Part A.
1. Discuss the differences between the classical and Keynesian versions of macroeconomic model.
2. Use the IS-LM model to predict the short-run effects of each of the following shocks on income, the interest rate, consumption, and investment.
(a) A wave of credit card fraud increases the frequency with which people make transactions in cash.
(b) A collapse of stock market
(c) An increase in government spending
3. The following describes a small open economy:
C = 60 + 0.8(Y -T)
I = 150 - 40r
NX = 200-60e
G = 200
T = 150
M = 3500
P = 4
R* = 5
(a) Calculate the equilibrium exchange rate, level of income and net exports.
(b) Assuming that the country operates under floating exchange system. Calculate what happens to the exchange rate, the level of income, net exports and the money supply if the government increases it spending by 50. Use the graph to explain your answers.
4-An increase in money supply shifts the LM curve to the right, but an increase in money demand shifts the LM curve to the left. Explain why there is a difference.