Question

tes no to 1ldood ms sd no s 0 mW S rsa of bolnat Question 2 [1 point Suppose Japan's economy operates according to Okun's law, with actual GDP Y200 trillion and actual unemployment 2.5 percent. If the natural rate of unemployment is 4% , what is potential GDP? Question 3 [6 points You are given the following information about an economy that is experiencing an investment boom. Consumption Investment Government purchases Net exports Net foreign income Government taxes 3000 1200 1500 -500 X-M 100 1000 Full employment GDP-5000 and the natural rate of employment is 6% (a) Calculate GDP and the current account (b) Calculate private savings and national savings (c) Use Okun's law to calculate the level of unemployment (d) Suppose the boom ends and consumption falls by 300, imports fall by 500, investment falls by 250, Government spending declines by 250 and taxes decline by 100. Calculate what happens to GDP, the current account, and national savings [1 point] [l point) [1 point) 12 points] (e) Explain whether a large current account deficit is good or bad for the economy in this case, and why. [1 point) Question 4 [2 points] Briefly describe the main differences between the neoclassical and Keynesian models. You should include comments on what they assume about prices and labour supply What is the effect of positive demand shocks such as an increase in government spending on output and prices in the two models?

Answer 1

(Question 2)

As per Okun's law, for every 1% decrease (increase) in the unemployment rate below (above) the natural rate of unemployment, actual GDP will be 2% higher than (lower than) its potential GDP.

In this case,

Actual unemployment rate - Natural rate of unemployment = 2.5% - 4% = - 1.5%

Therefore,

(Actual GDP - Potential GDP) / Potential GDP = - 1.5% x 2 = - 3%

(200 trillion - Potential GDP) / Potential GDP = - 3%

200 trillion - Potential GDP = Potential GDP x (-3%)

200 trillion - Potential GDP = Potential GDP x (- 0.03)

(1 - 0.03) x Potential GDP = 200 trillion

0.97 x Potential GDP = 200 trillion

Potential GDP = 206.19 trillion

NOTE: As HOMEWORKLIB Answering Policy, 1st question has been answered.