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CT7 Exam - September 2008

B

barbados

Member
Hi all, I have two questions regarding this exam:

Question 26: Why is the answer A?

Question 13: Calculate the injection into the circular flow?
Injection = I + G + X = 350 + 250 + 0 = 600. So answer: C.

However, I was reasoning as follows: Since saving, consumption expenditure, and tax is given, income can be calculated as: Y = C + T + S (since S = [Y-T]-C). Thus Y = 600 + 200 + 150 = 950.

Now we use X = Y - C - I - G + Z + T, thus X = 950 - 600 - 350 - 250 + 200 + 200 = 150.
And now Injection = I + G + X = 350 + 250 + 150 = 750.

Also 750 is part of the available answer. So where is my reasoning going wrong?

Thanks for your help.
 
Q26: Terms of trade (or more specifically, terms of trade index) is given by:

Index of export prices / Index of import prices x 100

(see page 13 of Chapter 19).

The price of exports has increased by 20%, so the numerator will need to be multiplied by 1.2.

The price of imports has decreased by 40%, so the denominator will need to be multiplied by 0.6.

The terms of trade index will therefore be twice as big as it was before, ie an improvement of 100% (option A).

Note that you have to be a bit careful with the terms "improvement" and "deterioration" in this context, as an "improvement" actually reflects that our exports have become less competitive.

For Q13, you've said that X = Y - C - I - G + Z + T, but I think you've made two mistakes here.

Firstly T shouldn't appear on the right hand side. I think the equation that you're using is Y = C + I + G + X - Z and tax doesn't feature in this as it's not a measure of economic activity (and this is what Y is measuring).

Secondly (and more importantly), this equation is only true in equilibrium. What we can always say (in equilibrium or not) is that AD = C + I + G + X - Z. Our equilibrium condition is Y = AD. So you cannot say Y = C + I + G + X - Z unless you know we're in equilibrium. And in this case it seems that we're not.

I think it's slightly odd that exports are zero, given that there are imports. But I think it's one of those cases where we just have to go with it. In any case, option C is more true than any of the other options :)
 
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