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    Macro Economics Exercise 1

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    Daisy Misty
    This document contains an exercise with multiple questions about macroeconomic concepts including aggregate demand, aggregate supply, the IS-LM model, and the effects of monetary and fiscal policy. The exercise includes graphing the IS and LM curves and finding equilibrium levels of output and interest rates. It also asks the student to determine whether several statements about the impacts of monetary and fiscal policy are true or false.

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    Macro Economics Exercise 1

    Uploaded by

    Daisy Misty
    69 views2 pages
    This document contains an exercise with multiple questions about macroeconomic concepts including aggregate demand, aggregate supply, the IS-LM model, and the effects of monetary and fiscal policy. The exercise includes graphing the IS and LM curves and finding equilibrium levels of output and interest rates. It also asks the student to determine whether several statements about the impacts of monetary and fiscal policy are true or false.

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    This document contains an exercise with multiple questions about macroeconomic concepts including aggregate demand, aggregate supply, the IS-LM model, and the effects of monetary and fiscal policy. The exercise includes graphing the IS and LM curves and finding equilibrium levels of output and interest rates. It also asks the student to determine whether several statements about the impacts of monetary and fiscal policy are true or false.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    69 views2 pages

    Macro Economics Exercise 1

    Uploaded by

    Daisy Misty
    This document contains an exercise with multiple questions about macroeconomic concepts including aggregate demand, aggregate supply, the IS-LM model, and the effects of monetary and fiscal policy. The exercise includes graphing the IS and LM curves and finding equilibrium levels of output and interest rates. It also asks the student to determine whether several statements about the impacts of monetary and fiscal policy are true or false.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 2

    IUP FEB-UGM

    Macroeconomics 1
    Hengki Purwoto
    Semester 1 2021/22

    Exercise 8 (Ch. 10, 11, & 12)


    1. Suppose the Fed reduces the money supply by 5 percent. Assume the velocity of money is
    constant.
    a. What happens to the aggregate demand curve?
    b. What happens to the level of output and the price level in the short run and in the long
    run? Give a precise numerical answer.
    c. In light of your answer to part (b), what happens to unemployment in the short run and
    in the long run according to Okun’s law? Again, give a precise numerical answer.
    d. What happens to the real interest rate in the short run and in the long run? (Hint: Use
    the model of the real interest rate in Chapter 3 to see what happens when output
    changes.) Here, your answer should just give the direction of the changes.

    2. In the Keynesian cross model, assume that the consumption function is given by
    C = 120 + 0.8 (Y - T ).
    Planned investment is 200; government purchases and taxes are both 400.
    a. Graph planned expenditure as a function of income.
    b. What is the equilibrium level of income?
    c. If government purchases increase to 420, what is the new equilibrium income? What is
    the multiplier for government purchases?

    3. The following equations describe an economy.


    Y = C + I + G.
    C = 50 + 0.75 (Y – T ).
    I = 150 - 10 r.
    (M/P )d = Y - 50r.
    G = 250.
    T = 200.
    M = 3,000.
    P = 4.
    a. Identify each of the variables and briefly explain their meaning.
    b. From the above list, use the relevant set of equations to derive the IS curve. Graph the
    IS curve on an appropriately labeled graph.
    c. From the above list, use the relevant set of equations to derive the LM curve. Graph the
    LM curve on the same graph you used in part (b).
    d. What are the equilibrium level of income and the equilibrium interest rate?

    4. Consider the economy of Hicksonia.


    a. The consumption function is given by
    C = 300 + 0.6(Y - T).
    The investment function is
    I = 700 - 80r.
    Government purchases and taxes are both 500. For this economy, graph the IS curve for
    r ranging from 0 to 8.
    b. The money demand function in Hicksonia is: (M/P)d = Y - 200r. The money supply M
    is 3,000 and the price level P is 3. Graph the LM curve for r ranging from 0 to 8.
    c. Find the equilibrium interest rate r and the equilibrium level of income Y.
    d. Suppose that government purchases are increased from 500 to 700. How does the IS
    curve shift? What are the new equilibrium interest rate and level of income?
    e. Suppose instead that the money supply is increased from 3,000 to 4,500. How does the
    LM curve shift? What are the new equilibrium interest rate and level of income?
    f. With the initial values for monetary and fiscal policy, suppose that the price level rises
    from 3 to 5. What happens? What are the new equilibrium interest rate and level of
    income?
    g. For the initial value of monetary and fiscal policy, derive and graph an equation for the
    aggregate demand curve. What happens to this aggregate demand curve if fiscal or
    monetary policy changes, as in parts (d) and (e)?

    5. Determine whether each of the following statements is true or false, and explain why. For
    each true statement, discuss whether there is anything unusual about the impact of
    monetary and fiscal policy in that special case.
    a. If investment does not depend on the interest rate, the LM curve is horizontal.
    b. If investment does not depend on the interest rate, the IS curve is vertical.
    c. If money demand does not depend on the interest rate, the IS curve is horizontal.
    d. If money demand does not depend on the interest rate, the LM curve is vertical.
    e. If money demand does not depend on income, the LM curve is horizontal.
    f. If money demand is extremely sensitive to the interest rate, the LM curve is horizontal.

    ENJOY

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