Macroeconomics Answers

The Covid-19 crisis and lockdown has been a supply-side shock to the South African economy. In 

response, the government offered a R500bn stimulus package to help cushion the blow.

Use the AD-AS model, in conjunction with the IS-LM-BP, to explain the supply and demand dynamics 

of the shock and policy response. Where will equilibrium income and prices settle?

You are given the following functions:

 (1) I = 41 - 7r 

 (2) S = 5 + 2r 

 (3) I = S

 a) Find r* and I*

 b) If the there is GHȼ27 million-bond financed increase 

in government expenditure, find:

 i) the new r* and I*. How will AD and Y be affected? 

Explain.

 ii) how much of investment is crowded out? How much 

of consumption is affected? Explain.

 iii) redo ii) using loanable funds diagrams.

(A) Given: C = 100 + 0.75Yd (where Yd = Y-T)

 I = 120-600i

 G = 200

 T = 20 + 0.2Y

 Ms/P = 300

Md/P = 50+0.5Y-600i

Where: C = Consumption

Y = Income

 I = Investment

G = Government spending

T = Taxes

i = interest rate

Ms/P = RealMoney Supply

Md/P = Real Demand for Money

(a) Derive the IS and LM curves

(b) Obtain the equilibrium:

i. Interest rate

ii. Income and consumption

1. From the give table calculate Elasticity of Price, Total Revenue and Marginal Revenue. 

Also, explain the relationship between AR and MR?

6 0

5 100

4 200

3 300

2 400

1 500

0 600

Price(6-0), Quantity demand (0-600)

(A) Discuss the four (4) Functions of Money (2 Marks). (B) With an example each, explain in detail, the three motives of why individuals hold money (6 Marks).

(B) The economy is at full employment. The government now wants to change the composition of demand towards investment and away from consumption without allowing aggregate demand to go beyond full employment. What is the required policy mix? Use the IS-LM analysis to show the policy proposal. (10 marks).

(A) Given: C = 100 + 0.75Yd (where Yd = Y-T) I = 120-600i G = 200 T = 20 + 0.2Y Ms/P = 300 Md/P = 50+0.5Y-600i Where: C = Consumption Y = Income I = Investment G = Government spending T = Taxes i = interest rate Ms/P = RealMoney Supply Md/P = Real Demand for Money (a) Derive the IS and LM curves (10 Marks) (b) Obtain the equilibrium: i. Interest rate (5 Marks) ii. Income (3 marks) iii. and consumption (2 marks) 

a) Given the following simple Keynesian Model: Y = C + I + G + X-M, where Consumption schedule is given as C= 100 +0.75Y Investment (I) = 50 Government (G) = 100 and Net Export (X-M) = 20 i. Calculate the Equlibrium Level of Income [4 Marks] ii. Calculate the size of Consumption at the Equilibrium Level [2 Marks] iii. Calculate the value of the Government Multiplier [2 Marks] iv. Assume Investment (I) changes by 50; calculate the new equilibrium level of Income

(i) Derive (algebraically) the savings function if the consumption

function is C = 200 + 0.6Y. [4 marks]

II. Graphically plot the savings function derived above. [4 Marks]

Note: In your Graph Indicate the following positions: Y>C; Y<C;

Y=C

Effect of an exchange rate appreciation