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The set of equations for an economic model is as follows:
Y = C + S + T , E = C + I* + G* , C = A + bYD , YD = Y - T , T = T* + tY , B = T – G*
, Y = E
A, I* and G* are the exogenous variables for autonomous consumption expenditure autonomous investment, government expenditure, respectively.
The following economic shock has occurred in this economy, ceteris paribus:
The requirements for housing loans have been tightened.
Represent this economic shock by drawing an appropriate new function. Mark W2 if the appropriate new function is a withdrawal function, or J2 if the appropriate new function is an injection function, or both.
Indicate the following after the occurrence of the above economic shock in J-W curve:
(i) the new equilibrium point as point E2, and
(ii) the level of new equiliribium output as Y2
suppose government expenditure increase by 20% and that this increase was financed by a 20% increased in tax rate. would equilibrium level of income changed or remain unchanged.
(a) show the slope of IS curve depends on interest elasticity of investment demand and marginal prosperity of consume and save.
(b) consider the following numerical version of IS-LM model:
C=500+0.75Y^d
T=20%
I=400-2000r
Ms=500
Md=0.5Y-8000r
G=600
- find the equation for the IS curve and explain its economic rationale.
- find the equation for the LM curve and explainits economic rationale.
There are many hotel businesses in the Philippines that operate in a monopolistically competitive market. To what rent would a perfectly competitive market be more efficient than a monopolistically competitive market? illustrate ur answer with an appropriate diagram(s) (20m)
3. Providing a suitable example, explain how Investment Spending (I) depends on interest rates.
4. Based on the following equation and assumptions, answer the questions:
For an economy, Y = C + I (here Y stands for national income, C stands for consumer spending, I stands for investment spending)
C = 400 + .6Y
I = Planned Investment + Unplanned investment
Planned investment is fixed at 500
Planned expenditure = C + Planned Investment
No government and closed economy
a. If Y=2500, what will be C and planned expenditure? (10) b. What is the amount of unplanned investment if Y=2500? (10) c. If Y=800, find planned expenditure. (10)
d. Find the Y for which Y = Planned expenditure.
1. Drawing diagram explain the process of “crowding out”. Also explain why the private sector might find budget deficit detrimental to their business planned projects.2. “Increase in net capital inflow will increase interest rates in the domestic loanable funds market” – do you agree with this statement? Explain by drawing a diagram and comment how you think investment will change if there is an increase in capital inflow.
a. “Natural resources are the most important determinant of long-term economic growth” – do you agree with this statement. Briefly explain your views.
b. What do you understand by the term “closed economy”? For a closed economy show, National savings = National Investment.
2. Consumer spending in an economy is defined by the following function: Consumer spending = 200 + .85 (Disposable Income) a. Draw this function in a diagram. b. If Disposable income increases by a dollar, how much will consumer spending increase or decrease? c. Assuming closed economy and no government, what will be the economy’s saving if income is 4000?
Q.2 why do we call mechanisms such as such as proportional income tax and welfare system automatic stabilizers? Choose any one of them and explain carefully how and why it affects fluctuations in output
Explain the process of credit creation in the economy and indicate the relationship between the reserve ratio and money multiplier
How do each of the policy proposals listed in (i) to (iv) affect the appropriability and fertility of research R&D spending in the long run, and output in the long run? i. An international treaty that ensures that each country’s patents are legally protected all over the world. ii. Tax credits for each dollar of R&D spending. iii. A decrease in funding of government-sponsored conferences between universities and corporations. iv.. The elimination of patents on breakthrough drugs, so the drugs can be sold at low cost as soon as they are available.
