ICMB204 Macroeconomics

Assignment 1

Guideline: Please follow this guideline strictly

1. Deadline for the assignment is Thursday 14th February at 07:50am. No

late submission is allowed.

2. Submit your work online as .pdf only. Do not submit as a zip file of multiple
files. Submission of hardcopy is not allowed.

3. The file name should only contain your student ID (e.g. 6088XXX.pdf).
Macroeconomics Assignment 1 Trimester II 2018-19
Due: Thursday 14th February 2018

1. In class, we discussed how factor price determined. Please identify the key assumption of how we
determine factor price as well as the cause that could change factor price.
2. Why does the GDP deflator give a different rate of inflation than does the CPI?
3. How does the production of a U.S. firm located in France affect U.S. GDP? How does the production
of a French firm located in Ohio affect U.S. GDP?
4. Suppose the CPI was 110 in 2010, and suppose one must spend $936 today to obtain the same basket
of goods and services that could be bought for $190 in 2010. Then what is today’s CPI?
5. “Inflation distorts relative prices”. What does it mean and why does it impose a cost on society?
6. List three problems that occur in the barter economy and briefly explain.
7. Use quantity of theory of money to describe how the change in quantity of money affects the
economy. Also specify assumptions used.
8. What are the financial instruments that central bank use in controlling money supply?
9. Explain the concept of diminishing marginal product of labor.
10. Explain the concept of Loanable funds and how does it related to the economy’s output? Also explain
the cause of ‘Crowding out’ effect. Use graph to support your answer.
11. Suppose that Congress were to implement an investment tax credit. What would be the impact of this
policy on the investment, national saving and interest rate? Explain the changes that occur by using
the loanable fund model. Support your answer with graph.
12. The production function of HappyNukland is identified as 𝑌 = 𝐾 𝛼 𝐿1−𝛼 The cost of capital is “r”
per unit, the cost of labor is “w” per unit and HappyNukland. has a budget for investment of M.
a. Formulate the Lagrange function. Then, derive the optimal general form of capital (K), labor
(L) and quantity of output (Y).
b. Given that α=0.75, r= 500 per unit, w= 100 per unit, and M=200,000. Identify the optimal value
of capital, labor and output of the HappyNukland.
c. Identify the value of MPK and MPL.
d. Identify and briefly discuss the return to scale of the HappyNukland production function
13. Suppose in a close economy, households have a consumption function as $500+0.8Yd. Firms have
an investment function as $400+0.05Y. Then government spends $500 and collected lump-sum tax
of $100.
a. Find equilibrium output, the value of net income, consumption and investment
b. What would happen to the equilibrium output, consumption and investment when the Marginal
Propensity to Consume (MPC) decrease to 0.7?
c. Explain changes that occur on the economy. Draw the graph to illustrate your explanation.