ECMB06-Special-Tutorial4_Ch3-4-8.doc

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Department
Economics for Management Studies
Course
MGEB06H3
Professor
Jack Parkinson
Semester
Summer

Description
ECMB06 – Special Tutorial #4 Last Time - The REAL economy in LR equilibrium: Suppose a country’s aggregate production function is given by Y =10•K 1/•L1/2and the country has 400 units of capital (K) and 100 workers (L). The consumption function is given by C =100 +0.80•(Y −T) and taxes are 20% of income. The government runs a budget deficit of 50. Aggregate real investment in the economy is given by the equation I = 200 – 10•r. The economy is closed. Note: r is measured in percentage points (so if r = 2 this means it is 2 per cent). • The LR equilibrium levels output is S 1 / 2 1 / 2 Y = Y = Y = 10 • (400 • (100 ) = 10(20)(10= 2,000 • The LR equilibrium level of consumption is: T = 0.20Y = 400 (Y – T) = 1,600 C = 100 + 0.80(1600) = 100 + 1280 = 1,380 • LR equilibrium saving The S = Y − T − C = 2000 − 400 −1380 = Pr ivate Sav= 220 PVT SGovt= T − G = Gov 't Saving = Gov 't Budget Surpl= - 50 SNAT = Y − C − G = 2000 − 400 −1380 = National Saving PVT+ SGovt 220 – 50 = 170 • LR equilibrium in the Loanable Funds Market SNAT =170 =I=200 −10 r* 10r* = (200 – 170) = 30 r* = (30/10) = 3 (per cent) I = 200 – 10(3) = 200 – 30 = 170 The NOMINAL economy in LR equilibrium Suppose we are told (given) the following information about the nominal economy. The nominal money supply is equal to 230 and this money circulates 10 times per year. 1) If the velocity of money is constant determine the nominal price level, nominal GDP and the real money supply in the long-run. 1 | P a g e 2) Suppose the central bank makes the nominal money supply to rise to 264.5. If velocity continues to be constant determine
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