Search & Filtering
Use the IS–LM diagram to describe the short run and long-run effects of the following changes
on national income, the interest rate, the price level, consumption, investment and real money
balances
a. An increase in government purchases
Use the IS–LM diagram to describe the short run and long-run effects of the following changes
on national income, the interest rate, the price level, consumption, investment and real money
balances
a. An increase in the money supply
In the Keynesian cross model, assume that the consumption function is given by
C = 120+ 0.8 (Y - T). Planned investment is 200, government purchases and taxes are both 400.
a) What is the equilibrium level of income?
b) If government purchases increase to 420, what is the new equilibrium income? What is the
multiplier for government purchases?
c) What level of government purchases is needed to achieve an income of 2,400? (Taxes remain
at 400.)
d) What level of taxes is needed to achieve an income of 2,400? (Government purchases remain
at 400.)
In the Keynesian cross model, assume that the consumption function is given by
C = 120+ 0.8 (Y - T). Planned investment is 200, government purchases and taxes are both 400.
a. Graph planned expenditure as a function of income.
1) Calculate the natural level of employment if the labor force is 150 million and the
natural rate of unemployment is 5%.
1) Assume that the cost of a unit of labor (W) is $50 (the nominal wage) and a unit of labor
produces one unit. Calculate the price per unit if mark up is :
i. 20%
ii. 40%
a) Explain fully how each of the following factors influence the determination of wages in
the economy
i. Expected price level (Pe)
ii. Unemployment rate (u)
iii. Institutional factors such as labor laws and regulations, minimum wages and
unemployment benefits (z)
a) With the aid of a graph, show the effect of a reduction in money supply on the aggregate
demand and supply in the short-run
a) Discuss the link between the quantity theory and the fisher effect
b) What does the Quantity Theory of Money State?
c) Define fiat money, commodity money, and seigniorage.
a) Explain why the aggregate demand (AD) curve slopes downwards
b) Why is the aggregate supply curve vertical in the long-run?
c) What is stabilization policy?
d) Write the quantity equation and explain it critically?
e) What does the assumption of constant velocity imply?
