Topic 4

Tests

2. c

3. a

4. b

7. c

10. c

11. b

12. a

13. d

14. b

15. c

16. c

17. a

20. b

23. a

24. d

26. b

29. b

37. b

Task 1

I=1000-40r

r(n)=10%

r(inf)=2%

r=r(n)-r(inf)=10-2=8%

I=1000-40*8%=1000-40*0.08=1000-3.2=996.8

Task 2

r=12%

Cost of investment projects, UAH million 10 15 18 32 40 14 25

Expected rate of return, % 15 9 13 16 11 19 7

I=10 mln * (15%-12%) = 0,3 mln

I=18 mln *(13%-12%) = 0,18 mln

I=32 mln *(16%-12%) = 1,28 mln

I=14 mln *(19%-12%) = 0,98 mln

AD=0,3+0,18+1,28+0,98=2,74 mln

Task 3

C=100+0.8Y

I=50

G=50

GDP-?

S-?

C-?

Y=C+I

Y=100+0.8Y+50; 0.2Y=150; Y=750

S=I=50; C=Y-S=700 or C=100+0.8*750=700

GDP=C+I+G=700+50+50=800

Task 4

DI1=90

C1=80

DI2=100

C2=87.5

MPC=(C2-C1)/( DI2-DI2)=(87.5-80)/(100-90)=7.5/10=0.75
Topic 5

1.

In the labor market, labor demand (ND) and its supply (NS) interact, which are functions of the average
real wage (Wr).

N is an equilibrium, where ND = NS which determines the equilibrium between the real wage and
employment. It is assumed that in equilibrium everyone who wants a job has it. So, the equilibrium
value of employment is called full employment.

When the labor market is in equilibrium, there is not necessary to move away from equilibrium. So, at
the equilibrium values of w and N there are no forces acting in the labor market to move the market
away from the equilibrium values.

2.

Aggregate demand adapts to the price level, and the aggregate supply is determined by the production
function.

This combination of graphs helps us to show that the supply in the market of goods is determined by the
production function and does not depend on the price level. But the demand for goods depends on the
level of prices: if they increase - demand falls, and vice versa. As a result, the equilibrium in this market
is determined by the change in the price level.

Flexible prices of the commodity market act as market regulator.

3.

The role of the equilibrium tool in market of savings performs the real interest rate (r).
4.

Money supply (MS) is an external variable, and demand for money (M D) is a variable, which depends only
on the size of the nominal product Y.

As demand for money is related to the rate of interest, the money demand curve at a given level of
income will be downward-sloping as is shown by the curve Md.
5.

The real interest rate determines the flow of funds into and from the financial market. A higher real
interest rates will lead to larger flows of funds into the market and the smaller flows out from the
market. The real interest rate will be as that the flows into the market are equal to the flows out of
the market.

- savings depends positively on r (flows of funds into the market)

- investment depends negatively on r (smaller flows out from the market)

equilibrium when r = r*, S = I

 The equilibrium interest rate, ensuring consistency between savings and investments, clears the
market from excess supply of financial resources and excessive demand from investors.