(i) Two key variables in macroeconomics are real GDP and the CPI. Select ONE of

these variables.

Explain what the variable measures and discuss one problem associated with its

measurement.

(ii) The country of Ur has a binding minimum aggregate real wage that results in

unemployment. The government is considering two alternative proposals aimed

at reducing the level of unemployment:

(a) Incentives for business to provide workers with extra capital equipment.

(b) Free childcare.

Evaluate the likely effectiveness of each policy in achieving a lower

unemployment rate.

(iii) The following equations describe national saving and investment for the

small open economy of Oz.

= 10 + 1.5

= 14 0.5

The world interest rate is 4 percent. Other things equal, suppose the

government of Oz increases the level of government spending by 2.

According to this model what are the effects on the budget balance, national

saving and investment, real interest rates and the balance of trade?

(iv) The per-worker production function for an economy is given by:

= ^0.25

With the aid of a diagram, discuss the potential for technology and private

investment to act as sources of permanent economic growth.

(v) The central bank of Wakanda has the following policy reaction function for

setting its real policy rate (where all variables are in percent):

= 1 + 0.5

Suppose Wakanda experiences a deflation rate of 2 percent? Discuss the

implications for monetary policy if:

(a) The central bank is not subject to the zero lower bound.

(b) The central bank is subject to the zero lower bound.