Question 1 1(20marks/2 marks each) Indicate whether each of the following statements is True or False (Write the word in full) 1.1) The factor market can best be described as where households buy goods and services. 1.2) Potential GDP is A) another name for real GDP. 1.3) The higher the real wage rate, the higher the labor force participation rate. 1.4) The aggregate production function relating real GDP to labor hours has a positive slope and becomes less steep as employment increases. 1.5). The labor force is defined as the number of people over 16 years of age. 1.6) When the economy is at full employment the natural unemployment rate is equal to 0 percent 1.7) If the governmen t runs a budget deficit then national saving is negative. 1.8) As saving decreases disposable income increases. 1.9) The quantity of real money demanded is independent of the price level. | 1.10) When the interest rate is above the equilibrium interest rate there is an | excess quantity of money and people will buy bonds Question 2 (25 marks) a) "The velocity of circulation is the average speed with which money is loaned to businesses and households." Is the previous statement correct or incorrect? (6 marks) b) What is the relationship between net borrower.net lender, debtor nation and creditor nation? (6 marks) Page 14 of 15 FACULTY OF COMMERCE MENT AND LAW OLD AND NEW CURRICULUM MODULES c) Describe how open market operations change the quantity of money. (6 marks) d) Define the aggregate production function. Discuss why the aggregate production function exhibits diminishing returns. (7 marks) Question 3(15 marks) Suppose the working-age population is 150 million, the labor force is 125 million,and employment is 120 million. a) What is the unemployment rate? (5 marks) b) Now suppose students graduate from college and begin to look for jobs. What is the new unemploymen t rate if none of the students have found jobs yet? (5 marks) c) Suppose that all 2 million students find jobs. What is the unemployment rate now? (5 marks) Question 4 (40 marks) In the country of Midland, autonomous consumption expenditure is 60 million, and the marginal propensity to consume is 0.6. Investment is 110 million, government expenditure is 70million and there are no income taxes. Investment and government expenditure are constant-they do not vary with income. The nation does not trade with the rest of the world. a) Draw the aggregate expenditure curve. (15 marks) b) What is the autonomous aggregate expenditure? (5 marks) c) What is the size of the multiplier in Midland's economy? (5 marks) d) What is aggregate planned expenditure and what is happening to inventories when real GDP is 800 million? (10 marks) e) What is the economy's equilibrium aggregate expenditure? (5 marks)

## Step 1: Determine the truth value of each statement in Question 1<br />### Evaluate each statement based on economic principles and definitions.<br /><br />1.1) False. The factor market is where households sell factors of production (like labor) to firms.<br />1.2) False. Potential GDP is the level of GDP attained when all firms are producing at capacity, not another name for real GDP.<br />1.3) True. Higher real wages can incentivize more people to join the labor force.<br />1.4) True. The aggregate production function has a positive slope and exhibits diminishing returns, meaning it becomes less steep as more labor is employed.<br />1.5) False. The labor force includes people over 16 who are either employed or actively seeking employment.<br />1.6) False. The natural unemployment rate is not zero; it includes frictional and structural unemployment.<br />1.7) False. A budget deficit does not necessarily mean national saving is negative; it means the government is borrowing to finance its deficit.<br />1.8) False. As saving decreases, disposable income does not necessarily increase; it depends on other factors like consumption.<br />1.9) False. The quantity of real money demanded is influenced by the price level.<br />1.10) True. When the interest rate is above equilibrium, there is excess money supply, leading people to buy bonds.<br /><br />## Step 2: Evaluate Question 2a<br />### The statement is incorrect. The velocity of circulation refers to the average frequency with which a unit of money is spent on new goods and services within a specific period.<br /><br />## Step 3: Explain the relationship in Question 2b<br />### A net borrower is a country or entity that borrows more than it lends, while a net lender lends more than it borrows. A debtor nation has a net international investment position that is negative, whereas a creditor nation has a positive net international investment position.<br /><br />## Step 4: Describe open market operations in Question 2c<br />### Open market operations involve the buying and selling of government securities by the central bank to control the money supply. Buying securities increases the money supply, while selling them decreases it.<br /><br />## Step 5: Define and discuss the aggregate production function in Question 2d<br />### The aggregate production function shows the relationship between total output (real GDP) and the total quantity of inputs (like labor). It exhibits diminishing returns because as more of one input is added, holding others constant, the additional output produced from each additional unit of input eventually decreases.<br /><br />## Step 6: Calculate the unemployment rate in Question 3a<br />### Unemployment rate = $\frac{(Labor Force - Employment)}{Labor Force} \times 100$<br />### Unemployment rate = $\frac{(125 - 120)}{125} \times 100 = 4\%$<br /><br />## Step 7: Calculate the new unemployment rate in Question 3b<br />### New labor force = 125 million + number of students<br />### New labor force = 125 million + 2 million = 127 million<br />### New unemployment = 7 million (5 million original + 2 million students)<br />### New unemployment rate = $\frac{7}{127} \times 100 \approx 5.51\%$<br /><br />## Step 8: Calculate the unemployment rate after students find jobs in Question 3c<br />### New employment = 120 million + 2 million = 122 million<br />### Unemployment rate = $\frac{(127 - 122)}{127} \times 100 \approx 3.94\%$<br /><br />## Step 9: Draw the aggregate expenditure curve in Question 4a<br />### The aggregate expenditure curve is plotted with real GDP on the x-axis and aggregate expenditure on the y-axis. The slope is determined by the marginal propensity to consume (0.6).<br /><br />## Step 10: Determine the autonomous aggregate expenditure in Question 4b<br />### Autonomous aggregate expenditure = Autonomous consumption + Investment + Government expenditure<br />### Autonomous aggregate expenditure = $60 + 110 + 70 = 240$ million<br /><br />## Step 11: Calculate the multiplier in Question 4c<br />### Multiplier = $\frac{1}{1 - MPC} = \frac{1}{1 - 0.6} = 2.5$<br /><br />## Step 12: Calculate aggregate planned expenditure and inventory changes in Question 4d<br />### Aggregate planned expenditure = Autonomous expenditure + MPC * Real GDP<br />### Aggregate planned expenditure = $240 + 0.6 \times 800 = 720$ million<br />### Since planned expenditure ($720$ million) is less than real GDP ($800$ million), inventories are increasing.<br /><br />## Step 13: Determine the equilibrium aggregate expenditure in Question 4e<br />### Equilibrium aggregate expenditure occurs where aggregate planned expenditure equals real GDP.<br />### Equilibrium real GDP = $\frac{Autonomous expenditure}{1 - MPC} = \frac{240}{1 - 0.6} = 600$ million