Answer all questions as briefly and precisely as possible. Each question is worth 25 marks (Total Marks = 100). Answers should be uploaded on Moodle by 4PM on Tuesday 9 August.
All these questions can be answered by consulting appropriate sections of the textbook and lecture notes. It is up to the student to identify and read these sources and no help or hints should be expected in this task.
1. Describe the Base Year method and the Chain Weighted method for calculating Real GDP. What problem(s) arises in using the Base Year method? How does the use of Chain Weighted method help rectify this problem?
2. Compare and contrast the CPI and GDP Deflator as measures of the cost of living. Does the CPI tend to overstate or understate the true cost of living? Explain your answer.
3. Consider the following aggregate production function which depends on labour alone:
whereY is aggregate output, L is the amount of labour employed, A is a productivity of the economy and xis a positive exponent that captures the productivity of labour.
[Numerical values of A, x and L are given in an Excel file attached to the tab “Parameter Values for Question 3 on the Resit CW”. You must use only those values that belong to the same row as the first initial of your surname. For example, if your surname starts with H, you should use A=108, x=1/4 and L=81. If you cannot find your initial, then contact me by sending a message via Moodle.]
i. Using the values of A and x from the Excel file but leaving L as a variable, solve for the equation that expresses the demand for labour in the economy as a function of the real wage of labour (W/P). [12 marks]
ii. Now, assuming that the supply of labour is fixed at the level that corresponds to the value of L in the row corresponding to your surname, solve for the equilibrium value of the real wage in the labour market. [10 marks]
iii. What is the value of Ywhen the labour market is in equilibrium? [3 marks]
[Show all working in answering (i)-(iii)]
4. What are the different components of demand for goods and services in a closed economy and what are the main determinants of each? How does a decrease in taxes affect aggregate demand and through what component does this effect take place?