Question 1 (20 marks)

Zootopia has three commercial banks and a central bank that issues legal tender andissues base money to commercial banks at the policy interest rate of 1%. Amie has $1,000 in cash that she deposits into her account with the Tiger Bank. Brad has $2,000 in cash that he deposits into his account with the Dragon Bank, Sam has $1,500 in cash that he deposits into his account with the Bear Bank. Paula has $500 that she also deposits into her account with the Bear Bank.

a) Show the impact on the balance sheet for the Tiger Bank, Dragon Bank and Bear Bank. What happens to the amount of base money and broad money in the economy when Amie, Brad, Sam and Paula deposit their cash into their bank accounts? (4 marks)

(Note: Please copy and paste the tables to answer the next sections of the question)

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b) Amie, Brad and Paula apply for (and receive) loans from their respective banks. Amie receives $1,500loan; Brad receives $1,000 loan and Paula receive $2,000 loan. Show what happens to banks’ balance sheets. What happens to the amount of base money and broad money in the economy? (4 marks)

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c) Amie employs Brad to do the gardening for her. She pays Brad $200 by transferring the funds to his account with the Dragon Bank. Sam hires Paula to do accounting for him for $500 and pays by transferring the funds to her account with the Bear Bank. Paula buys a second-hand car from Amie for $1,400 and pays by transferring the funds to her account with the Tiger Bank. Assuming all transactions happen on the same day show the impact on the balance sheet of all the banks. How would the amount of broad money in the economy change as a result of all these transactions? Does any of the banks have a problem? (4 marks)

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d) Now assume that in addition to all transactions in c) Paula decides to open an account in the Tiger bank and transfer $1,000 to her new account from her account in the Bear Bank. Would any of the banks have a problem? Explain using information provided in the question. (3 marks)

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e) Are there any ways for a bank to solve a problem with meeting its payment obligations? What determines how much it would cost the bank? Will the amount of base money in the economy change as a result? Explain. (3 marks)

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f) What would happen if Amie, Brad, Sam and Paula decide to withdraw all their money from their deposits? What is this situation called? (2 marks)

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Question 2 (20 marks)

question 2.1

Give an example of a situation when an economy is in recession according to both definitions of recession and give another example of a situation when an economy may be in recession according to one of the definitions but not the other. (4 marks)

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question 2.2

Consider two identical countries. The only difference between them is that in country A the marginal propensity to consume (out of disposable income) MPC=0.4 and in country B MPC=0.7. The marginal tax rate t=0.2. I=20,000, G=10,000, NX=25,000-0.2Y (where Y is total income), c₀=15,000.

a) Calculate the multiplier in both countries (round up to two decimal places) (3 marks)

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b) (i) What would be the equilibrium levels of output in country A and country B?(2 marks)

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(ii) Show the equilibrium levels of output in country A and country B on awell labelled graph with aggregate demand on the vertical axis and output (income) on the horizontal axis.(3 marks)

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c) Now assume that consumers lose their confidence and decrease autonomous consumption c₀from 15,000 to 10,000. What will happen to output in both countries? Which country will have a larger effect on its GDP? Illustrate using the graph from part b). (5 marks)

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question 2.3

Usually investment depends on the interest rate. Briefly explain how an increase in the interest rate r would affect aggregate investment. Use a reference to the expected rate of profit in your explanation. (Word limit: max 100 words)(3 marks)

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Question 3 (20 marks)

question 3.1

a) Briefly explain how a decrease in housing prices would affect consumption and investment. You may assume that consumers would like to maintain their target wealth.(word limit: max 100 words)(4 marks)

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b) Given your answer to a), what is likely to happen to GDP? Explain using a diagram.

