www.Expertsmind.com | Macroeconomics Assignment | Economics

Macroeconomics | Assignment Instructions: Complete all questions and ensure that submitted work is your own. Assignmentsmust be hand written (not typed) and submitted in hard copy only. Students can submit theirassignments either during their feedback forum (falling on or before the due date) or else submittheir assignments into the Economics, Finance and Marketing Assignment Submission Box inBuilding 108. The assignment is optional, no extensions under any circumstances will be granted.The assignment is due on Wednesday 7 September.(a) Atlantis is a small, isolated island in the South Atlantic. The inhabitants grow potatoes andcatch fish. The accompanying table shows the maximum annual output combinations ofpotatoes and fish that can be produced.Production Alternatives Quantity of Potatoes (kg) Quantity of Fish (kg)A 1,000 0B 800 300C 600 500D 400 600E 200 650F 0 675i. Draw a production possibilities frontier that corresponds with the data in the table.ii. Can Atlantis produce 500 kilograms of fish and 800 kilograms of potatoes? Explain.Where would this point lie relative to the production possibilities frontier?__________________________________________________________________________________________________________________________________________________iii. What is the opportunity cost of increasing the annual output of potatoes from 600 to 800kilograms?_________________________________________________________________________IllustratePage 2iv. What is the opportunity cost of increasing the annual output of potatoes from 200 to 400kilograms?_________________________________________________________________________v. Why are the answers to parts iii and iv not the same? What does this imply aboutopportunity costs?__________________________________________________________________________________________________________________________________________________(b) Government survey takers determine that typical family expenditures each month in the baseyear (2010) are as follows:20 pizzas at $10 each; Rent of apartment, $600 per month; Petrol and car maintenance, $100;Phone service $50In the following year (2011), the survey takers determine that pizzas have risen to $11 each,

apartment rent is $640, petrol and car maintenance has risen to $210, and phone service hasdropped in price to $40.i. Find the CPI for 2011 and the rate of inflation between the two years__________________________________________________________________________________________________________________________________________________ii. The family’s nominal income rose by 5% in 2011. Are they worse off in terms of whattheir income is able to buy?_________________________________________________________________________(c) Use the economic data given to find national savings, private savings, public savings and thenational saving rate (national savings as a proportion of GDP) in a closed economy.i. Case 1GDP = 6000Tax collections = 1200Government transfer payments = 400Consumption expenditure = 4500Government budget surplus = 100____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________Page 3(d) Using demand and supply, illustrate the following situationsi. Market for umbrellas (on rainy days): A store owner finds that customers are willing topay more for umbrellas on rainy days.ii. Market for leather shoes: The cost of leather increases dramatically, resulting in asmaller quantity of leather shoes being purchased by consumers.iii. Market for airline travel: Deregulation of the airline industry allows more airlines to enterthe market, reducing the cost of air travel.iv. Market for petrol: The sharp rise in the price of oil leads many consumers to reducingtheir petrol purchases.(e) Compute how much each of the following items is worth in terms of today's dollars using 177as the price index for today.i. In 1926 the CPI was 17.7 and the price of a movie ticket was $0.25.__________________________________________________________________________ii. In 1932 the CPI was 13.1 and a cook earned $15.00 a week.__________________________________________________________________________(2+1.5+0.5+0.5+1.5) + (2+1) + 4 + 6 + 1 = 20Illustrate (iii)Illustrate (i) Illustrate (ii)Illustrate (iv)

Assignment

a)

i) Production Possibilities Curve

ii) No, Atlantis cannot produce 500 Kg of fish and 800 Kg of potatoes because the available resources and given state of technology renders this combination unaffordable for Atlantis to produce. This is shown by combination G in the PPC drawn below.

iii) The opportunity cost of increasing the annual output of potatoes from 600 to 800kilograms is 200 fish.

iv) The opportunity cost of increasing the annual output of potatoes from 200 to 400 kilograms 50 fish.

v) Answers in Part (iii) and (iv) are not same because of the difference in opportunity cost. As we move down the production possibility curve, opportunity cost increases. Since the resources are limited goods have to be produced using the given resources and the state of technology. To use more of one resource the other has to be sacrificed.

b)

i) Consumer expenditure in year 2010:

20 pizza @$10 each =200

Rent of apartment =600

Petrol & car maintenance =100

Phone services = 50

Total =950

Consumer expenditure in year 2011:

20 pizza @$11 each =220

Rent of apartment =640

Petrol & car maintenance =210

Phone services = 40

Total =1110

Consumer price index for 2011= (1110/ 950) X100

= 116.84

Rate of inflation between these two years

= [(Price in current year- price in base year)/ price in base year] X 100

= 16.84

ii) If the family’s income rose by 5% the family is worse off in terms of what their income can buy as it is still lower than the rate of inflation which is around 16%.

c) Private saving = Disposable income - Consumption expenditure

= Income – taxes + transfer payments – consumption expenditure

= 6000 – 1200 + 400 – 4500

= 700

Public saving = Government budget surplus

= 100

National savings = Private saving + Public saving

= 700 + 100

= 800

National saving rate (%) = (National savings/GDP) x 100

= (800/6000) x 100

= 0.13 x 100

= 13 %

d)

i)

ii)

iii)

iv)

e)

i) Cost of movie ticket today= (CPI for today/ CPI for 1926)X Cost of movie ticket in1926

= 177/17.7X0.25

=$ 2.5

ii) Income of cook today = (CPI for today/ CPI for 1932)X Cost of movie ticket in1926

=177/13.1 X 15

=$ 202.50