Macroeconomics Answers

The fundamental equations in an economy are given as:

Consumption function C =200+0.8yd

Investment function. I=300

Tax. T=120

Government expenditure. G=200

Exports. X=100

Imports M=0.05y

Find the following.

1.The equilibrium level of income.

2.The net exports.

1.     Show using the IS-LM graph the impact of an expansionary fiscal policy if the LM curve is vertical. If you were the Economic Planner in this country, how would you implement the fiscal policy without causing any crowding out of private investment? (You may insert a snapshot of the graph if drawn manually) (5 marks).

1.     Suppose the IS curve is Y = 39XX-100i and Y = 1500 + 250i is the LM curve, where XX is the last two digits of your ID number. Using these compute:

a)     The equilibrium interest rate and output (i*and Y*).

b)     If government spending was increased by 100m with an immediate impact elasticity of 2.5 in the goods market, determine new income and interest rate.

c)     Determine the impact of the above policy on private investment if it is known that di/dA = XX/100, where XX is the last two digits of your ID number.

d)     Determine the magnitude of the change in money supply required to eliminate any crowding out effect in (c) above. Suppose di/dMs = -0.1X, where X is the last digit of your ID number.

e)     Explain the dynamics represented in (a-d) using an IS-LM space. (You may insert a snapshot of the graph if drawn manually).

1.     Drive the AD (Aggregate Demand) curve using the following: IS curve is given as Y = 20XX-100i, LM₁ is Y= 1000+25i (when P = 1) and LM₂ is Y = 500+25i (when P =2), where XX is the last two digits of your student ID number. Show the derivation in (interest rate-income) and (price level-income) spaces. (You may insert a snapshot of the graphs if drawn manually).

. What would you expect to happen to spending on food at home and spending on food in

restaurants during a decline in economic activity? How would income elasticity of

demand help explain these changes? Justify your stance.

Assume R = 10%

b)   Suppose the bank’s investment portfolio value goes up from its initial level by 10%. Show the bank’s changed balance sheet. What would be the bank’s new capital and new leverage ratio? Show the percentage changes in bank capital and in its leverage ratio.

c)   Suppose due to a sudden stock market crash, the bank’s investment portfolio goes down from the initial level by 15%. Show the bank’s changed balance sheet. What would be the bank’s new capital and leverage ratio? Show the percentage changes in bank capital and in leverage ratio.  

a) Define nominal exchange rate (NER) and real exchange rate (RER).

b) What happens to the U. S. real exchange rate (RER) and its net exports (NX) under the following situations?

i)    The U.S. NER is unchanged, the U.S. price rises, foreign price stays the same.

ii) The U.S. NER is unchanged, the U.S. price unchanged, foreign price rises.

iii) The U.S. NER rises, the U.S. price remains same, foreign price stays the same.

iv) The U.S. NER is unchanged, the U.S. price falls, foreign price falls.

v) The U.S. NER falls, the U.S. price rises, foreign price stays the same

Suppose because of anticipated higher inflation in the near future, the Fed wants to decrease country’s money supply by $100 billion now.

a)   If the reserve ratio R = 10% and the Fed wants to use its open market operations policy tool, will it buy or sell U. S. government bonds?

b)   What would be the amount of bonds the Fed will buy or sell in the market? Show your calculations.

do you think increase in government expenditures can be a cause of inflation?

QUESTION 24

If high-income countries want low-income countries to reduce their greenhouse emission gasses:

1. All they have to do is ask.
2. A simple explanation of the costs and benefits involved will carry the day.
3. It will require armed conflict.
4. Then the high-income countries may need to pay some of the costs.
5. All of the above.  

QUESTION 25

Countries with higher income levels:

1. Will always be the worst polluters.
2. Produce the least pollution.
3. May be willing to place a relatively greater emphasis on environmental protection.
4. May be willing to place a lower emphasis on environmental protection.
5. Cannot be helped. 

QUESTION 26

We may fairly easily quantify the economic benefits of additional oil in the U.S.:

1. And they are definitely higher than the social costs.
2. And they are definitely lower than the social costs.
3. But we cannot quantify the explicit costs.
4. But the social costs are more challenging to measure.
5. Finally, we are done with this quiz.