8/10/2019 Problem Set 2 (Econtwo)

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Introduction to Macroeconomics (ECONTWO)

Term/ Year: 3rdTerm- AY 202-203

!ro"#em $et 2

Question 1: General Equilibrium Model

The following equations describe a three- sectors economy with tax:

Consumtion ! "#$%d

Tax ! "#&'Gross ri(ate domestic in(estment ! )"" * '"i

+ublic ,er(ices ! $""

Transactions Moti(e ! "#&'%

,eculati(e Moti(e! - 'i

Money ,uly ! '""

1. /hat is the equation that describes the 0, cur(e

&.

/hat is the equation that describes 2M cur(e3. /hat are the equilibrium le(els of income and the interest rate

4. 5ow much will be the change in equilibrium income if go(ernment sending increases by 1'"'. 5ow much will be the change in equilibrium interest rate6 if go(ernment sending increases by 1'"

*Again, this is just an easier version. Please bring Lecture 1 notes on the day we are going to answer this so I could discuss to

you some given (regarding goods and services market that I gave in the 1st!"am so you could be reviewed and be #re#ared.

7or Questions 3 and 46 0 8now that this is in the lecture notes but try to understand the reasons as exlained in class# This

would hel a lot in answering Question 4#

Question &: 9- 9, Model

Exlain the reasons the aggregate demand cur(e sloes downward# Gi(e an examle of an e(ent that would shift theaggregate-demand cur(e# /hich way would this e(ent shift the cur(e

Question 3: 9- 9, Model

Exlain why the long-run aggregate-suly cur(e is (ertical# Exlain why the short-run aggregate-suly cur(e is uward

sloing#

Question 4: 9- 9, Model

Exlain whether each of the following e(ents shifts the short-run aggregate suly cur(e6 the aggregate demand cur(e6

both6 or neither# 7or each e(ent that does shift a cur(e6 draw a diagram to illustrate the effect on the economy#

a. 5ouseholds decide to sa(e a larger share of their income#

b.

+alay cros suffer a rolonged eriod of disastrous hea(y rains during the rainy season#c. The election of a oular residential candidate suddenly increases eole;s confidence in the future#

$te#s %or Analy&ing 'acroeconomic luctuations

1. )ecide whether the event shi%ts the aggregate demand curve or the aggregate su##ly curve (or #erha#s both.

. )ecide in which direction the curve shi%ts.

+. se the diagram o% aggregate demand and aggregate su##ly to determine the im#act on out#ut and the #rice level.