Business Economics (Please answer more detail, thanks)

Question 1 (12 marks; 3 marks each)

State one similarity and one difference between the following pairs of terms:

a. private saving and public saving

b. frictional unemployment and structural unemployment

c. GDP deflator and consumer price index (CPI)

d. nominal interest rate and real interest rate

Question 2 (15 marks; 5 marks each)

State whether the following statements are TRUE or FALSE. Briefly explain your answer.

a. The long-run Phillips curve is a vertical straight line.

b. When the Federal Reserve conducts an open sale of government bonds, the federal funds rate will fall.

c. An expansionary monetary policy does not lead to an increase in output in the short run.

Question 3 (12 marks)

a. It is found that the real GDP per capita of developing countries grows faster than developed countries at the same period. Explain this phenomenon in the light of diminishing returns to capital. (8 marks)

b. In a closed economy, consumption is $80,000, taxes are $17,600, government purchases are $30,000 and national saving amounts to $20,000. Compute the level of GDP and private saving. (4 marks)

Question 4 (15 marks)

Suppose an economy has enough labor, capital, and land to produce 1,000 apples per year. Apples are the only product of the economy and the price is $10 per apple. In 2019, money supply is $5, 000 and velocity of money is constant.

a. State the quantity theory of money. (3 marks)

b. Compute nominal GDP and velocity of money in 2019. (4 marks)

In 2020, the central bank of the economy increases the money supply by 10%.

c. Compute nominal GDP and price level in 2020. What is the inflation rate between 2019 and 2020? (4 marks)

d. According to the Fisher effect,

• i. how are nominal and real interest rates related to one another? (2 marks)
• ii. what will be the impact of the increase in money supply by 10% on nominal and real interest rates respectively? (2 marks)

Question 5 (16 marks)

Suppose that Economy A is in the long-run equilibrium initially.

a. Copy the following diagram to your answer book. Label the x-axis and y-axis appropriately for the following diagram. Add the long-run aggregate supply curve (LRAS) on the diagram to illustrate the current state of Economy A. Label the full-employment output (YN) on the diagram. (where AD = aggregate demand and SRAS = short-run aggregate supply) (3 marks)

b. Now suppose the major trading partner of Economy A imposes a tariff (i.e., imported tax) on the exported goods of Economy A.

• i. Use the diagram in part (a) to show what happens to output and the price level of Economy A in the short run. What happens to the unemployment rate? (5 marks)
• ii. To stabilize the price level and achieve full unemployment, what kind of fiscal policy should the government of Economy A adopt? Illustrate your answer with the same diagram in part (a). (5 marks)
• iii. Some economists criticized the effectiveness of active stabilization policy to stabilize the economy. Explain briefly. (3 marks)