Download Gross Domestic Product and more Assignments Macroeconomics in PDF only on Docsity! SPRING 2021 ASSIGNMENT 2 ECO 1020 A – PRINCIPLES OF MACROECONOMICS DATE: 23TH MARCH 2021 INSTRUCTIONS: Answer ALL Questions. QUESTION ONE If the total demand for money is equal to the transactions demand plus the asset demand for money. a) Assume that each dollar held for transactions purposes is spent on the average five times per year to buy final goods and services. If the nominal GDP is $5000 billion ($5 trillion), what is the transaction demand? (1 marks) $5000 billion / 5 = $1000 billion b) The table below shows the asset demand at certain rates of interest. Using your answer to part (a), complete the table to show the total demand for money at various rates of interest. Interest rate Asset demand Total demand (in %) (billions) (billions) 10 $ 40 $1,040 8 80 1,080 6 120 1,120 4 160 1160 (4 marks) i) If the money supply is $1080 billion, what will be the equilibrium rate of interest? (1 marks) - Where money supply is equal to total demand at 8% ii) If the money supply rises, will the equilibrium rate of interest rise or fall? (2 marks) - If the money supply increases, the rate will fall. iii) If GDP rises, will the equilibrium rate of interest rise or fall? (2 marks) - The rate will rise because transactions demand, hence total demand, will rise and intersect supply at a new higher rate of interest QUESTION TWO Answer the next question(s) on the basis of the following production possibilities tables for two countries, Latalia and Trombonia: L a t a l i a ' s p r o d u c t i o n p o s s i b i l i t i e s A B C D E P o r k ( t o n s ) 4 3 2 1 0 B e a n s ( t o n s ) 0 5 1 0 1 5 2 0 T r o m b o n i a ' s p r o d u c t i o n p o s s i b i l i t i e s A B C D E P o r k ( t o n s ) 8 6 4 2 0 B e a n s ( t o n s ) 0 6 1 2 1 8 2 4 a)What does the above data indicate about opportunity cost between the two countries (1 marks) -They are very diverse, but complement each other as one country may have more of one product whilst the other is lacking. opposites b)What is the domestic real cost of 1 ton of pork in Latalia?. (1 marks) -5 tons of beans. c) Refer to the above tables. if these two nations specialize on the basis of comparative advantage, what would each country produce? (1 marks) -Latalia will produce beans and Trombonia will produce pork. d) Assume that before specialization and trade, Latalia produced combination c and trombonia produced combination B. if these two nations now specialize completely based on comparative advantage, what would be the total gains from specialization and trade? (2 marks) - 4 tons of beans. e) Explain the rationale for a middle-income country like Kenya engaging in international trade. (5 marks)
