Macroeconomics Answers

Assuming there is no Ricardo-Barro effect, a government budget deficit will____ the real interest rate and ____ the quantity of investment.

lower; decrease.

raise; increase.

raise; decrease.

lower; increase.

When government becomes a lender in the loanable funds market:

• (i) The supply of funds increases, and the interest rate decreases.
• (ii) The supply of funds increases, and the interest rate increases.
• (iii) The supply of funds decreases, and the interest rate decreases.
• (iv) The supply of funds decreases, and the interest rate increases.

(i) and (ii) are correct.

(ii) and (iv) are correct.

only (iii) is correct.

only (i) is correct.

Use AD-AS analysis to show how each of the events below will affect the equilibrium price level and real output in an economy in the short run (your answer must include a graph and explanation in words)

4. 1.Workers expect inflation to rise and negotiate higher money wages today (6 marks) 4.2. New technology increases the productivity of workers (6 marks)

4.3. Consumers expect the economy to go into recession. (6 marks)

4.4 Explain briefly why a monetary contraction for a small open economy under fixed exchange rates will have no effect on real income. (4 marks)

4.5 Define the AD curve and show graphically how the AD curve is derived. (7 marks) 

Explain why each of the following statements is true. Discuss the impact of monetary and fiscal policy in each of these special cases:

3.1 If investment does not depend on the interest rate, the IS curve is vertical. (5 marks) 3.2. If money demand does not depend on the interest rate, the LM curve is vertical. (5 marks)

3.3. Use the IS-LM diagram to describe the short-run and long-run effects of an increase in government purchases on national income, the interest rate, the price level, consumption, investment, and real money balances. (note: your answer must include a graph and explanation in words) (10 marks) 

2.1 List and explain 2 reasons why the AD curve has a negative slope (5 marks)

2.2 Briefly discuss the determinants of

2.2.1 Imports (3 marks)

2.2.3. Exports (3 marks)

2.3 With the help of an IS-LM diagram show the effect of restrictive monetary policy on output under flexible exchange rates and with perfect capital mobility. (8 marks) 2.4 Explain fully how a real depreciation affects output. (8 mark) 

1.1 Define the IS curve and explain how the IS-curve is derived. Use graphs to illustrate your answer. (8 marks)

1.2 Draw a graph with the AD (aggregate demand), short run AS (aggregate supply) and long run AS curves. Assume the economy is in a state of long run equilibrium. Clearly indicate this on the graph. (5 marks)

1.3 Now consider an increase in government spending (G). Explain, verbally and graphically, the impact of the increase in G on the AD-AS model in the short run. (5 marks)

1.4 Show and explain the AS adjustment process, in other words, how output adjusts over time, from the short run to the long run (following the increase in G). [6 marks]