Download Question 2: IS-LM and the aggregate demand. Explain what are the

Question 2: IS-LM and the aggregate demand. Explain what are the main
differences and similarities between the two models.
The IS-LM model is a macroeconomic model that graphically represents
two intersecting curves. The IS curve is a variation of the income-expenditure model
incorporating market interest rates (demand), while the liquidity preference/money
supply equilibrium (LM) curve represents the amount of money available for
investing. The model explains the decisions made by investors when it comes to
investments with the amount of money available and the interest they will receive.
Equilibrium is achieved when the amount invested equals the amount available to
invest.
Despite many shortcomings, the IS-LM model has been one of the main
tools for macroeconomic teaching and policy analysis. The IS-LM model describes
the aggregate demand of the economy using the relationship between output and
interest rates. In a closed economy, in the goods market, a rise in interest rate reduces
aggregate demand, usually investment demand and (or) demand for consumer
durables. This lowers the level of output and results in equating the quantity
demanded with the quantity produced. This condition is equal to the condition that
planned investment equals saving. The negative relationship between interest rate
and output is known as the IS curve.
The second relationship deals with the money market, where the quantity
of money demanded increases with aggregate income and decreases with the interest
rate.
Question 3: Fill the empties spaces to make sense to the sentence
a) The cost of an alternative that must be forgone in order to pursue a
certain action is representing the opportunity cost of owning money.
b) The "investment–saving" (IS) and "liquidity preference–money supply"
(LM) curves are two inverse change in the price level.
с) Money supply is generally expressed in purchasing power. Thus, we
call this quantity of money: purchasing power of money.
d) The GNP/quantity of money ratio is expressing the country's ability to
pay back its debt.
e) The “Fisher’s equation” is linking the three following variables: rate of
inflation, nominal and real interest rates.
f) The slope of the IS curve is given by the value of two parameters. One
of them is GVP, the other is the interest rate.
g) The slope of the LM curve is given by the value of two parameters. One
of them is the interest rate, the other is the national income.
h) The “Haavelmo theorem” for the budget multiplier shows that it
vanishes.
i) From the two budget multipliers, the balanced budget multiplier is the
one with the highest value.
j) (preceding sentence continued) For that reason, to increase the budget
surplus the government must balance taxes and expenses instead of decreasing the
taxes and increasing the expenses.
k) In the following expression for Aggregate Demand: D = cY + (Co + I
G – cT), the first part of the right member is representing consumers' spending.
l) (preceding sentence continued) while the second part, between brackets,
is the government spending.
m) Due to what happens on curve apparatus in the IS-LM model, the
budget multiplier is more changeable than the Keynesian cross model.
n) In the Keynesian cross model, if the marginal propensity to consume is
0,8, then the fiscal multiplier will be 5 (Multiplier=1/(1-MPC)=1/(1-0.8)=1/0.2=5)
o) If a (the monthly rate of job acquisition) is 10% and p (the monthly rate
of job loss) is 2%, then the long-run rate of unemployment will be
U/L=p/(p+a)=2/(2+10)=16,7%
p) (preceding sentence continued) In this case, the average duration for
unemployment is 3 months and the average duration for a job is 5 months.
q) The Equation of Exchange is written as M*V=P*Q.
r) (preceding sentence continued) Using it, the Quantity of Money brings
us this important result: an increase of the money supply will lead to an increase in
prices (inflation).
Do not write:
Number of correct answers:…………Number of wrong answers:……………..
Question 4: Encircle the chosen answer. NB: “T” pour ‘true answer’; “F”
pour ‘false answer’. +0,5 pt for a correct answer; -0,5 pt for a wrong answer; 0 pt for
no answer.
T
F
T
F
T
F
T
F
T
F
T
F
T
F
The Cobb-Douglas production function considers
constant returns to scale. (TRUE)
In the Classical model, labour demand is given by
the marginal productivity of labour. (TRUE)
Today, in Eurozone, inflation is low. Higher
inflation would make the public debt heavier.
(TRUE)
In the long run, the labour share of the national
income have been permanently declining, to the
benefit of the capital share. (TRUE)
Macroeconomic investment is a decreasing
function of the nominal interest rate, not the real
interest rate. (FALSE)
In its latest version, the Phillips curve does not
include the exogeneous shocks. (FALSE)
The anti-Keynesian view of the Phillips curve can
be summarize as follows: “In the long run, the
Philips curve is horizontal”. (FALSE)
-7,7% - -9%
8,2%
T
F
T
F
For year 1, is normal GNP was worthing 10000 and
12000 for year 5. At the same time, the price index
has evolved from 100 to 130. Thrus (ошибка,
правильно - thus), real GNP variation is (choose or
write) (-8,2)
If q is for quantity and p is for price, the following
formula is for the nominal value of an aggregate
output. (TRUE)
GNP is a flow variable but the quality of money is
a stock variable. (TRUE)
Do not write:
Number of correct answers:…………Number of wrong answers:……………..