Exam
The Goods Market
1. In a closed economy consumption faction is defined as
O c0 + c1 (Y - T)
where C consumption, c0 is subsistence consumption level, c1 is Marginal Propensity to Consume, Y is National Income and T is Net Taxes.
Investment and government spending are exogenous and defined as
I I- and G G-
(a) find the Output (Y) at the equilibrium
(b) Graphically illustrate the Demand/Production model.
(c) When output is LOWER than the equilibrium, what, would happen'? Explain in detail the process that will bring the output back to the equilibrium.
(d) When output is HIGHER than the equilibrium, what would happen? Explain in details the process that will bring the output back to the equilibrium.
2. The effect of a change in Autonomous Spending
(a) Suppose there is an INCREASE in Government Spending. Use the Demand/Production diagram to explain what would happen. Explain in details the process how output increases from the initial to the new equilibrium.
(b) Suppose there is a DECREASE in Government Spending. Use the Demand/production diagram to explain what would happen. Explain in details the process how output decreases from the initial to the new equilibrium.
3. Investment - Saving Nexus
In a closed economy please show that when production equals to demand, investment also equals to saving. In other words, start with Y = C + I + G. Show that how we have investment equals to the sum of private paid public saving (I = S + (T - G))
4. The Paradox of Thrift
Use the Investment-Saving Graph (froth the Video) to explain the paradox of saving. Explain in details how an increase in intended saving might not lead to an increase in real saving.
Financial Market
(Hint: in the process of disequilibrium, you should mention about the excess demand of money and the excess supply of bands)
1. Equilibrium and Disequilibrium in Financial Market
(a) Graphically illustrate the Money Supply/Demand diagram. Show the initial equilibrium where Money Supply is equal to Money Demand.
(b) if interest rate in the market is HIGHER than the equilibrium rate, what would happen? Explain the process how the market forces the interest rate back to the equilibrium rate.
e) If interest, rate in the market is LOWER than the equilibrium rate, what would happen? Explain the process the market Forces the interest rate up to the equilibrium rate.
2. Expansionary Monetary Policy
(a) Graphically illustrate the Money Supply/Demand diagram. Show the initial equilibrium where Money Supply is equal to money Demand.
(b) Suppose the fed decide to any bounds from the market. Show what would happen on the graph.
(c) Explain in words how the interest rate would adjust to the new equilibrium.
3. Contractionary Monetary Policy
(a) Graphically illustrate the Money Supply/Demand diagram. Show the initial equilibrium where Money Supply/ Demand diagram. Show the initial equilibrium where Money Supply is equal to Money Demand.
(b) Suppose the Fed decide to sell bonds to the market. Show what would happen on the graph.
(c) Explain in words how the interest rate would adjust to the new equilibrium.
4. Liquidity Trap
Use the Money Demand/Supply Diagram to explain why the Fed conventionally could not push the interest ratio below zero. Why negative real interest rate is implausible in the market? Explain in details.
The IS-LM Model
1. The Derivation of lS-LM
(a) Use the Demand/Production diagram to derive a negative-doped IS curve, Explain in details.
(b) Use the Money Demand/Supply diagram to derive a positive-sloped LM curve. Explain in details.
2. Fiscal - Monetary Polices
(a) After 2008 the US Government sought the solution to the crisis. They consider between the Fiscal stimulus and the Monetary expansion. Use a positive-sloped LM and a negative-sloped IS to show how fiscal stimulus could expand the national output in one diagram and show how output could change from the initial equilibrium to the new equilibrium. What the assumptions we must have economic expansion are. (You can use the Money Market diagram and the Demand/Production diagram to explain too)
(b) In the mid 2000s US economy was rapidly expanding due to the housing market boom. The Government considered between reduction in budget deficit and Monterey contraction in order to cool down the economy. Use a positive-sloped LM and a negative sloped IS to show how Fiscal contraction could tune the economy in another diagram. Explain in details how output could change from the initial equilibrium. What the assumptions we must have to ensure economics contraction are. (You can use the Money Market diagram and the Demand/production diagram to explain too)
3. Policy Effectiveness
(a.) Why the economy might have Vertical (steep) LM curve? What would be the consequence if there is Government stimulus package? Use the Money market diagram and IS-LM to explain.
(b). Why the economy might have horizontal (flat) LM Curve? What would be the consequence if the Fed tried to increase money supply? Use the Money market diagram, Production/Demand diagram and IS-LM to explain.
(c) Why the economy might have vertical (steep) lS curve? What would be the consequence if the Fed tried to increase money supply? Else the Money market diagram, Production/Demand diagram and IS-L.M. to explain.
(d) Why the economy might have horizontal (flat) IS curve? What would be the consequence if the fed to increase money supply? Use the Money market diagram, Production/Demand diagram and IS-LM to explain.
(e) Use the IS-LM, Money Market and Production diagram to explains what happened after 2008 in your view. Explain in details what happened. Why the economy is still sluggish in 2016?
Labor Market
1. WS/PS Derivation
(a) Show the Wage Setting function and derive a negative-sloped Wage Setting curve. Discuss the assumptions we have for the model.
(b) Show the Price Setting relation and derive a horizontal Price Setting curve. Discuss the assumptions we have for the model.
(c) Draw a complete wage setting/Price Setting (WS/PS) diagram.
2. Policy Implication
(a) If US Government decided to decrease unemployment benefit, what would happen unemployment rate and real wage? How we move from the old Unemployment rate level to the new one? Use the WS-PS diagram and explain in details.
(b) If US Government decided to increase unemployment benefit. What would happen unemployment rate and real wage? How we move from the old Unemployment, rate level to new one? Use the WS-PS diagram and explain in details.
(c) If US Government relaxed the Antitrust law, which empowers the firms to increase their profit margin, what would happen unemployment rate level to the now one? Use the WS-PS diagram and explain in details.
(d) It US Government strengthened the Antitrust law, which reduces the firms' ability to increase their profit margin, what would happen unemployment rate and real wage? How we move from the old Unemployment rate level to the new one? Use the WS-PS diagram and explain in details.
AS-AD Model
The Derivation of AS-AD
(a) Show the derivation of the upwatid-sloping AS Curve. You should start with the relation of Unemployment/Output and substitute that into the WS-PS equilibrium. Explain in details how an increase in output (Y) could lead to an increase in price level (P) for AS relation.
(b) Show the derivation of the downward-sloping AD Curve. 'You should start with the relation in Money market that led to a shift in LM. Explain in details how an increase in price level(P) could lead to a reduction in output (Y) for AD relation.
2. Monetary Expansion
(a) In the Short, run, use the AS-AD model to explain the effect, of monetary expansion. You can use the Money market model and IS-LM model to complement your answer too.
(b) In the medium run, what will happen to the AS-AD, Labor market and IS-LM. Explain in details, (c) Explain what the "Neutrality of Money' is from the results above.
3. Crisis
(a) In the Short run, use the AS-AD model to explain the effect of a reduction in autonomous spending, or when economy sinks into the economic crisis. You can use the Money market model and IS-LM model to complement your answer too.
(h) In the medium run, what will happen to the AS-AD, Labor Market and IS-LM Explain in details.
(c) From this model the economy is automatically recovered in the medium run. Government is not needed to fix the market. However, some economists do not believe that would happen in the real world. Explain two main reasons discussed in the videos why the economy might not he recovered by itself and how the fiscal stimulus might be more feasible during the crisis.