Macroeconomics
Assignment 2
Hand in Assignment 2 during the last lecture
Question One [Total 24 marks]
a. A decrease in money supply causes the real interest rate to ________ and output to
________ in the short run, before prices adjust to restore equilibrium.
A) rise; rise
B) rise; fall
C) fall; rise
D) fall; fall
b. In classical IS-LM analysis, the effects of a decline in desired investment include
A) a decline in output.
B) an increase in the price level.
C) a decline in the real interest rate.
D) an increase in unemployment.
c. The AD, SRAS, and LRAS curves each show a relationship between which two
economic variables?
A) The aggregate price level and output
B) The aggregate price level and the interest rate
C) Output and unemployment
D) Output and the interest rate
d. The high point in the business cycle is referred to as the
A) turning point.
B) peak.
C) boom.
D) trough.
This study source was downloaded by 100000804571086 from CourseHero.com on 09-06-2022 10:17:06 GMT -05:00
https://www.coursehero.com/file/58853124/Assignment-2pdf/
e. A decrease in government spending on the park system would cause
A) the aggregate demand curve to shift to the right.
B) the aggregate demand curve to shift to the left.
C) a movement down and to the right along the aggregate demand curve.
D) a movement up and to the left along the aggregate demand curve.
f. Which of the following changes shifts the AD curve down and to the left?
A) A temporary increase in government purchases
B) A rise in the nominal money supply
C) A decrease in corporate taxes
D) A decrease in consumer confidence
g. When plotted with the aggregate price level on the vertical axis and output on the
horizontal axis, the long-run aggregate supply curve
A) slopes upward.
B) slopes downward.
C) is vertical.
D) is horizontal.
h. According to classical macroeconomists, prices adjust ________ to shocks, so the
government should ________.
A) slowly; do little
B) rapidly; do little
C) rapidly; fight recessions
D) slowly; fight recessions
1
This study source was downloaded by 100000804571086 from CourseHero.com on 09-06-2022 10:17:06 GMT -05:00
https://www.coursehero.com/file/58853124/Assignment-2pdf/
Question Two [Total 32 marks]
a. Is a typical AD curve downward sloping? Use wealth effect to explain your answer.
[5 marks]
b. Suppose an economy is at the short run equilibrium which its current output level called
Y1, is below the full employment output level called Yf. Using a correctly labelled
aggregate demand and aggregate supply graph to show each of the following for the
economy.
I) Full-employment output level
II) Current output level
III) Current price level called P1
[9 marks]
c. To deal with the economic recession in part b, the central bank considers using monetary
policy to bring the economy back to its long run equilibrium level of output. Draw a
correctly labelled aggregate demand and aggregate supply graph to show the effect of
the policy on the output level and the price level of the economy. Briefly explain your
answer.
[10 marks]
d. If the government does nothing, discuss how the economy restores its long run
equilibrium level of output in part b. Is your answer in part d. the same as that in part
c.? Briefly explain your answer.
[8 marks]
Question Three [Total 16 marks]
Desired consumption is Cd = 100 + 0.8Y - 500r - 0.5G, and desired investment is
Id = 100 - 500r. Real money demand is Md/P = Y - 2000i. Other variables are πe = 0.05,
G = 200,
= 1000, and M = 2100.
a. Find the equilibrium values of the real interest rate, consumption, investment, and the
price level.
[8 marks]
b. Suppose the money supply increases to 2800. Find the equilibrium values of the real
interest rate, consumption, investment, and the price level. (Assume that the
expected inflation rate is unchanged.)
[8 marks]
2
This study source was downloaded by 100000804571086 from CourseHero.com on 09-06-2022 10:17:06 GMT -05:00
https://www.coursehero.com/file/58853124/Assignment-2pdf/
Question Four [Total 28 marks]
The following table shows the disposable income and consumption in an economy.
Disposable
Income
$0
250
500
750
1,000
1,250
1,500
Consumption
$200
350
500
650
800
950
1,100
a. Find the autonomous consumption and the marginal propensity to consume (MPC) in
the economy. Briefly explain your answer.
[8 marks]
b. If the government planned expenditure is $200 and the planned investment expenditure
is $250, derive the aggregate planned expenditure function of the economy.
[5 marks]
c. Write down the equilibrium condition of output level in the income-expenditure model.
Then find the equilibrium GDP. Please show your steps clearly.
[5 marks]
d. If the current level of output is $1,500, explain the sequence of events that moves the
economy to the equilibrium GDP in part c. Assume the government doesn’t change its
expenditure.
[10 marks]
3
This study source was downloaded by 100000804571086 from CourseHero.com on 09-06-2022 10:17:06 GMT -05:00
https://www.coursehero.com/file/58853124/Assignment-2pdf/
Powered by TCPDF (www.tcpdf.org)