Macroeconomics Assignment

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1. The full employment level of output is where the labor market and the output market are in
equilibrium. The following is the equilibrium condition for labor market:

The labor demanded at equilibrium wage rate of $10 is as follows:

( )
Now, using the product market to determine the full employment:


Thus, full employment output is 48000 units.
Income level at time t=1 is as follows:

2. The consumption level of households in each period after taxes is considered as follows:

The household savings in each period are as follows:

The timing of the taxation can change the consumption decision. If the taxes are deferred to next
year, then the households will consume more this year and will reduce the consumption level
next year.
3. Total private savings are as follows:

Total government savings are as follows:

Total national savings are as follows:

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The balance of payment is not in equilibrium as the borrowing by government not offset by the
investment. The borrowing in period 1 is of $1400 whereas the investment is just $24.
4. European Union countries are the borrowers and hence, they are selling government bonds to
increase the amount to be borrowed to help revive the economy. This has caused an increase in
the interest rates. The increase in the interest rates will cause the consumption in the current
period i.e. in period 1 to fall whereas the consumption in next period i.e. in period 2 will
increase. This increase in interest rate will revive the economy in next year by improving the
consumption in period 2.

5. With U.S. facing downturn and European countries facing recession, Chinese economy will be
severely affected. As per the neo classical view, an increase in the recession in one economy will
cause output of other economy to fall as the imports will decline. This will cause price to rise and
the exchange rate policy will appreciate. Thus, with recession in EU countries, the Chinese
economy importing goods will cause the Chinese output to fall and the exchange rate will
Consumption
in period 2
Consumption
in period 1
Budget line
before interest
rate change
Budget line
after interest
rate increase

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appreciate. The Chinese reserves will reduce and will not help the Chinese economy from the
trouble as the reserves will soon run down causing financial crisis in the economy.
The problems that China is facing internally is of inflation and decline in output. This will cause
problem for the fiscal policy as the exchange rate is appreciating causing aggregate demand to
fall.
6. With fixed exchange rate in a small developing country and the country is importing goods
from counties experiencing the inflation, this will lead to decline in the output in the developing
country causing the exchange rate to revaluate as the aggregate demand will fall. The revaluation
will cause decline in the exports and will cause inflation in the economy of developing country.
A decrease in the aggregate demand and revaluation of exchange rate will cause the finance
crisis for the developing countries. Yes, this country is in danger of inflation as the imports will
cause inflation to rise from the countries experiencing recession.
7a. For IS equation,


(

) ( ) (

)


(

) ( ) (

)

(

7b. For LM equation:

( )
( )


7c. To find the aggregate demand curve,



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