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Consider a hypothetical closed economy with the following functions: C = 50 + 0.75(Y-T); I = 100 – 2r; G = 120; T = 140; Ms = 440; P = 2; (M/P)d = 0.5Y – 1.5r;
A. Write down the IS function.
B. Write down the LM function.
C. Determine the equilibrium levels of income and interest rate.
D. What happens to equilibrium r if money supply is raised from 1,000 to 1,200?
E. If the central bank wishes to raise the interest rate to 7 percent, what money supply should it set? F. If government purchases increase by 224, what is the impact of this change on the IS curve? and What is the impact of the change on the equilibrium level of income?
Under what circumstances might it be possible to reduce inflation without causing a recession?
12. In the current Pakistan's scenario what fiscal policy do you suggest to achieve high economic growth
with price stability? Justify your answer.
Distinguish between growth correlates and fundamental causes of growth
3. Suppose a country targets an income level of Y ∗.
(a) Demonstrate, using graphs, that either fiscal or monetary policies
can be used to achieve the targeted level of income.
(b) What are the possible reasons for a country to opt for a particular
policy (fiscal or monetary) while both of them can yield similar
level of income?
4. A country faced an unexpected build-up of foreign exchange earning
following a positive price shock on the country’s main export in the international market. This gain was, however, accompanied by a soaring
inflation. How and under what conditions, if any, can the build-up of
the foreign exchange reserve trigger inflation?
If technological change increases structural unemployment, why do most governments and economists encourage such change?
6. Suppose that declining resource supplies reduce potential output in each period by 4%. What kind of monetary policy would be needed to maintain a zero rate of inflation at full employment?
2. As the economy slipped into recession in 1980 and 1981, the Fed was under enormous pressure to adopt an expansionary monetary policy. Suppose it had begun an expansionary policy early in 1981. What does the text’s analysis of the inflation-unemployment cycle suggest about how the macroeconomic history of the 1980s might have been changed?
1. The Case in Point titled “Some Reflections on the 1970s” describes the changes in inflation and in unemployment in 1970 and 1971 as a watershed development for macroeconomic thought. Why was an increase in unemployment such a significant event?
