market for loanable funds is in equilibrium in which the government is running a balanced budget. In equilibrium, GDP, consumption expenditure and government expenditure are $4,000 million, $2,500 million and $1,000 million, respectively.

a. Calculate private saving, public saving, taxes and investment.

b. In order to finance for additional expenditures in the future, suppose the government is running a budget deficit in which it raises fund through selling government bonds in the open market. Explain the effects of this policy on the real interest rate and investment.

c. If the imaginary economy is a closed economy, what is the relationship between domestic investment and national saving?

d. If the imaginary economy has a reform, and then changes to an open economy, what is the new relationship between domestic investment and national saving?

Question 4

a. Suppose that in an economy, this year's money supply is $2 million, nominal GDP is $12 million, and real GDP is $10 million.

i. Compute the velocity of money.

ii. Suppose that velocity is constant and the economy's real output of goods and services is expected to grow by 4 percent next year due to technical progress. What is the price level next year if the central bank keeps the money supply constant?

b. State the six costs of inflation. Illustrate your answer with an example.

Question 5:

Suppose an economy that is initially at full employment faces a substantial drop in exports.

a. With the aid of a graph of aggregate demand and aggregate supply, explain the short-run effect of a substantial fall in exports on output, unemployment and price level.

b. What kind of monetary policy should the central bank adopt to restore the economy back to the full-employment level in the short run? Explain the mechanism for this monetary policy.