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2. (12 marks in total) Consider an economy that produces three types of goods: Apple, Cheese and Bread. In the base year, the production and
2. (12 marks in total) Consider an economy that produces three types of goods: Apple, Cheese and Bread. In the base year, the production and the unit price were as follows: Product Quantity Unit Price Apple 5000 Cheese 1000 $10 Bread 2000 $2 In the current year, the production and the unit price are as follows: Product Quantity Unit Price Apple 6000 $4 Cheese 1200 $15 Bread 2500 $3 (a) (3 marks) Find nominal GDP in the base year and in the current year. By what percentage does nominal GDP increase from the base year to the current year? (b) (3 marks) Find real GDP in the base year and in the current year. By what percentage does real GDP increase from the base year to the current year?(c) (3 marks) Find the GDP deflator for the base year and the current year. By what percentage does the price level increase from the base year to the current year? (d) (3 marks) Would you say that the percentage increase in nominal GDP in this economy since the base year is due more to increases in prices or increases in quantities? Explain.3. (18 marks in total) Consider an economy in which the marginal product of labour is given by MPN = A(150 - N), where NV is the amount of labor used. The amount of labour supplied is given by 60+5(1 -t)w, where w is the real wage and t is the tax rate on labour income. (a) (4 marks) Suppose A = 2 and t = 20%. Calculate the equilibrium levels of real wage and employment. (b) (4 marks) Suppose that the economy experiences an adverse supply shock and A = 1. Everything else remains the same as before. Calculate the equilibrium levels of real wage and employment in this case.(c) (4 marks) Suppose that the government lowers the labour income tax by 50% following the adverse supply shock, i.e., A = 1 and t = 10%. Calculate the equilibrium levels of real wage and employment in this case. (d) (6 marks) Use the labour market diagram to illustrate the adjustments from the original equilibrium in part (a) to the equilibrium in part (b) and then the ad- justments from the equilibrium in part (b) to the equilibrium in part (c). Explain the adjustments from (a) to (b) and the adjustments from (b) to (c) clearly.4. (20 marks in total) Consider a closedeconomy. The economywide expected future marginal product of capital is JUPKI = 50 [1.0533r -. where Kl is the future capital stock. The depreciation rate of capital, 5.. is 1% per period. The current. capital stock, K, is 900 units of capital. The real price of a unit of capital is 8 unit of output. Firms pa}r taxes equal to 2% of their output. The consumption equation is C = IUU + HEY lr, where C is consumption, Y is output, and r is the real interest rate. Government spending equals 150 and fullremployment output. is lUU. [a] {E marks] Suppose the current real interest rate is 10% per period. 1What. are the values of the taxeadjusted user cost. of capital, the desired future capital stock, and the desired level of investment? [b] {2 marks] 1When the real interest. rate equals 10%, what are the desired levels of consumption and saving [assuming output is at the fullreniployment level]? (c) (2 marks) Is the goods market in equilibrium when the real interest rate equals 10%? Provide an intuitive explanation to your answers. (d) (10 marks) Solve for the real interest rate that clears the goods market. What are the goods market-clearing values of consumption, saving, and investment? What is the desired amount of capital stock in this equilibrium
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