Macroeconomics Answers

The unemployment rate measures the fraction of what

Using a fixed price IS-LM framework show (graphically) that the effectiveness of monetary policy depends on the shape of the IS curve. 

Q.3 Business Cycles

A hypothetical economy gets hit by an adverse shock that reduces the marginal productivity of capital.

Furthermore, economists have estimated that this shock will affect the goods market more as compared

to the labour market and aggregate supply.

Answer the following questions in this context:

a) Analyze and explain the effects of these shocks on all broad macroeconomic variables both in the short

run and the long run using the IS-LM-LAS framework.

b) Does the Keynesian explanation of the relationship between output and price-level hold in the long run

equilibrium?

c) What might a Keynesian policy maker recommend to bring the economy back to original equilibrium?

Will this policy be successful?

d) Will a classical policymaker agree with Keynes’ recommended policy? Explain.

Q.1 IS-LM and Aggregate Demand

a) Derive the IS Curve (graphically) for a three sector economy. What does it represent? What will happen

to shape of the IS curve if the marginal propensity to save decreases?

b) Using Keynes’ liquidity preference theory, explain why aggregate demand for money function is

downward sloping? What will happen to the position of aggregate money demand and the LM-curve if

expected inflation increase?

c) What is Keynes effect? What condition(s) in the money market make the Keynes effect ineffective?

d) Using a fixed price IS-LM framework show (graphically) that the effectiveness of monetary policy

depends on the shape of the IS curve.

Q.2 Labor Market and Aggregate Supply

a) Under what assumption(s) aggregate supply curve may become horizontal / vertical?

b) Explain the effect of a decrease in the stock of wealth on real wages, aggregate employment and

aggregate output supply.

Q.1 Consider t

(d) Determine the equilibrium levels of all endogenous variables under the assumptions of the classical

macroeconomic framework.

(e) Beginning from the initial classical equilibrium, suppose that the central bank increases the money supply

by 420 while price remains fixed at its initial long run equilibrium level. What will be the impact of this

policy on all endogenous variables in short run and long run?

(i) Starting from the initial equilibrium position again, suppose that the capital stock increases by 170. What

will be the impact of the expansion on labour market equilibrium and aggregate supply of output?

Calculate values of all endogenous variables and give intuitive explanation of the results.

(j) Compare the equilibrium positions in (d) and (i) indicating all points.

(k) Suppose that Li → ∞ in Equation.9 of the model. How will it affect the shape of the money demand and

the LM curve. Will the monetary policy of part (e) have the same

A hypothetical economy gets hit by an adverse shock that reduces the marginal productivity of capital. Furthermore, economists have estimated that this shock will affect the goods market more as compared to the labour market and aggregate supply. Answer the following questions in this context: a) Analyze and explain the effects of these shocks on all broad macroeconomic variables both in the short run and the long run using the IS-LM-LAS framework. b) Does the Keynesian explanation of the relationship between output and price-level hold in the long run equilibrium? c) What might a Keynesian policy maker recommend to bring the economy back to original equilibrium? Will this policy be successful? d) Will a classical policymaker agree with Keynes’ recommended policy? Explain

Use a diagram to illustrate and explain the effect of a political unrest in South Africa on the dollar/rand exchange rate