Q. 1.
A. To calculate nominal, real, and GDP deflator, the following equations were used. Nominal (NGDP = Quantity (year) X Price (year), while real GDP) can be expressed as (RGDP = Nominal / Deflator), and GDP deflator can be expressed as (GDPD = Nominal / Real GDP X 100%). Therefore; (See Table 1.)
B. For multiple items, calculating CPI requires a weighed average of the commodity price. In this sense, the prices of listed items were calculated as (Average = Bread price +TV Sets + etc. / 5) for each year. After which, the CPI was calculated using the equation (CPI of Multi Items = CPI at current period price / base period price X 100). Therefore; (See Table 1.)
C. Based on the computed CPI and GDP Deflator, it appears that both have moved on a similar direction with CPI showing higher change in terms of value than deflator. One of the reasons for the perceived difference is that CPI measures only the goods bought by consumers while GDP Deflator measures the prices of all goods and services.
D. Calculating the unemployment rate and labor force participation for the year 2014-2016 is represented by the equation ((Labor force participation rate = (labor force = employed + unemployed) / working age non-institutionalized population while (unemployment rate = unemployed population / labor force). Therefore; (See Table 1.)
Q. 2.
A. Long run equilibrium level of consumption if C (consumption) = 12500 + 0.75(Y (income) – T (taxes 1/5)) – 325r is C=12500 + 0.75 (11,375 – 2,275) – 325, therefore: C=19,000.00. For investment, if I (investment function) = 25000 – 500r, therefore: I = 24500. For the real interest rate, if nominal interest rate is 500 (r) and assuming the inflation rate from 2016 is 13.77%, therefore: r=486.23. As for the real wage for labor, if MPL (marginal production of labor)= K1/3L–1/3 is MPL = 8,0001/3 3375–1/3 therefore: MPL = 2,640 – 2,261.25 or MPL=378.75. Lastly, for the real rental price of capital, if MPK (marginal production of capital)= K– 2/3L2/3 is MPK = 8,000– 2/3 3,3752/3, therefore: MPK = 2,270 – 2,227.5 or MPK=492.5.
B. When the autonomous consumption increases by 13.2%, the new consumption can be represented as C (consumption) = 12,877 + 0.75 (Y (income) – T (taxes 1/5)) – 325r, therefore: C =20,277.40. However, given that there is no proposed increase in investment and interest, the rate can be assumed to remain constant. On the other hand, the real wage for labor given the increase would MPL=428.745 while the rental price of capital would be MPL=557.51.
C.
D. Since the government wants to increase the long run equilibrium level of investment to improve investment by 800, the government can achieve that by increasing any of the four points of aggregate demand (AD). In this case, government spending is increased to 800, hence, the change can be represented by the equation Y=C+I+G+(N-X). If Y=C+I+G+(N-X) is Y=19000+24500+800+0, therefore: Y=44300. However, the government budget balance will come out as Y=C+S+T combined together with government budget term will suggest (G – T) = (S – I) – (X – M). If the tax rate remains constant at 0.2, therefore: the government will have a higher spending rate that savings and tax income cannot support.
E. If the government decided to increase spending on good and services to set the real interest rate to 36% the final output will be C=12500 + 0.75 (11,375 – 2,275) – 360, hence the final output will be C= 18965, if Y=C+I+G+(N-X) is Y=18965+24500+800+0, therefore: Y=44264, which indicates that the government would be able to achieve its goal given the lower output.
Q. 3.
A. If all of the primary factors of Alberta’s closed economy are affected by the collapse of the oil prices, the market will eventually fall out of the equilibrium. Suppose Alberta’s market interest rate was reduced to 4% rather than the normal 6% based on the sample graph, the borrowers are likely to demand at least 7000 worth of loans, but the suppliers would only be able to provide less than half of the demand. To compensate the insufficiency in supply the borrowers will drive the interest rate up and the competition is likely to bring the interest rate back to 6%. In addition, the real rental rate for capital will be also out of equilibrium considering that the rental rate adjusts to capital demand with supply in order to maintain equilibrium. In the case of Albert’s economy, the real rental rate will shift towards demand with equilibrium emerging at the higher price level. The major factor affecting the shift in AD and AS curve is the insufficiency of supply, which constitutes increase interest rate, hence, aggregating higher price (Matete et a., 2014).
Figure 1 Sample graph of classical version of loanable funds Figure 2 Sample real rental rate
Q. 4.
A. The statement is true in the sense that when the economic growth was determined using the total factor productivity being % ∆GDP = 2.75 % ∆TFP + 6 (% ∆L) + 2 (% ∆K) where TFP refers to factor productivity, L for the increase in labor, and K for capital. Therefore, the estimated GDP is 10.75% deducted by the growth rate of 9% provides a target inflation of 1.75% or approximately 2% as the central bank suggests. This means that having the monetary velocity, which always constant and capital share of 40% will enable, the economy to achieve the target inflation making the statement true.
B. If both parties renew contract for another year in consideration to the expected inflation rate of 2% and increase in real wage by 3%, the change suggests a nominal wage based on the equation Real wage = (old wage * CPI) / old wage. To determine the change in wage, assuming that Jocelyn is currently getting $15/ hour, the nominal wage is $15 therefore: RW=(15x.002) is RW=14.97. Considering the 3% increase in real wage, Jocelyn’s nominal wage is $15.0149.
Under the circumstances that Jocelyn have signed a new contract, the following year’s inflation rate did not have a significant effect on her wages and in fact she is receiving almost the same wage as the previous year despite the 3% addition to the real wage. This is because if her previous rate/hour is $15, the real wage reflects $14.97 and with the addition of 3% will only bring it up to $15.0149, which is only $0.015 difference in wage rate between the previous and the new contract.
C. When the primary labor market is unionized, the implication ranges from restricting the supply of labor either by closing the business or threats of going to strike. Hence, the formation of unions in the primary labor market suggests increase in demand while supply remains constant. At some point unions (Q3) bargain for higher wages above the market equilibrium causing unemployment of Q1 and Q2 on Figure 3.
Figure 3 Sample labor market diagram Figure 4 Sample secondary labor market diagram
If labor mobility between the primary and secondary labor market is to be considered where primary can move to secondary while the latter cannot do the same towards the former, there will be an apparent imbalance in the equilibrium between the two labor markets. This is because when the primary moves to secondary, there will be an increase in demand while the supply decreases, and with the secondary not being able to move to primary, there will a revere effect on the primary sector where there is higher supply, but constant to low in demand. As a result of the primary displacing the workers in the secondary market, the displacement causes high unemployment with minimum wage going higher than the free market wage level.
Works Cited
Matete, John Kennedy, et al. "Factors Affecting Pricing of Loanable Funds by Commercial Banks in Kenya." International Journal of Business and Social Science, vol. 5, no. 7, June 2014, pp. 242-257.
