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Assume the money sector can be described as
money demand=(1/4)Y-10i
money supply=400
IS equation:Y=2000-40i
(a) if multiplier is 2 what is the effect of increase in government purchases by 200 on income and interest rate?
(b) can you determine how much investment is crowded out as a result of this increase in government purchases
(c) if money demand equation were changed to [money demand=(1/4)Y, how would your answer in (a) and (b) change?
Consider low-skilled workers in garment factories receiving guaranteed wage rate by the government. Explain what type of price control the wage rate is and how this would make workers better off?
Consider a world consisting of two countries, Belgium and Holland. Belgium has
L=100 workers and Holland has L*=200 workers, the only input. There are two goods
– bread (B) and tulips (T).
In Belgium: MPLB=1 and MPLT =1/2, in Holland: MPL*
B = 1/2 and MPL*
T =1.
(a) Which country has a comparative advantage in which good?
(b) Draw the production possibilities frontier for each country. Draw the relative
supply of bread (B/T) curve for each country. Assume that each country has the same
downward-sloping relative demand for bread curve. What is the autarky equilibrium
relative price of bread in each country?
(c) Now derive and draw the world relative supply of bread curve.
(d) Suppose that the relative demand for bread curve intersects with the world relative
What can you say about the trade equilibrium
relative price of bread? Which country produces which good or goods?
Is there complete specialization? Who gains from trade?
2. Continue with the same equations,
What is the value of the simple multiplier (with taxes)
By how much does an increase in government spending of ∆G increase the level of income in this model, which includes the money market?
By how much does a change in government spending of ∆G affect the equilibrium interest rate?
3. How does an increase in the tax rate affect the IS curve?
How does the increase affect the equilibrium level of income?
4. Show that a given change in the money stock has a larger effect on output the less interest sensitive is the demand for money.
(b) How does the respond of the interest rate to a change in the money stock depend on the interest sensitivity of money demand?
The following equations describe an economy (think of C, I, G, etc as being measured in billions and i as a percentage; a 5 percent interest rate implies i = 5)
C = 0.8 (1 – t) Y
t = 0.25
I = 900 – 50i
G = 800
L = 0.25Y – 62.5.i
M / P = 500
What is the general definition of the IS curve?
What is the equation that describes the IS curve?
What is the equation that describes the LM curve?
What is the general definition of the LM curve?
What are the equilibrium levels of income and the interest rate?
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:
(i) Starting from the initial equilibrium position again, suppose that the capital stock increases by 170. What
will be the impact of this 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 effect as calculated above or any
different? Explain using graphs and multipliers.
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:
(c) Derive the equations of the IS, LM and AD curves. Determine the numerical values of the slopes and
intercepts of these curves and interpret each?
(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?
(f) Compare the equilibrium positions in (d) and (e) 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:
(a) Briefly explain the meaning of each equation in the above model. What are the values of d Y C , r I , LY and
S Nw . Give economic interpretation of each.
(b) Add all relevant identities and equilibrium conditions to complete the model. Write down the endogenous
and exogenous variables.
1 What is industrial sector and write about the industrial sector of Ghanaian economy
2 What is the GDP and write about the GDP of the Ghanaian economy
3 Briefly explain employment in relation to the Ghanaian economy
the government proposed reduced spending in form of a slashed public wage bill. Use the AD-AS framework to explain logically the potential effect of such a policy move on output and prices. [Make reference to what happens to the curves but NO drawings of graphs required].
a. In the short run
