Macro Eco

Question 1:

Assume that Econoland produces haircuts and shirts with inputs of labor. Econoland has 1000 hours of labor available. A haircut requires Ð... hour of labor, while a shirt requires 5 hours of labor. Construct Econolands PPF.

Answer 1:

To construct Econolands Production Possibility Frontier (PPF) we first need to understand what is a PPF.

A production possibilities frontier (PPF) is a graph showing the different quantities of two goods that an economy can efficiently produce with limited productive resources.

Points along the curve describe the trade-off between the two goods, that is, the opportunity cost. Opportunity cost here measures how much an additional unit of one good costs in units forgone of the other good. The curve illustrates that increasing production of one good reduces maximum production of the other good as resources are transferred away from the other good.

Given:

* Econoland produces two goods

o Shirts

o Haircuts.

* 1000 hours of labor is the constraint

* Haircut requires 0.5 hours of labour

* Shirt requires 5 hours of labour

HS = Line indicating the PPF (which in this case is a straight line)

With the given constraint of 1000 hours of labour we get the cases where:

o Pt H indicates the situation when all labour units are being employed to produce 2000 haircuts ( As haircut requires 0.5 hrs => 2000*0.5 = 1000 labor hours)

o Pt S indicates the situation where all labour units are being employed to produce 200 shirts ( As shirt requires 5 hrs => 200*5 = 1000 labor hours)

The slope of the production possibilities frontier (PPF) at any given point is called the marginal rate of transformation (MRT) or the marginal rate of technical substitution (MRTS). It describes numerically the rate at which one good can be transformed into the other. It is also called the (marginal) "opportunity cost" of a commodity, that is, it is the opportunity cost of H in terms of S at the margin. It measures how much of good S is given up for one more unit of good H or vice versa.

i.e in the above diagram, in moving from S' to S'' we give up (H' - H'') units of haircuts.

Questions 2:

Say that Diligent has 10 hours to study for upcoming tests in economics and history. Draw a PPF for grades, given Diligent's limited time resources. If Diligent studies inefficiently by listening to loud music and chatting with friends. Where will Diligent's grade "output" be relative to the PPF? What will happen to the grade if Diligent increases study inputs from 10 hours to 15 hours?

Answer 2:

Given:

Diligent has 10 hours study constraint

We construct the initial PPF i.e. EH as the maximum utilization of his study hours depending on various combination of hours spent on history and economics and hence his relative grades in the same.

Here E denotes the point the where all study time is allocated to Economics

And H denotes the point the where all study time is allocated to History

In order to maximise his grades in both the subjects , a point on the curve EH will denote the best possible combination where full resources are utilised.

However if Diligent studies inefficiently by listening to loud music and chatting with friends he will not reah the maximum utilisation point and will lie somewhere within the PPF curve at say, point U. This point U denotes the underutilization of resources.

Now by increasing the input from 10 hours to 15 hours in a situation where Diligent utilises all 15 hrs efficiently, an outward shift in the PPF takes place to E'H'.

This implies that Diligent is putting in more effort into his studies, and his expected results would be much better.

Question 3:

What are the major objectives of Macroeconomics? Write a brief definition of each of these objectives. Explain carefully why each objective is important.

Answer 3:

Broadly, the objective of macroeconomic policies is to maximize the level of national income, providing economic growth to raise the utility and standard of living of participants in the economy.

Macroeconomics is concerned with the behaviour of the economy as a whole - with booms and recessions, the economy's total output of goods and services, the growth of output, the rates of inflation and unemployment, the balance of payments, and exchange rates. Macroeconomics deals with both long run economic growth and the short run business cycles that constitute the business cycle. Macroeconomics focuses on the economic behaviour and policies that affect consumption and investment, the domestic currency and trade balance, the determinants of changes in wages and prices, monetary and fiscal policies, the supply of money, the budget, interest rates and national debt.

There are also a number of secondary objectives which are held to lead to the maximization of income over the long run. While there are variations between the objectives of different national and international entities, most follow the ones detailed below:

o Sustainability - a rate of growth which allows an increase in living standards without undue structural and environmental