Scenario 1

Consider the following simple Keynesian macroeconomic model for a closed economy without government intervention, consisting of 3 equations and 3 unknowns (endogenous variables), namely A (Aggregate expenditure), C (Consumption expenditure) and Y (Income).

Simple Keynesian Macroeconomic Model

1. A = C + I
2. C = a + bY
3. Y = A

Furthermore, the values of the exogenous variables and the MPC (marginal propensity to consume) are given below.

a = R100 million (autonomous consumption) b = 0.75 (marginal propensity to consume)

I = R600 million (investment expenditure)

Questions

1. Calculate the equilibrium level of income (Y). Show all workings.

1. Calculate the equilibrium level of consumption

1. (C). Show all workings.

1. What is the value of the multiplier? Show all workings.

Scenario 2

Assume the government now decides to play an active role by introducing a balanced budget where G = T= R500m. Furthermore, is assumed that the tax is a lump-sum tax which is totally independent of income. G = R500 million (government expenditure)

T = R500 million (autonomous lump-sum tax)

Explain fully how this will affect the model and calculate the new equilibrium level of income. Show all workings.

1. With reference to question 1(d) above, is a balanced budget neutral with respect to its impact on the equilibrium level of income? What is the value of the balanced budget multiplier? Give reasons for your answer.

1. Assume that the full employment level of income is equal to R4,100 million.

If the lump-sum tax is kept constant at R500m, by how much should the government increase its expenditure to achieve full employment? What is the new level of government expenditure? Show all workings.

Scenario 3

You have been appointed economic advisor to the policy makers of your country. Your task is to devise and implement two measures that will reduce structural unemployment and alleviate poverty in your country.

Critically discuss these measures and substantiate why you think they will be effective. Illustrate the impact of your measures by making use of an appropriate AD-AS (aggregate demand / aggregate supply) model similar to the one below.

Scenario 4

As senior member of your organisation assuming a monopolistic environment, maximising profits is one of your core functions. Use relevant diagrams to illustrate the

pricing and output determination strategies of a business operating in a monopolistic competition. Your answer must illustrate both the short-run and the long-run approaches.

[Hint: Explain your answer from a short-run and long-run perspective]