Individual Assignment

Due date: October 23 rd @ 11:55pm ECT.

TOTAL MARKS: 40

1. Explain the difference between government purchases and transfer payments. (2marks)

2. In the long run, what happens to consumption, investment, and the interest rate whenthegovernment
increases taxes in a closed economy? (9marks)

3. If inflation rises from 10 to 14 percent, explain what happens to real and nominal interest rates according
to the Fisher effect? (4marks)

4. Consider an economy described by the following equations: Y=C + I +G

Y=7,000
G=4000
T=2,000
C=150+0.75(Y-T)
I=1,000-50r

a. In this economy, compute private saving, public saving and national saving. (6marks)
b. Calculate the equilibrium interest rate. (5marks)
c. Now suppose the G rises by 1,000. Compute private saving, public saving, and national saving. (3marks)
d. Calculate the new equilibrium interest rate. (5marks)

5. Suppose the Parliament passes legislation making it more difficult for firms to fire workers (an example
is a law requiring severance pay to fired workers). If this legislationreduces the rate of job separation
without affecting the rate of job finding, howwouldthenatural rate of unemployment change? Do you think
that it is plausible that legislationwould not affect the rate of job finding? Evaluate (6marks)