Institute of Business Management
Semester:
Course Instructor:
Date: 07/04/2014
Spring
Irfan Lal
Total Marks:100
Due Date: Before Final term
Assignment No.3
Q# 1 Money demand in an economy in which no interest is paid on money is
Md/p = 500 + 0.2Y - 1000i.
a) Suppose that P = 100, Y = 1000, and i = 0.10, determine how velocity is affected by an
increase in real income by an increase in the nominal interest rate and by an increase in price
level.
b) The price level doubles from P = 100 to P = 200. Find real money demand, nominal money
demand, and velocity
Q#2 Explain Money demand function and Money market equilibrium graphically?
Q#3
a) What determines the position of the FE line? Give two examples of changes in the economy
that would shift the FE line to the right.
b). What relationship does the IS curve capture? Derive the IS curve graphically and show why it
slopes as it does. Give two examples of changes in the economy that would cause the IS curve to
shift down and to the left.
c). What relationship does the LM curve capture? Derive the LM curve graphically and show why it
slopes as it does. Give two examples of changes in the economy that would cause the LM curve to
shift down and to the right.
Q#4 Define general equilibrium and show the general equilibrium point in the IS-LM diagram. If the
economy isn't in general equilibrium, what determines output and the real interest rate? What
economic forces act to bring the economy back to general equilibrium?
Q# 5 Define monetary neutrality. Show that, after prices adjust completely, money is neutral in the ISLM model. What are the classical and Keynesian views about whether money is neutral in the short
run? In the long run?
Q#6 Explain main factors of aggregate demand (AD) curve? Why does the AD curve slope
downward? Give two examples of changes in the economy that shift the AD curve up and to the right
and explain why the shifts occur.
Q#7 Describe the short-run aggregate supply (SRAS) curve and the long-run aggregate supply
(LRAS) curve. Why is one of these curves horizontal and the other vertical?
9. Use the AD-AS framework to analyze whether money is neutral in the short run and whether it is
neutral in the long run
Q#8 Use the IS-LM model to determine the effects of each of the following on the general equilibrium
values of the real wage, employment, output, real interest rate, consumption, investment, and price
level.
a. A reduction in the effective tax rate on capital increases desired investment.
b. The expected rate of inflation rises.
c. An influx of working-age immigrants increases labor supply (ignore any other possible effects of
Increased population).
d. Increased usage of automatic teller machines reduces the demand for money.
Q#9 a) According to the misperceptions theory, what effect does an increase in the price level have
on the amount of output supplied by producers? Explain. Does it matter whether the increase in the
price level was expected?
b) Explain misperception, anticipated and unanticipated theory of money?
Q#10
a) Explain Inflation and cost of inflation (Expected and unexpected).
b) Differentiate Demand pull and cost push inflation with the help of graph which one you suggest
for economy and why?
Q#11 What do you understand by Phillips curve graphically explain short run and long run Phillips
curve?
Define Hyper inflation, stagflation and crowding out?
.
Q#12 who determines the nation's money supply? Explain how the money supply could be expanded
or reduced in an economy
Q# 13 Define
.
a) Quantity theory of money
b) Hyper Inflation
c) Stagflation
d) Crowding out Crowding In
e) Business Cycle