MCAROECONOMICS
GROUP ASSIGNMENT 2
(PROBLEM SOLVING)
FROM GROUP 6
On Shi Wei (286641)
Bong Hui Ying (286652)
Tan Kok Yang (286813)
Nur Ariana Ezza Binti Abdul Mutalib (286981)
Tan Hui Jie (287049)
A) Suppose that the Central Bank decided to increase percent of Reserve Requirement Ratio
(RRR) from 10% to 15% to solve inflation problem. With the aid of money market
diagram, explain the impact of increasing of RRR to the money market equilibrium.
(5 markah/marks)
Initial equilibrium occurs at point E0 when the MS0 cross MD0, the interest rate is r0 and the
quantity of money is Q0. When the Central Bank decided to increase the percent of Reserve
Requirement Ratio (RRR) from 10% to 15%, the money of reserves at central bank must be
increase and the money that can be loan in the market will decrease. It will affect the money supply
in market will decrease and the money supply (MS) curve will shift to left from MS0 to MS1.
When the MS curve shifts to left, the money demand (MD) will higher than the MS and cause the
excess MD at the point AE0. To equilibrium the money market, the interest rate (r) will increase
from r0 to r1. When the MS decreases, the quantity of the money will decrease together from Q0
to Q1. At the same time the money demand (MD) will be unchanged in the new equilibrium. The
final equilibrium occurs at point E1 when the money supply is at MS1, interest rate at r1 and the
quantity of money at Q1.
B) With the aid of IS-LM diagram, explain and show the effect of a rise in autonomous import
on the levels of equilibrium output and interest rate.
(5 markah/marks)
Initial equilibrium occurs at point E0 when the IS0 cross LM0, the interest rate is r0 and the income
was Y0. When the autonomous import (M) rises, the net export (NX) will decrease. The net export
decrease will affect the IS curve decrease, the IS curve will shift to the left from IS0 to IS1. At the
same time the income will decrease from Y0 to Y1, it causes the disposable income to decrease
and the money demand of the transaction and precautionary will also decrease. It causes the
money supply (MS) to be higher than the money demand (MD) which is excess money supply.
To equilibrium the IS-LM curve, the interest rate will decrease from r0 to r1. At the same time the
LM curve will be unchanged in the new equilibrium. The final equilibrium occurs at point E1
when the IS curve at IS0, interest rate at r1 and the income at Y1.
C) With the aid of an appropriate diagram, explain why the size of crowding-out effect is
larger when investment is interest elastic and become smaller when investment is interest
inelastic.
(6 markah/marks)
Initial equilibrium occurs at point E0, when the IS0 cross LM0, the interest rate is r0 and the
income was Y0. When the government spending increases, the IS curve will increase and shift to
the right from IS0 to IS1. In E0, the excess money demand will be happening in E0A and income
will increase from Y0 to Y2, to overcome this problem the interest rate will increase from r0 to r1.
When the interest rate increases the investment will decrease and the income will decrease from
Y2 to Y1. The crowding-out effect is in area at Y1Y2. At the same time the LM curve will be
unchanged in the new equilibrium. The final equilibrium occurs at point E1 when the IS curve at
IS1, interest rate at r1 and the income at Y1.
Initial equilibrium occurs at point E0, when the IS0 cross LM0, the interest rate is r0 and the
income was Y0. When the government spending increases, the IS curve will increase and shift to
the right from IS0 to IS1. In E0, the excess money demand will be happening in E0A and income
will increase from Y0 to Y2, to overcome this problem the interest rate will increase from r0 to r1.
When the interest rate increases the investment will decrease and the income will decrease from
Y2 to Y1. The crowding-out effect is in area at Y1Y2. At the same time the LM curve will be
unchanged in the new equilibrium. The final equilibrium occurs at point E1 when the IS curve at
IS1, interest rate at r1 and the income at Y1.
It may be focused on the strength or impact of crowding-out effect depending on the interest
sensitivity of investment function like the slope of the IS curve and interest sensitivity of the money
demand function like the slope of the LM curve. The greater the value of the interest sensitivity of
the investment function and lower the value of the money demand function, greater will be the
crowding-out effect. The lower the value of the interest sensitivity of the investment function and
greater the value of the money demand function, lower will be the crowding-out effect.
