Download Macroeconomics

Macroeconomics
Mid-Term Examination
23rd November 2006
Time Allowed: 1 hour 30 minutes
Answer ALL THREE questions.
Question 1 (20 Marks)
Discuss TWO of the following;
a) The Marginal Propensity to Consume
b) Open Market Operations
c) The Money Multiplier
d) Nominal and Real GDP
e) Paradox of thrift (saving)
Question 2 (40 Marks)
Suppose that you are provided with the following information
Prices € Butter
Cars
Oil
Quantities Butter
2003
1.0
500
100
2003
500
2004
1.0
550
150
2004
500
2005
1.2
570
160
2005
480
Cars
300
350
400
Oil
700
750
770
a) Assuming that the economy produces these three and only these three goods, calculate
nominal GDP for all three years and real GDP with base year 2003 .
(12 Marks)
b) Calculate the inflation rate for 2004 and 2005 using the GDP deflator. (8 Marks)
c) Suppose a Consumer Price Index (CPI) is constructed using weights corresponding to
quantities produced in 2003, what is the rate of inflation in 2004 and 2005 as measured
by the CPI index?
(10 Marks)
d) Suppose now that oil is exported. How do the answers to parts b and c change?
Calculate the relevant changes.
(10 Marks)
(Please turn over)
Question 3 (40 marks)
Consider the following numerical version of the IS-LM model:
C = 800 + 0.7YD
I = 500 – 2000i + 0.1Y
G = 500
T = 500
Real money demand (M/P)d = 0.2Y – 4000i
Real money supply (M/P)s = 400
a) Find the equation for the IS curve.
(5 Marks)
b) Find the equation for the LM curve.
(5 Marks)
c) Solve for equilibrium real output (Y), disposable income (YD) the equilibrium
interest rate (i), consumption (C), investment (I) and private saving (S).
(5 Marks)
d) Verify that production equals demand and that total savings equals investment.
(5Marks)
e) Suppose that government spending increases to 800. Solve again for Y, i, C and
I, and once again verify that production equals demand. Summarise and explain
using words and diagrams the effects of this expansionary fiscal policy on Y, i, C
and I.
(10 Marks)
f) Setting all variable back to their original levels, suppose now that the money
supply increases to 900. Solve again for Y, i, C and I, and verify that production
equals demand. Summarise and explain using words and diagrams the effects of
this expansionary monetary policy on Y, i, C and I.
(10 Marks)