Question

Question 1

In a certain economy, the components of planned spending are given as:
Cd=600+0.8(Y-T)-350r, Ip=200-450r, G=250, NX=20, T=300
Find the relationship between planned aggregate expenditure and the real interest rate, r, and output, Y, in this economy. The real interest rate, r, is set by the Reserve Bank to equal 0.05 (5 per cent). Find the short-run equilibrium output.
Suppose potential output (Y*) is 4100. The Reserve Bank has set the real interest rate equal to 5 per cent. At that real interest rate, what is the output gap? What should the
Reserve Bank do to eliminate the output gap and restore full employment?

Question 2
The demand for vans in a certain country is given by: D = 2000 − 20P, Supply by domestic van producers is: S = 1700+ 40 P, where P is the price of a van. The economy opens to trade. The world price of vans is 4 units. Find the domestic quantities demanded and supplied, and the quantity of imports or exports. Who will favour the opening of the van market to trade, and who will oppose it? If The government imposes a tariff of 0.5 unit per van. Find the effects on domestic quantities demanded and supplied, and on the quantity of imports or exports. Also find the revenue raised by the tariff. Who will favour the imposition of the tariff, and who will oppose it?

Answer 1