D) Given the following data:
Perbelanjaan penggunaan / Consumption expenditure (C) = 340 + 0.8Yd
Perbelanjaan Pelaburan / Investment (I) = 400 – 1800r
Perbelanjaan Kerajaan / Government Expenditure (G) = 700
Cukai /Taxes (T) = 300 + 0.5Y
Permintaan wang spekulasi / Speculative demand for money (Mds/P) = 240 – 1200r
Permintaan wang urusniaga / Transaction demand for money (Mdt/P)= 0.5Y
Penawaran wang / Money supply (Ms/P)= 700
Harga / Price (P)= 1
di mana Yd = pendapatan bolehguna, Y = pendapatan negara, r = kadar bunga
where Yd = disposable income, Y = national income, r = interest rate
i) Terbitkan persamaan keluk IS dan LM .
Derive the equations for IS and LM curves.
(6 markah/marks)
𝑌𝐼𝑆 = 𝐶 + 𝐼 + 𝐺
𝑌𝐼𝑆 = 340 + 0.8(𝑌𝑑 ) + 400 − 1800𝑟 + 700
𝑌𝐼𝑆 = 340 + 0.8{𝑌 − (300 + 0.5𝑌)} + 400 − 1800𝑟 + 700
𝑌𝐼𝑆 = 340 + 0.8(𝑌 − 300 − 0.5𝑌) + 400 − 1800𝑟 + 700
𝑌𝐼𝑆 = 340 + 0.8𝑌 − 240 − 0.4𝑌 + 400 − 1800𝑟 + 700
𝑌𝐼𝑆 = 1200 + 0.4𝑌 − 1800𝑟
𝑌𝐼𝑆 (1 − 0.4) = 1200 − 1800𝑟
0.6𝑌𝐼𝑆 = 1200 − 1800𝑟
𝑌𝐼𝑆 = (1200 − 1800𝑟)/0.6
𝑌𝐼𝑆 = 2000 − 3000𝑟
𝑌𝐿𝑀 =
𝑀𝐷 = 𝑀𝑆
240 − 1200𝑟 + 0.5𝑌𝐿𝑀 = 700
0.5𝑌𝐿𝑀 = 700 − 240 + 1200𝑟
0.5𝑌𝐿𝑀 = 460 + 1200𝑟
𝑌𝐿𝑀 = (460 + 1200𝑟)/0.5
𝑌𝐿𝑀 = 920 + 2400𝑟
Equition of IS and LM curve is 𝑌𝐼𝑆 = 2000 − 3000𝑟 and 𝑌𝐿𝑀 = 920 + 2400𝑟
ii) Hitung tingkat kadar bunga dan pendapatan keseimbangan.
Calculate the equilibrium levels of interest rate and income.
(4 markah/marks)
𝑌𝐼𝑆 = 𝑌𝐿𝑀
2000 − 3000𝑟 = 920 + 2400𝑟
1080 = 5400𝑟
𝑟 = 0.2
𝑌𝐼𝑆
𝑌𝐼𝑆
𝑌𝐼𝑆
𝑌𝐼𝑆
= 2000 − 3000𝑟
= 2000 − 3000(0.2)
= 2000 − 600
= 1400
𝑌𝐿𝑀
𝑌𝐿𝑀
𝑌𝐿𝑀
𝑌𝐿𝑀
= 920 + 2400𝑟
= 920 + 2400(0.2)
= 920 + 480
= 1400
= Equilibrium levels of interest rate is 0.2 and income is 1400
iii) Pelaksanaan dasar kewangan mengembang meningkatkan penawaran wang kepada 1000.
Hitung tingkat kadar bunga dan pendapatan keseimbangan yang baru.
The implementation of expansionary monetary policy increases money supply to 1000.
Find the new equilibrium levels of interest rate and income.
(4 markah/marks)
𝑛𝑒𝑤 𝑀𝐷 = 𝑛𝑒𝑤 𝑀𝑆
240 − 1200𝑟 + 0.5𝑌 = 1000
0.5𝑌 = 1000 − 240 + 1200𝑟
0.5𝑌 = 760 + 1200𝑟
𝑌 = (760 + 1200𝑟)/0.5
𝑌 = 1520 + 2400𝑟
𝑌𝐼𝑆 = 𝑌𝐿𝑀
2000 − 3000𝑟 = 1520 + 2400𝑟
480 = 5400𝑟
𝑟 = 0.089
𝑌𝐼𝑆
𝑌𝐼𝑆
𝑌𝐼𝑆
𝑌𝐼𝑆
= 2000 − 3000𝑟
= 2000 − 3000(0.089)
= 2000 − 267
= 1733
𝑌𝐿𝑀
𝑌𝐿𝑀
𝑌𝐿𝑀
𝑌𝐿𝑀
= 920 + 2400𝑟
= 920 + 2400(0.089)
= 920 + 213.6
= 1733.6
= New equilibrium levels of interest rate are 0.089 and income is 1733