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    EKN120 Practice Exercise 1 [UP 2023]

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    EKN120 Practice Exercise 1 [UP 2023]

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    EKN120 Practice Exercise 1 [UP 2023]

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    EKN120 Principles of Macroeconomics University of Pretoria

    Practice Exercise #1 2023

    The purpose of these exercises is to develop and improve your analytical and computational
    skills. They require careful reasoning. Most of these questions are based on exercises in
    Janse van Rensburg et al. (2021) and EKN120 past exam/test papers.

    1. Come up with consumption and savings equations/functions that correctly represents the
    data given in the following table.
    Table 1: Income and consumption data
    Disposable income Consumption
    R0 R40
    100 100
    200 160
    300 220
    400 280

    2. Which South African province host the least citizens but covers the largest land area?
    3. List any four basic functions of the central/federal government?
    4. Use the following information to answer questions that follow:
    a C0 = 50, I = 80, M P C = 25% Yd = 520 a
    (a) Write down the consumption function and calculate the value of C.
    (b) Write down the savings function and calculate the value of S.
    (c) Calculate the multiplier.
    (d) If disposable income changes to 770, how big will the multiplier be after this change?
    (e) Draw a graph to illustrate the consumption function in (a).
    5. Calculate the Gross Value at factor cost using the following information:
    Subsidies on production and products = R4,000
    Taxes on production and products = R2,000
    Gross domestic production at Market Prices = R10,000
    6. Identify which of the following variables will be used to calculate:
    (a) GDP according to the expenditure method
    (b) GDP according to the income approach
    • wages and rents bigwhitespace • individual household expenditure
    • expenditure by foreigners • savings
    • government purchases • investment expenditure
    • proprietor’s income • transfers
    • income taxes • corporate profits
    • consumption expenditure • interest

    1
    7. Calculate the unknown variable/answer the following questions:
    (a) C0 = 50; Y = 360; S =?; 1 − c = 0.25.
    (b) Y = 500; S = 50; c = 0.8; C =?.
    (c) C0 = 200; Y =?; c = 2/3.
    (d) Graphically illustrate the savings function in (a).

    8. Calculate the GDP according to the income approach using the following information,
    Write down (or indicate) all the variables and values you use to do the calculation.

    • Private consumption expenditure R500 • Remuneration to employees R350


    • Net exports R300 • Rent R100
    • Interest R200 • Company profits R400
    • Dividends R100 • Taxes on production and products R100
    • Subsidies on production & products R200 • Statistical adjustment R100
    • Sole proprietors’ profits R150 • Government spending R200

    9. Use the following information to answer the questions below1 :


    a C = 50 + 0.8Yd , I = 70, G = 200, T = 20, X = 20, Z = 40 a
    (a) Calculate the equilibrium levels of national income and private consumption expenditure.
    (b) Calculate the value of the multiplier.
    (c) Say the government increases its expenditure to 300. Use the multiplier to find the new
    level of national income.
    (d) Illustrate the change from 9(a) to 9(c) using the income-expenditure diagram.

    10. Using AD/AS analysis, illustrate, on separate graphs, how the government’s expansionary
    and contractionary policy can influence the levels of real GDP. What effect can each
    scenario have on the government’s budget?

    11. Answer the following questions:


    (a) Use the following data to calculate:
    (i) the size of the labour force (ii) the official unemployment rate
    • total population 1500 a very wider white space • not in labour force 1150
    • unemployed 123 • looking for full-time jobs 100
    • population under 16 years of age or institutionalized 1120
    (b) If the price index was 110 last year and is 135 this year, what is this year’s rate of
    inflation?
    (c) Suppose an economy’s real GDP is R60,000 in year 1 and R63,000 in year 2. What is
    the growth rate of its GDP? Assume the population was 100 in year 1 and 102 in year
    2, what is the growth rate of GDP per capita?
    (d) Graphically illustrate, on an AD/AS diagram, the effects of an interest rate increase on
    the South African economy. What is the effect on SA’s inflation and unemployment?
    What policy action(s) can the government take to offset the effect of this rate hike?
    1
    Note that some authors use Z instead of M .

    2
    12. Suppose the nominal annual interest rate on a two year loan is 8% p.a. and lenders expect
    inflation to be 5% in each of the of the two years. What is the annual rate of interest?

    13. How does the SARB respond to 8.5% inflation rate, way outside its target band of 3-6%?

    14. Answer the following questions:


    (a) List three groups of people that are hurt by unanticipated inflation and explain why?
    (b) Illustrate graphically the concept of cost-push inflation and demand-pull inflation.

    15. Answer the following questions given the monthly CPI for 2009-2012 in Table 2 below.
    Table 2: Monthly CPI 2009-2012

    Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Ave

    2009 81.4 82.3 83.4 83.8 84.1 84.5 85.4 86.0 86.0 86.0 86.0 86.2 84.6
    2010 86.4 87.0 87.7 87.8 88.0 88.0 88.6 88.7 88.7 88.9 89.0 89.2 ?
    2011 89.6 90.2 91.3 91.6 92.0 92.4 93.2 93.8 93.8 94.2 94.5 94.6 ?
    2012 95.2 95.7 96.8 97.2 97.2 97.5 97.8 98.0 98.9 99.5 99.60 100 ?

    (a) Which period is the base month?


    (b) Calculate the year-on-year inflation rate for June 2011.
    (c) Calculate the inflation rate to be reported as 2012 average inflation rate.
    (d) In how many years will 2012 inflation rate, calculated in (c), double the price level (up
    to one decimal place)?

    16. Imagine that you are an economic advisor in the Presidential Economic Advisory Council
    (PEAC). Explain to President Cyril Ramaphosa the likely effect of each of the following
    three events occurring in South Africa with regards to AD/AS curve and how these changes
    will affect the equilibrium general price level and output.
    (a) Political instability in SA which increases the risk for foreign investors, thereby, discouraging
    them to invest more in SA.
    (b) South African firms are optimistic about future business conditions and forecast high
    rates of return.
    (c) The global financial crisis negatively affecting SA’s net export spending.

    N. David Sithole
    September 26, 2023
    References
    Janse van Rensburg, J., McConnell, C. R., Brue, S. L., and Flynn, S. M. (2021). Economics:
    A Southern African Context 3rd Edition. McGraw-Hill Education.

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