Consumption is a small and wealthy country with an open economy.

The local currency called F. You have been informed flowing key numbers for the economy of consumption billion F:

Investments 100

Public consumption 230

Capital income 50

Working Income 550

Net export 0

1-What is the value of private consumption?

2- It takes an unexpected growth in private consumption, which makes it larger

than the value of production . What sizes in the formula for the expenditure side in gross domestic product (GDP) is most likely that will change in the short runand why?

3- Government of consumption are aware that this imbalance between production and consumption can not continue in the long run. What measures would you suggest, and why?

4 -Discuss what the government can do in order to keep unemployment

at a low level.

Question 2

Suppose the supply and demand for a commodity is given by:

P = 10 + Xs

And

P=100 – ½ XD

. Where P is the price the commodity has been sold for, Xs is supplied quantity and XD is demand quantity.

1 -Determine the market equilibrium for this commodity. Illustrate in a figure.

2 -What happens to supply, price and turnover if production costs fall?

(Do not calculate exact values, but explain and illustrate in the figure.)

3 -Assume that the current good is an inferior good and that the good has multiple substitutes. What happens to the demand for this good when:

(a) The income in the society increases?

(b) Prices of substitutes (alternative goods) going up?

4 .Consider the equilibrium of a). Suppose that the government imposes a maximum price of 50 in the current market. Illustrate in figure what effects

this have. Why is illegal sales a common problem when it introduced

maximum prices?

Question 3

A product is sold in a domestic market. There is free competition in this market. The production of the product is characterized by increasing long-run marginal costs (long-run marginal costs).

1 -Explain the economic consequences of introducing a tax on this product.

2- Explain the economic impacts of international trade when the domestic price is higher than the world market price.

3 -Explain the economic impacts of an upper limit on the import /

export when the domestic price is higher than the world market price.

Question 4. We have a linear regression model:

Yt = ß0 + ß1 x1t + ß2 x2t + ?t t = 1,…….., T

where Yt is the dependent variable,

x1t and x2t are independent variables,

?t is the error term, t = 1; ……… ,T indexes observations and ß0; ß1 and ß2 are unknown parameter to be estimated.

1 -Give an interpretation of ß1 when x1 is a continuous variable.

2 -Give an interpretation of ß2 when x2 is one dummy variable, i.e x2= 0 or

x2= 1

3 -The parameters of this model can be estimated by using least squares

method (OLS – ordinary least squares). Explain what is meant by “OLS is

BLUE “. (BLUE – Best Linear Unbiased Estimator)?

4- Explain briefly the assumptions that OLS is BLUE.

5 -regression model in double log-form is:

ln Yt = ß0+ ß1 ln x1t + ß2 ln x2t + ?t t = 1,……., T

Give an interpretation of ß1 when x1 is a continuous variable.

Question5

1-What is the present value of $ 5 000 in seven years when the discount rate is 6%?

2-Suppose you deposit $ 5 000 in the bank. How much can you raise after 10 years when discount rate is 5% for the first four years and then rises to 7% annually?

3 -A used car costs $ 120 000. car can be sold for $ 10 000 after six years. What

is the annual cost (depreciation and interest costs) if the discount rate is 9%?

4- A securities provide a payout of $ 30 000 each year for 6 years. Suppose first

amount comes in one year. What is the sale value of the security if the discount rate is 7 %?

5- When buying stereo can choose between paying now and get 1.5% discount

or to get a deferment of payment of 3 months. Provide a discussion of what is

the most profitable option.