Question 1 (20 points) – Topic 1
The following table provides the economic data for an economy.
Year 2019 2020 2021
Price Quantity Price Quantity Price Quantity
Good 1 32 80 36 120 34 110
Good 2 11 150 13 160 15 180
Good 3 43 40 44 50 50 60
Good 4 51 160 58 240 54 180
Good 5 22 85 20 80 23 90
Good 6 8 340 9 360 6 320
Here is some additional information about this economy that holds true for all 3 years:
• Unless otherwise stated, the goods are produced within the economy and the goods are consumed by
local sectors.
• Good 1 is a pure consumption good. Domestic households purchase three-fifths of that good while
the remaining goes to foreign households.
• Both households and firms purchase good 2, in which households buy 80% of that good. In addition,
half of the good 2 consumed by businesses is produced outside the country.
• Residents purchase all good 3, and a quarter of them is purchased from abroad.
• Firms consume half of good 4 while the government purchase 30% of them. The rest is bought by
foreign businesses.
• The share of good 5 consumed by households, firms and government are 40%, 40% and 20%
respectively.
• Half of good 6 goes to the government while the remainder is equally split between households and
firms. However, the country does not produce a single unit of the good.
• The government has chosen 2020 as the base year. In the base year, both the GDP deflator and the
CPI are nominalized to 100.
Based on the information given, complete the following table.
2019 2020 2021
(Nominal) Consumption
(Nominal) Investment
(Nominal) Government spending
(Nominal) Exports
(Nominal) Imports
Nominal GDP
Real GDP
GDP deflator
Cost of consumption basket (in CPI)
CPI
Note:
• The above table is reproduced on page 3 of this assignment (so that you can print it & fill it out).
You must submit that page as your answer to Question 1 with your assignment for grading.
• Also, on separate page(s), show your work! You are required to do both; otherwise, you will receive
a grade of zero for this part of the question. Keep your answer to 2 decimal places if needed.
MGEB05 Assignment 1 (Fall 2022) 3
Submit this page for grading; otherwise, you will receive a grade of ZERO for
Question 1.
2019 2020 2021
(Nominal) Consumption
(Nominal) Investment
(Nominal) Government spending
(Nominal) Exports
(Nominal) Imports
Nominal GDP
Real GDP
GDP deflator
Cost of the consumption basket
(in CPI)
CPI
MGEB05 Assignment 1 (Fall 2022) 4
Question 2 (30 points) – Topic 2 (save your answer as HW1-Q2.pdf)
A closed economy can be described by the long-run classical model:
Y = 2K
0.5L
0.5
C = 950 + 0.5(Y – T) – 70r
I(r) = 3000 – 30r
MPK = K
–0.5L
0.5 MPL = K0.5L
–0.5
Note: r is measured in percentage points (i.e., if r = 5, then r = 5%). Keep your answer to 3 decimal
places if needed.
The economy is endowed with 625 units of capital and 10000 workers. Initially, the government collects
14% of output as income taxes and it runs a budget surplus of 100.
a) Find the equilibrium levels of output, real interest rate, and investment. Also, find the long-run
equilibrium real wage for labour and real rental price of capital. (5 points)
Suppose the business confidence index changes from 113 to 115. As a result, autonomous investment
changes by 4%.
Note: you will need to decide whether autonomous investment increases or decreases.
b) Find the new equilibrium levels of real interest rate, investment, and real rental price of capital. (5
points)
c) Show your answers for parts (a) & (b) in three diagrams (that depict the loanable funds market, the labour market, and the rental market for capital in long-run equilibrium). Be sure to identify which
points on your diagrams are the long-run equilibria for part (a) & (b) respectively. No written
explanation is required. (9 points)
d) (Continued from part b) Suppose the government wants to keep the (equilibrium) level of
consumption to 1798 via a change in government spending. Find the level of government spending
that could achieve this goal. What happens to the budget balance (i.e., increase or decrease, and by
how much)? (6 points)
e) (Ignored part (d)) Now, consider what happens to the economy in the very long-run. Based on your answer in part (b), what happens to the stock of capital and level of output in the very long-run?
Explain in words only. (5 points)
Question 3 (30 points) – Topics 2 & 3 (save your answer as HW1-Q3.pdf)
Suppose Canada is a closed economy and in its long-run equilibrium initially. The government increases
its subsidy to capital investment projects. At the same time, the shortage of computer
chips/semiconductors forces many manufactures to delay their spending on replacing depreciated
machinery and equipment.
In the context of the long-run classical model, examine the effects of the above events on the following
variables in the long run:
• output
• real interest rate
• national savings
• real rental price of capital
• price level
Explain your answer with the aids of ONE diagram for the market of loanable funds and ONE diagram
for the rental market for capital.
MGEB05 Assignment 1 (Fall 2022) 5
Question 4 (20 points) – Topics 2, 3 & 4 (save your answer as HW1-Q4.pdf)
Each part of the question is NOT related to other parts and each part is worth 5 points.
a) Suppose a closed economy experiences a skill-biased technological change and, at the same time, a
slowdown in the pace of educational advancement reduces the supply of skilled workers. According
to neoclassical theory of distribution what happens to the real wages of skilled workers? Explain and
support your answer with ONE labour market diagram for the skilled workers.
b) “When the aggregate price level rises faster than initially expected, borrowers with unindexed
contracts will find their real interests paid on loan turn negative.” True/False/Uncertain, explain.
c) Surveys by different polling organizations show that the public expects the prices will continue to
rise at the pace that is faster than before. If the overall price level is determined in the money market,
what happens to today’s overall price level after the release of these survey results? Explain.
d) The economy is in its long-run equilibrium with the size of the labour force is 5000. If the number
of workers who are actively looking for job is 500 and the number of unemployed workers who find
themselves a job in each month is 270, find the job separation rate.
Note: Keep your answer to 3 decimal places if needed
