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MGEB06 Assignment 1 (Fall 2020) Question 1 (20 points) - Topic 1 The following table provides the economic data for an economy. Year 2017 2018 2019 Price Quantity Price Quantity Price Quantity Good 1 21 300 22 360 25 360 Good 2 13 300 14 330 15 280 Good 3 6 160 7 180 8 170 Good 4 15 750 14 650 12 650 Good 5 4 400 6 450 5 420 Good 6 8 95 10 110 9 100 Here is some additional information about this economy that holds true for all 3 years unless otherwise stated: Unless otherwise stated, the goods are produced within the economy. . Good 1 is a pure consumption good and 40% are purchased from abroad. Half good 2 goes to households, while the remainder of the good is equally split between firms and the government. Firms purchase one-fifth of good 3 while the government consumes 30% of the good. The remainder is bought by households. Of the good 3 purchased by households, one-fifth goes to foreign households while the rest goes to domestic households. Both households and small businesses purchase good 4: 60% goes to households and 40% goes to small businesses. In addition, half of the good 4 consumed by households is produced abroad All of good 5 is bought by domestic sectors: 30% goes to domestic consumers while the remainder is equally split between firms and the public sector. Half of the good 6 is bought by foreign households. Of the remainder of good 6, 60% is purchased by the government and the rest is bought by firms. The government has chosen 2017 as the base year. Based on the information given, complete the following table. 2017 2018 2019 Consumption Investment Government spending Exports Imports Nominal GDP Real GDP GDP deflator CPI Inflation rate (using GDP deflator) Not applicable Inflation rate (using CPI) Not applicable Note: The above table is reproduced on page 5 of this assignment (you can copy/print it & fill it out). You must submit that page as your answer to Question 1 with your assignment for grading. Also, on separate page(s), show your work! You are required to do both; otherwise, you will receive a grade of zero for this part of the question. MGEB06 Assignment 1 (Fall 2020) 2 Question 2 (25 points) - Topic 2 A closed economy can be described by the long-run classical model: Y = 5K1/ 413/4v11 Ination rate (using GDP deator) Not applicable 1 Ination rate (using CPI) Not applicable 1 Note: 0 The above table is reproduced on page 5 of this assignment (you can copy/print it & ll it out). You must submit that page as your answer to Question 1 with your assignment for grading. 0 Also, on separate page(s), show your work! You are required to do both; otherwise, you will receive a grade of zero for this part of the question. MGEB06 Assignment 1 (Fall 2020) 2 ( Question 2 (25 points) Topic 2 A closed economy can be described by the long-run classical model: Y m SKI/4L3/4 C = 23500 + 0.6(Y m T) m 1200r I = 15000 - 800r MPK = 1.25K-3/4L3/4 MPL = 3.75K1/4L'1/4 In this economy, there are two productive factors, K and L and both factor inputs are fully employed. The stock of capital and the supply of labour are equal to 50625 and 10000 respectively. Initially, the level of government spending represents 24% of the initial national income. The government runs a 0 budget decit, and the size of the budget decits is equal to 4% of total output. Note: r represents the real interest rate and is measured in percentage points (for example, if r = 10, then this is interpreted as r = 10%). Keep your answers to 3 decimal points if needed. a) Compute the long-run equilibrium levels of consumption, national savings and real interest rate. Also, nd the long-run equilibrium real wage for labour and real rental price of capital. (5 points). Suppose the outbreak of COVID-19 reduces spending by both households and businesses. As a result, autonomous consumption and autonomous investment change by 6% and 5% respectively. b) Find the new long-run equilibrium levels of national savings and real interest rate, real wage, and real rental price of capital. (4 points) 0) Compare your answers in parts (a) & (b), what happens to the (equilibrium) level of investment? (i.e., increase/decrease/remain unchanged)? Explain, in words only, why the variable changes or remains unchanged. (4 points) (1) Show your answers for parts (a) & (b) in three diagrams (that depict the loanable funds market, the labour market, and the rental market for capital in long-run equilibrium). Be sure to identify which points on your diagrams are the long-run equilibria for part (a) & (b) respectively. No written explanation is required. (6 points) e) Suppose the government wants to promote the level of national savings to 8250 via a change government spending. Find the change in the level of government spending that will accomplish this goal. What happens to the budget balance (i.e., improves/deteriorateso change)? (6 points) Question 3 (40 points) Topics 2, 3 & 4 The economy is initially in its longrun equilibrium. The outbreak of the pandemic has increased the speed of autonomation and articial intelligence (AI); as a result, the spending on autonomation and AI increases by 10%. a) According to the long-run classical model, what happens to the equilibrium levels of output, real interest rate, and investment? What happens to the real wage and the real rental price of capital? Explain your answer with the aid of THREE diagrams one for the loanable funds market, one for the labour market, and one for the rental market for capital. (15 points) b) (Continued from part a) What happens to the stock of the capital in the very long run? Use the long run classical model to examine the effects on output and real interest rate in the very long run. What happens to the real wage and the real rental price of capital? Explain your answer with the aid of another set of THREE diagrams one for the loanable funds market, one for the labour market, and one for the rental market for capital. (15 points) MGEB06 Assignment 1 (Fall 2020) 3 interest rate, and investment? What happens to the real wage and the real rental price of capital? Explain your answer with the aid of THREE diagrams one for the loanable funds market, one for the labour market, and one for the rental market for capital. (15 points) b) (Continued from part a) What happens to the stock of the capital in the very long run? Use the long- run classical model to examine the effects on output and real interest rate in the very long run. What happens to the real wage and the real rental price of capital? Explain your answer with the aid of another set of THREE diagrams one for the loanable funds market, one for the labour market, and one for the rental market for capital. (15 points) MGEB06 Assignment 1 (Fall 2020) 3 c) Use the Solow to explain the impact of this shock on the steady state level of output per worker and consumption per worker. Use one Solow model diagram to demonstrate your answer, don't forget to clearly label the initial and new steady state points. (10 points) Question 4 (15 points) Topics 3 & 4 Consider an economy that is characterized by the Solow Model. The (aggregate) production function is given by: Y = 16.2I