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Q.1 Consider the following information about a hypothetical economy:
1. Y = A (0.025K − 0.5N) N
2. A=2/3
3. K=2000
4. N^s=-18+(18/5)w
5. C=200+(2/3)(Y-T)-300r
6. T=-75+(1/4)Y
7. I =100−100r
8. G=100
9. L = 0.5Y − 200i
10. M=6300
11. π^e=0.10
Now using this information, answer the following:
(g) If government wants to attain same output change as in part (e) using fiscal policy rather than the
monetary expansion, by what amount should it change its policy instruments. Analyze all possible options
the government may exercise. What will be the effect of such policies on all endogenous variables?
(h) Compare the equilibrium positions in (d) and (g) in one graph indicating all points.
Q.1 Consider the following information about a hypothetical economy:
1. Y = A (0.025K − 0.5N) N
2. A=2/3
3. K=2000
4. N^s=-18+(18/5)w
5. C=200+(2/3)(Y-T)-300r
6. T=-75+(1/4)Y
7. I =100−100r
8. G=100
9. L = 0.5Y − 200i
10. M=6300
11. π^e=0.10
Now using this information, answer the following:
(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?
(f) Compare the equilibrium positions in (d) and (e) in one graph indicating all points.
What property is shared by all points along the LM schedule? Along the IS schedule?
Why literature describe the Keynesian consumption function as a short-run model?
How does interest rate affected by devaluation ?
1. Develop a qualitative analysis on income, interest rate, trade balance and private consumption using the IS-LM-BP model if the Fiji dollar was devalued. Assume perfect capital mobility. Carefully discuss the adjustment processes.
a) Draw a production function that exhibits diminishing marginal product of labor. Define total cost, average total cost, and marginal cost. How are they related?
(b) Two firms are in the candy market. Each firm can choose to go for the high end of the market (high quality) or low end (low quality). Resulting profits are given by the following payoff matrix :
Firm 2.
Low High
Low -20,-30 900,600
Firm 1
High 100,80 50,50
(i) Does any firm have a dominant strategy? Explain.
(ii) Find the pure strategy Nash equlibria (if any).
Suppose you are appointed as an economic advisor to the government of Zimbabwe. Assume the government is facing a difficult choice on the type of exchange rate policy to be adopted. Advise the government of Zimbabwe on the key considerations in choosing the exchange rate regime (whether fixed, floating etc.)
Discuss the neoclassical model of investment and Tobin's q theory.
