Macroeconomics Answers

Contractionary policies are designed to slow economy and reduce inflation

by decreasing aggregate demand and aggregate output. Explain why contractionary fiscal policy and

contractionary monetary policy have opposite effects on the interest rate despite having the same

goal of decreasing aggregate demand and aggregate output. Illustrate your answer with graphs of

the money market.

Q3. Suppose that

C = 60 + 0.8YD

I = 150 - 10r

G = 250

T = 200

Ms = 100

Md = 40 + 0.1Y - 10r

( all the magnitudes are in real terms)

a. Write the equations for the IS and LM schedules.

b. Find the equilibrium values for income and the interest rate .

Suppose we change the model such that investment is assumed to be completely

interest inelastic; investment does not depend on the rate of interest and we have

I = 150.

c. Write the new equations for the IS and LM schedules. Show the schedules graphically.

d. Find the new equilibrium values for income and the interest rate. (4+2+8+3=17 marks)

If the level of government spending were to decrease by 100 units in the IS – LM schedule

 model, how would this affect the position of the IS schedule?(1+3=4)

Assume that the economy is at its peak with the reference to the flexible accelerator explain the behaviour of business fixed investment

With reference to the flexible accelerator, explain the behaviour of business fixed investment

¢15,000

Taxes paid to government 

¢5,000

Revenue received from sale of apples

¢35,000

Apples sold to the public

¢10,000

Apples sold to Kojo Juice Incorporation

¢25,000

Transactions of Kojo Juice Incorporation

Wages paid to workers of Kojo Juice Incorporation 

¢10,000

Taxes paid to government

¢2,000

Apples bought from Holi Apple Incorporation

¢25,000

Revenue received from sale of apple juice

¢40,000

The fundamental identity of national income accounting states that the same value of total 

economic activity is obtained whether activity is measured by the production of final goods and 

services (product approach), the amount of income generated by the economic activity (income 

approach), or the expenditure on final goods and services (expenditure approach). Using the data 

in the table above, show that the product approach, income approach and expenditure approach 

yield the same value of total economic activity (GDP).

1. Explain the role and importance of the presence of involuntary unemployment in ensuring that the labour discipline model works as a tool for employers to incentivise workers to exert effort into their jobs

role of involuntary unemployment in the labour discipline model

assume that the economy is at its peak with reference to the flexible accelerator explain the behaviour of business fixed investment

Between 2011 and 2016, UK unemployment fell from a high of 8.5% to 4.8%. Some argue that government attempts to reduce unemployment inevitably lead to trade-offs with other macroeconomic policy objectives.

Discuss the view that falling unemployment will inevitably lead to trade-offs with other macroeconomic policy objectives.