Question 5: GDP and Inflation (a) Consider the below production data for a small economy and calculate nominal GDP for each Year.

Year Price of Milk Quantity of Milk Price of Cookies Quantity of Cookies 2019* $2 10 $1 20 2020 $2.25 12 $1.2 25

(b) Given 2019 is the base year, calculate real GDP for each year.

(c) Calculate the rate of real economic growth in 2020.

(d) For each year calculate the GDP deflator. For 2020 calculate the rate of inflation too.

(e) Assume the CPI basket contains 2 units of milk and 3 units of cookies and construct a CPI for each year. For 2020 also calculate the rate of inflation.

Question 6: Production & Economic Growth (a) An economy has the following production function . If the capital stock (K) is 1024 and Labour (L) is 676 in year t, then calculate output for this economy for year t.

(b) What returns to scale does the production function in (a) have? Demonstrate your answer.

(c) Using the information in (a) calculate the marginal product of capital and interpret your answer.

Question 7: The Business Cycle (a) Sketch a diagram of an economy in long-run equilibrium utilising the AD/AS model.

(b) Assume that there is, now, a decrease in net exports (NX). What will be the short-run impact? Add this to your diagram in (a).

(c) With what type of monetary policy might you expect the Reserve Bank of New Zealand to respond to (b) with? Add this to your diagram in (a).

Question 8: Unemployment and Inflation (a) Consider the below employment table for a small economy (figures are in millions) and calculate the size of the labour force, the labour force participation rate, and the unemployment rate.

Population Number Employed Number Unemployed 50 34 2

(b) The relation between the unemployment rate and the inflation rate is given by: . If & what is the current unemployment rate?

(c) If inflation expectations in (b) decrease: calculate the new rate of unemployment.

Question 9: Investment & Exchange Rates (a) Given the following parameters for a closed economy: ,,, & , Calculate national savings (S), including the breakdown of private and public savings.

(b) If $1NZ can buy $0.78US, then how much can $1US buy of $NZ?

(c) If a pint of beer costs $8 in New Zealand and 5 in the United Kingdom, assuming purchasing power parity holds, what is the UK-NZ$ exchange rate?

(d) If the nominal exchange rate between Australia and New Zealand is (AUS$-NZ$) is 0.95 and a widget costs $99 in New Zealand and $90 in Australia, calculate the real exchange rate. Interpret your answer.