Macroeconomics:

Question 1

Economists use economic models to replicate real life situations for economic policy. Production possibilities frontier is one of the few economic models used to explain the behavior of economies. You are supposed to use a production possibilities frontier to show society's trade-off between two "goods" - a clean environment and the quantity of industrial output. What factor do you think determines the slope of the frontier? Illustrate what happens to the frontier if engineers develop a new way of producing electricity that emit lesser pollutants.

Question 2

a)Elucidate how an economy's income must always equal its expenditure.

b)Assume a hypothetical economy that produces only one good - Peanut Butter. In year 1, the quantity produced is 4 packs and the price is Rs.400 per pack. In year 2, the quantity produced is 5 packs and the price is Rs.500 per pack. Inyear3, the quantity produced is 6 packs and the price is Rs.600 per pack. Year 1 is the base year.

a.What is nominal GDP for each of these three years?

b.What is real GDP for each of these years?

c.What is the GDP deflator for each of these years?

d.What is the percentage growth rate of real GDP from year 2 to year 3?

e.What is the inflation rate as measured by the GDP deflator from year 2 to year 3?

f.In this one-good economy, how might you have answered parts (d) and (e) without first answering parts (b) and (c)?