(4 marks)

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c) Given your answer to b), how can the government use fiscal policy to prevent GDP from changing? Use a diagram in your explanation. (4 marks)

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d) If the marginal propensity to import is large, what can be said about effectiveness of fiscal policy? (2 mark)

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question 3.2

Country X has run budget deficit for the past twenty years and its government debt stands at 120% of GDP. Due to pandemic of COVID-19 the government considers implementing big investment in infrastructure and effective decrease in taxes. Expert 1 says that the debt to GDP ratio is too high and the country cannot afford increasing it any further. Expert 1 suggests printing money instead to finance budget deficit arguing that it would be cheaper and more efficient way of financing budget deficit. You are hired as Expert 2. Would you agree with Expert 1? Explain. What would be your advice to the government? (word limit: max 200 words). (6 marks)

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Question 4 (20 marks)

Consider the market for potatoes. You can assume perfect competition.

It is known that the market equilibrium price is $3 per kg and the market equilibrium quantity is 100,000 kg. It is known that when the price is $3 price elasticity of demand is 0.4 and price elasticity of supply is 1.1. Assume that initially the market for potatoes is in equilibrium.

a) Draw a diagram with (downward-sloping) demand and (upward-sloping) supply schedules. Indicate the market equilibrium, consumer surplus, producer surplus and the dead-weight loss. (Remember the relation between elasticity and the absolute slope of the demand and supply schedules. You do not have to be precise, just make sure it is clear which schedule is steeper).(5 marks)

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b) If the price increases by 5% what wouldbe the percentage change of quantity demanded? What would be the new quantity demanded? If the price increases from $3 to $3.03 what wouldbe the new quantity producers would be willing to supply?(4 marks)

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c) The government decides to introduce a 10% tax on the price of potatoes. How would such a decision affect the equilibrium price (paid by consumers) and the equilibrium quantity? Explain using a clearly labelled graph. (Note that you are not required to calculate anything in this question.)(4 marks)

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d) What would happen to consumer surplus, producer surplus, government revenue and the dead-weight loss when the 10% tax on the price of potatoes is implemented. Explain. Show thenew consumer surplus, producer surplus, government revenue and the dead-weight loss on the graph in part c). Who bears higher tax burden, consumers or producers? Explain.(7 marks)

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Question 5(20 marks)

question 5.1

a) Consider the game below. What are the strategies for Boeing? Does it have a dominant strategy? What are the strategies for Airbus? Does it have a dominant strategy? Does this gamehave any Nash equilibrium(s)? If the answer is yes, find all equilibriums. If the answer is no, explain why it does not exist. (4 marks)

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b) Consider the game below. What are the strategies for Alice? Does she have a dominant strategy? What are the strategies for Nick? Does he have a dominant strategy? Does this gamehave any Nash equilibrium(s)? If the answer is yes, find all equilibriums. If the answer is no, explain why it does not exist. (4 marks)

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question 5.2

Is the following statement true or false?

“If in the perfectly competitive market all firms are identical, the price markup for each firm is zero.” Explain. (3 marks)

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question 5.3

a) Using information in the following table, calculate the hourly employment rent and total employment rent.(4 marks)

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b) Do employers benefit from employment rent? Explain.(3 marks)

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question 5.4

Provide one example of the principle-agent problem.(2 marks)

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Question 6(20 marks)

Consider a firm producing branded smartphones. Given that it produces a differentiated product it has market power and faces demand curve for its product.

Assume that the firm has a fixed cost of $2,000,000 and the cost of producing of each additional smartphone is $100.

a) Sketch the marginal cost curve and the average cost curve on the graph above.(3 marks)

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b) Write down the formula for the isoprofit curve using the information provided. Sketch several isoprofit curves on the graph above.(2 marks)

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c) Indicate the point on the graph that shows the price the firm would choose to charge and the quantity the firm would sell. Call it point A. Indicate the corresponding quantity (Q*) and price (P*) on the axes.(3 marks)

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d) Given that the firm sells Q* at the price P*, indicate consumer surplus, producer surplus and the dead-weight loss on the graph. Is quantity Q* Pareto efficient? Explain.(4 marks)

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e) Do producer surplus and the firm’s profit mean the same thing? Explain.

(2 marks)

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f) Now assume that the firm has sufficient information and so much bargaining power that it could charge each consumer, separately, the maximum they would be willing to pay for the smartphone. Indicate on the diagram below the number of phones sold, the highest and the lowest price paid by any consumer, the consumer and producer surplus. Is there dead-weight loss in this case? Explain.(6 marks)

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