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An economy is currently in equilibrium and the following figures refer to elements in its national accounts: $ Billion Consumption (total) 60 Investment 5 Government expenditure 8 Imports 10 Exports 7
(a) What is the current equilibrium level of GDP? (1 mark)
(b) What is the level of injections? (1 mark)
(c) What is the level of withdrawals? (1 mark)
(d) Assuming that tax revenues are $7 billion, what is the value of savings? (1 mark)
(e) If GDP now rises to $80 billion and, as a result, the domestic consumption of domestically produced goods rises to $58 billion, what is the MPCd? (i.e. marginal propensity to consume domestic goods) (2 marks)
(f) What is the value of the multiplier? (2 marks)
(g) Given an initial level of GDP of $80 billion, assume that spending on exports rises by $4 billion, spending on investment rises by $1 billion, while government expenditure falls by $2 billion; and that all of these events happen within the same fiscal period.
By how much will GDP change? (1 mark)
What will be the new GDP value (1 mark)
(a) Which of the following are final goods and services and which are intermediate goods and services? Please explain why in your answer. (4 marks – 1 mark each)
(i) A windscreen purchased by a motor vehicle spare parts supplier;
(ii) A new bulldozer to be used by a construction company;
(iii) A household cleaning service purchased by a family from a domestic cleaning service company;
(iv) Coking coal
(b) An economy produces final goods and services with a market value of $800 billion in a given year, but only $750 billion worth of goods and services is sold to domestic or foreign buyers.
Is this nation’s GDP $800 billion or $750 billion? Explain your answer. (2 marks)
(c) Explain why a new truck sold for use by a transport company is a final good, even though it is a fixed investment (capital) used to produce other goods. (2 marks)
Should the value of this truck then be added to GDP or should only the goods it transports be included in GDP? Please explain your reasoning. (2 marks)
(10 marks total – 2.5 marks each part)
(a) Illustrate and explain with diagrams the difference between demand-pull and cost-push inflation; (1.25 for each diagram, and 2.5 marks for the explanation);
(b) Provide (describe) two (2) causes of each type of inflation
(2.5 marks for 2 demand-pull causes and 2.5 marks for 2 cost-push causes)
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