Andalas University

Faculty of Economics
Department of Economics

Introduction to Macroeconomics

Homework Assignments in Lieu of Final Semester Exam

Lecturer: Prof. Dr. Werry Darta Taifur
Date: Thursday, 21December 2020

Directions:

§ The homework assigments carries a total of 100 points. You only answer six problems
among eleven problems.
§ Please choose the six problems that are the easiest for you to answer.
§ Please make sure you read the question carefully before attempting to answer it.
§ Please answer the questions clearly.
§ Your answers are emailed to me no later than by 2 PM tomorrow (22 December 2020)

1. Explain briefly how macroeconomics is different from microeconomics. How can

macroeconomists use microeconomic theory to guide them in their work, and why might they
want to do so? Then what are the core of macroeconomic theory.

2. Assume that in 2011, the following prevails in the Republic of Kubang : 


Y = $200 G=$0

C = $ 160 T=$0

S = $ 40

I (planned) = $ 30

Assume that households consume 80 percent of their income, they save 20 percent of
their income, MPC = .8, and MPS = .2. That is, C = .8Yd and S = .2Yd.

a. Is the economy of Kubang inequilibrium ? What is Kubang ’s 
equilibrium level of

income? What is likely to happen in the 
coming months if the government takes no action?



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 b. If $200 is the “full-employment ”level of Y, what fiscal policy 
might the government
follow if its goal is full employment? 


c. If the full-employment level of Y is $250, what fiscal policy 
might the government follow?



d. Suppose Y = $200, C = $160, S = $40, and I = $40. Is Kubang ’s 
economy in equilibrium?

e. Starting with the situation in part d, suppose the government starts spending $30 each year
with no taxation and continues to spend $30 every period. If I remains constant, what will
happen to the equilibrium level of Kubang ’s domes- tic product (Y)? What will the new
levels of C and S be? 


f. Starting with the situation in part d, suppose the government starts taxing the population
$30 each year without spending anything and continues to tax at that rate every period. If I
remains constant, what will happen to the equilibrium level of Kubang ’s domestic product
(Y)? What will be the new levels of C and S? How does your answer to part f differ from
your answer to part e? Why? 


3. On macroeconomic analysis at least there are three equilibrium conditions as shown in the
following figures. Please explain clearly what are the differences among three figures.

Figure 1 Figure 2 Figure 3

4. a. Money has three distinguishing characteristics: (1) a means of payment, or medium of

exchange; (2) a store of value; and (3) a unit of account. Describe each of the characteristics
of the money.

b. The two most common measures of money are transactions money, also called M1, and
broad money, also called M2. Explain in your own words the definitions of M1 and M2.
Why is M2 sometimes a more stable measure of money than M1?

c. The Fed or Central Bank has three tools to control the money supply:
(1) changing the
required reserve ratio, (2) changing the discount rate (the interest rate member banks pay
when they borrow from the Fed), and (3) engaging in open market operations (the buying

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 and selling of already-existing government securities). Explain how the Fed or the Central
Bank increases the money supply and decreases the money supply by using the three tools
that have been described.

5. Explain several reasons for a downward-sloping aggregate demand. Then drawn and explain
the effect on increase in money supply and government purchase on aggregate demand curve

6. To remember you that the unemployment rate is the ratio of the number of unemployed
people to the number of people in the labor force. To be considered unemployed and
in the labor force, a person must be looking for work. 
Suppose the number of employed
people in Kubang is 121,166,640. The unemployment rate in this economy is 10.4 percent,
or .104, and the labor force participation rate is 72.5 percent, or .725. Based on the above data,
find an explain:
a. What is the size of the labor force?
b. How many people are unemployed?
c. What is the size of the working-age population? 


7. For each of the following statements, decide whether you agree or disagree and explain your
answer:
a. During periods of budget surplus (when G < T), the government debt grows. 

b. A tax cut will increase the equilibrium level of GDP if the 
budget is in deficit but
will decrease the equilibrium level of 
GDP if the budget is in surplus. 

c. If the MPS = .90, the tax multiplier is actually larger than the 
expenditure
multiplier.



8. Explain the definition of cost-push inflation. Figure 4 shows the initial condition of the
equilibrium price level. Based on this picture explain
where the AS curve shifts if there is cost-push
inflation. Then also explain the main reasons for the
shift. Figure 4

Figure 4. Initial Condition of The Equilibrium Price

Level

9. The policy mix is the combination of monetary and fiscal policies in use at a given time.
There is no rule about what constitutes the best policy mix or the best composition of
output. Describe the policy mix that would result in each of the following situations. 


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 a. The interest rate decreases, investment increases, and the change in aggregate output is
indeterminate. 

b. Aggregate output increases, and the interest rate change is indeterminate.
c. The interest rate increases, investment decreases, and the change in aggregate output is
indeterminate. 

d. Aggregate output decreases, and the interest rate change is indeterminate.

10. Graph the following two consumption functions: (1)C = 300 + .5Y
(2)C = .5Y

a. For each function, calculate and graph the average propensity to consume (APC) when
income is $100, $400, and $800.

b. For each function, what happens to the APC as income rises?
c. For each function, what is the relationship between the APC and the marginal propensity to
consume?

d. Under the first consumption function, a family with income of $50,000 consumes a smaller
proportion of its income than a family with income of $20,000; yet if we take a dollar of
income away from the rich family and give it to the poor family, total consumption by the
two families does not change. Explain how this is possible.

11. You are given the following model that describes the economy of Hypothetica.

(1) Consumption function: C = 100 + .8Yd 


(2) Planned investment: I = 38 

(3) Government spending: G = 75 

(4) Exports: EX = 25 

(5) Imports: IM = .05 Yd 

(6) Disposable income: Yd = Y - T 

(7) Taxes: T = 40 

(8) Planned aggregate expenditure:
AE = C + I + G + EX - IM 

(9) Definition of equilibrium income: Y = AE 


a. What is equilibrium income in Hypothetica? What is the 
government deficit? What is the
current account balance?


b. If government spending is increased to G=80, what happens to equilibrium income?
Explain using the government 
spending multiplier. What happens to imports? 


c. Now suppose the amount of imports is limited to IM = 40 
by a quota on imports. If

government spending is again increased from 75 to 80, what happens to equilibrium
income? Explain why the same increase in G has a bigger effect on income in the second
case. What is it about the presence of imports that changes the value of the multiplier?

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d. If exports are fixed at EX = 25, what must income be to ensure a current account balance
of zero? (Hint: Imports depend on income, so what must income be for imports to be equal
to exports?) By how much must we cut government spending to balance the current
account? (Hint: Use your answer to the first part of this question to determine how much
of a decrease in income is needed. Then use the multiplier to calculate the decrease in G
needed to reduce income by that amount.) 


Good Luck