QUESTION ONE

Sunshine is a small open economy described by the following long-run classical equations where Y is the economy's real GDP, T-taxes, G-government spending, NX - net exports, I-investment, C- consumption, r - domestic interest rates, r* - world interest rates.

Y=4000

G=1250

T=1,000

C=250+2/3 (Y-T)

I = 450-25r

NX= 1250 -175

r = r* = 4

a. Required: Select the appropriate answer that represent [i] investment, [ii] national savings, [iii] equilibrium exchange rate and [iv] trade balance.

b. Suppose the government of sunshine cut its spending to 2,000. Required: Select the appropriate answer that represent [i] investment, [ii] national savings, [iii] equilibrium exchange rate and [iv] trade balance.

c. Now suppose the world interest rate falls from 8 to 3 percent, (G is again 2000). Required: Select the appropriate answer that represent [i] private savings, [ii] public savings, [ii] national savings, [iv] investment, [v] trade balance and [vi] equilibrium exchange rate

QUESTION TWO

Suppose an economy produces steel, wheat, and oil. The steel industry produces $100,000 in revenue, spends $4,000 on oil, $10,000 on wheat, pays workers $80,000. The wheat industry produces $150,000 in revenue, spends $20,000 on oil, $10,000 on steel, and pays workers $90,000. The oil industry produces $200,000 in revenue, spends $40,000 on wheat, $30,000 on steel, and pays workers $100,000. There is no government. There are neither exports nor imports, and none of the industries accumulate or de-accumulate inventories. Calculate GDP using the production and income methods.

QUESTION THREE

Suppose the unemployment rate is 6%, the total working-age population is 120 million, and the number of unemployed is 3.5 million. Determine: (a) The participation rate. (b) The size of the labor force. (c) The number of employed workers. (d) The Employment-Population rate