Tutorial One:
Part A
The International Monetary Fund hires you as a senior economic advisor on economic growth
and development. Your first task as a senior officer is to determine if there are potential tradeoffs or complementariness between macroeconomic objectives you wish to pursue. To archive,
this, fill out the table below. Use the upper diagonal to state whether conflict or
complementariness exists between objectives. Write either complement/substitutes/none. Use
the lower diagonal to describe the type of conflict/complementariness that you identified in the
lower diagonal.
a. Substitutes implies the objectives contradicts each other: e.g., high inflation vs low
unemployment.
b. Complements implies the objectives supports one another: e.g., high economic growth
vs high development.
Objective
Economic growth and Stability of output Stable
low unemployment
and employment
and Balance
low inflation payments
equilibrium
the long run
Economic growth and
low unemployment
Stability
of
output
and employment
Stable
and
low
inflation
Balance of payments
equilibrium
in
the
long run
Distribution
of
income and equity.
Economic
development
poverty reduction
and
of Distribution
of Economic
income
and development
in equity.
and
poverty reduction
Part B
1. The following information depicts the economy of Lalaland:
• C = 100 + 0.75Yd
• I = 200
• G = 150
• X = 200
• M = 150 + 0.4Y
• t = 20%
a. Calculate Lalaland’s equilibrium income level (Ye) by using the total expenditure
approach.
b. Calculate Lalaland’s equilibrium income level (Ye) by using the injection-leakage
approach.
c. Is government’s budget in a surplus or deficit at the current income level? Show your
calculations.
d. Suppose that investment (I) increases with 50 in Lalaland. Calculate Lalaland’s new
equilibrium income level by means of the multiplier.
2. Suppose that the following information describes the economy of TikTok:
• C = 175 + 0.8Yd
• I = 500
• G = 300
• X = 250
• M = 25 + 0.2Y
• t = 50%
• Ye = 1363
a. Suppose that the authorities of TikTok would like to increase the equilibrium income
(Ye) to 4000, by how much should they raise government spending (G) to archive
this desired Ye?
b. Calculate the equilibrium value of consumption in this economy after the increase in
government spending in question b.
3. In 2020 the TikTok economy grew by 1.3% which is low economic growth. A decline in
the rate of growth of 1% is expected in 2023. To stimulate growth, the TikTok central
bank reduces the repo rate (expansionary monetary policy).
a. Use the IS-LM model to how the reduction in the repo rate will affect real GDP and
real interest rate in equilibrium. Assume the IS curve is flat while the LM curve is
steep.
b. Discuss the assumptions behind the slopes of the IS and LM curves.
c. Discuss the chain reaction behind your answer in a.
d. Is expansionary effective and why?