Question 1: For this question you can choose to answer either (A), or (B), but NOT BOTH.
A. "The IS curve represents all combinations of interest rates and GDP consistent with product market equilibrium whilst the LM curve represents all combinations of interest rates and GDP consistent with money market equilibrium."
Identify and briefly explain the theoretical reasons why the IS-LM model was needed
Explain in detail the process by which the IS and LM curves are derived
Your answer should include all relevant diagrams.
B. In a four sector model where C = 5000 + .9YD, Io = 1200, Go = 800, T = 600 + .25Y, Xo = 700 and M = 450 + .15Y, YOU ARE
(i) What is the value of the relevant TAXATION multiplier in this model?
(ii) What is the initial value of equilibrium GDP for this economy?
(iii) Assume that the Full-Employment level of GDP is $ 18,000 million? What is the size of the relevant inflationary or deflationary/recessionary gap?
(iv) Assume that INVESTMENT expenditure increases by $200 million. What is the new value of equilibrium GDP after this change?
(v) Provide 2 factors that could cause INVESTMENT expenditures to increase.
(vi) Given your results for part (ii) what conclusions can you reach concerning the economy's BUDGET RESULT; and the economy's current account result?
Your answers should include all relevant workings and/or calculations.
Question 2: MONETARY ACCOMODATION is a policy that can be used to minimise, if not eliminate, the effects of CROWDING-OUT. It is also sometimes referred to as TARGETTINGTHE INTEREST RATE.
A. Explain in detail both of these concepts their relation to contemporary fiscal or budgetary policies. Your answer should refer to all types of CROWDING-OUT.
B. In a four sector model where C = 5000 + .9YD, Io = 1200, Go = 800, T = 600 + .25Y, Xo = 700 and M = 450 + .15Y, YOU ARE
(i) What is the value of the relevant TAXATION multiplier in this model?
(ii) What is the initial value of equilibrium GDP for this economy?
(iii) Assume that the Full-Employment level of GDP is $ 18,000 million? What is the size of the relevant inflationary or deflationary/recessionary gap?
(iv) Assume that INVESTMENT expenditure increases by $200 million. What is the new value of equilibrium GDP after this change?
(v) Provide 2 factors that could cause INVESTMENT expenditures to increase.
(vi) Given your results for part (ii) what conclusions can you reach concerning the economy's BUDGET RESULT; and the economy's current account result.
C. In a four sector model where C = 5000 + .9YD, Io = 1200, Go = 800, T = 600 + .25Y, Xo = 700 and M = 450 + .15Y, YOU ARE
(i) What is the value of the relevant TAXATION multiplier in this model?
(ii) What is the initial value of equilibrium GDP for this economy?
(iii) Assume that the Full-Employment level of GDP is $ 18,000 million? What is the size of the relevant inflationary or deflationary/recessionary gap?
(iv) Assume that INVESTMENT expenditure increases by $200 million. What is the new value of equilibrium GDP after this change?
(v) Provide 2 factors that could cause INVESTMENT expenditures to increase.
(vi) Given your results for part (ii) what conclusions can you reach concerning the economy's BUDGET RESULT; and the economy's current Account result?
Question 3: In deriving or obtaining the Aggregate Demand Curve from the IS-LM model, 3 separate effects or methods are used. These are the "Interest Rate" effect; the "Real Balance/Wealth" effect; and the "Foreign Purchases/International Substitution" effect, respectively.
Explain in detail how 2 of these 3effects can be used to explain the negative slope of the Aggregate Demand curve.
Your answer should also BRIEFLY identify and explain the various shift factors of the Aggregate Demand curve as well as those factors that determine its slope or gradient.
Your answer should include all relevant diagrams.
Question 4: For this question you can choose to answer either (A), or (B), but NOT BOTH.
A. "The Classical or Neo-Classical model of the macro-economy is regarded as a market-clearing model. Alternatively, the Simple or Original Keynesian model of the macro-economy is regarded as a non market-clearing model."
Explain the differences between these 2 models in terms of being either market- clearing or non market-clearing. Your answer should include how these models relate to both product and labour markets, respectively.
Your answer should include all relevant diagrams.
B. "The Classical model's "INTEREST RATE" effect was used to explain how the economy would always move to a FULL-EMPLOYMENT level of GDP.
However the original, or simple, Keynesian model used the concepts of MONETARY IMPOTENCE and DEFLATIONARY IMPOTENCE, respectively, to argue that the economy would not automatically move towards a FULL-EMPLOYMENT level of GDP."
Explain and comment upon this statement.
Question 5:
For this question you can choose to answer either (A), or (B), but NOT BOTH.
A. "How the velocity of circulation behaves is very important when discussing the effect of a change in money supply on the level of production in the macro-economy."
Compare and contrast the Keynesian and Monetarist views on the behaviour of the velocity of circulation, and explain the importance of these views when a MONETARY CONTRACTION occurs in the domestic economy, in relation to the IS-LM model.
Your answer should include all relevant diagrams.
B. "The Monetarist model of the business or trade cycle is dependent on the Fooling process. The Fooling process or model is in turn dependent upon the assumption of Backward-Looking or Adaptive Expectations"
Explain in detail how this "Fooling" is said to occur in the context of an increase in domestic money supply.
Your answer should clearly show how this model relates to the Monetarist explanation of the business or trade cycle, using the concept of Backward-Looking or Adaptive Expectations.
Your answer should include all relevant diagrams
Question 6
"The New-Keynesian model of the trade cycle was an improvement on the simple or original Keynesian model because it did not simply assume that money wages were sticky in a downward direction, but provided a comprehensive theory (or set of theories) that was lacking or missing from the simple of original Keynesian model."
As part of this model, a number of key concepts were used to explain why markets - both product and labour - may not automatically clear.
These include:
· MENU COSTS
· COST-PLUS OR MARK-UP PRICING POLICIES
· TURN-OVER COST MODELS
· EFFECTIVE AND NOTIONAL DEMANDS FOR LABOUR
· CONTRACTIONAL COMPARED TO AUCTION LABOUR MARKET EMPLOYMENT SYSTEMS
Briefly explain how each of these concepts support or underpin the New or Post-Keynesian model
Your answer should include all relevant diagrams
Question 7: Compare and contrast the Adaptive-Expectations, Accelerationist, or Expectations-Augmented Phillips Curve model as developed by Milton Friedman, with the Rational Expectatons version/model of the Phillips curve identifying the various components of both models.
How do they differ?
Your answer should incorporate all relevant diagrams.
Question 8: Why do Monetarists, such as Friedman, argue for the implementation or use of a money rule as being the most important anti-inflation policy? What other policies do they suggest and what role do they play in the fight against inflation?