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EC111Class11Questions - requires exactly two workers to...

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EC111 MACROECONOMICS Spring Term 2012 EC111 Class Exercise 11 1. Explain why the following are major targets of macroeconomic policy, and how the relevant variables are defined. a. Sustained long-term growth in real national income per capita. b. Keeping economic activity stable from year to year. c. Maintaining a low average unemployment rate d. Keeping price inflation low and stable. 2. Explain why two countries with the same level of GDP per capita are likely to have different standards of living. Suppose GDP per capita increases in both countries, explain why the standard of living in both countries might fall. 3. Suppose an economy consists of 5,000 firms and 10,000 households. There is no government and no foreign trade. Each household has a single worker and each firm has a single machine. In each period of time, say a week, a given machine
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Unformatted text preview: requires exactly two workers to produce a litre of an all-encompassing consumption good that is then sold to the household. This is the only consumption good in the economy. Suppose each worker is paid £50 per week for supplying labour. There is no investment or savings in this economy. a. Draw a circular flow diagram for this simple economy, labelling the services of productive factors, goods and services produced, income and expenditure. b. What is the potential output for this economy? At this potential output, what is total expenditure in the economy? c. What tensions will occur in the economy if the number of households increases to 11,000? d. If for some reason the price of a litre of the consumption good is set at £90, what tensions will arise in this economy given the original 10,000 households?...
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