Intermediate macroeconomics. SEC 222 Assignment one.

Submit questions 4, 9 and 11 on

Friday 14th February 2020
1. Properly write the macroeconomic equation for
(a) Closed economy macroeconomics
(b) Open economy macroeconomics
(c) The goods market Equilibrium
(d) The money market equilibrium
2. Assume a consumption function given by the equation: C=250+ 0.75 Yd
(a) What are the components “250, 0.75 and yd” called? What does each measure? And how is
each related to the level of consumption?
(b) Plot the consumption function, and label it properly
(c) Define, calculate and interpret the government purchase multiplier
(d) Using the government purchase multiplier obtained above, calculate by how much income
will increase if government increased its spending by 25million.

3. Assume that GDP is $6,000. Personal disposable income is $5,100 and the government
budget deficit is $200. Consumption is $3,800.
(a) How large is saving (S)?

(b) What is the size of investment (I)?

(c) How large is government spending (G)?
4. Use the IS – LM model and clearly explain
(a) The impact of an increase in taxes on the interest rate, income, consumption and
investment.
(b) The impact of a decrease in money supply on the interest rate, income, consumption and
investment.

5. The following equation describe the economy (Think of C, I, G, etc as being measured in
billions of K and i as a percentage)
C=200+0.8 ( 1−T ) Y ; T =0.25 ; I =900−50 i; Ǵ=800; L=0.25Y −62.5 i;
Ḿ
=500
Ṕ
(a) What is the equation that describes the goods market (IS curve)?
(b) What is the definition of the IS curve?
(c) What is the equation that describes money market (LM curve)?
(d) What is the definition of the LM curve?
(e) What is the equilibrium level of income and the interest rate?

6. Suppose you are a member of ‘economic policy advisory team’ for the government. Suggest a
policy mix to achieve an increase in output (Y) while keeping interest rate (r) constant.
Support your argument with an IS-LM model.

7. Briefly discuss the following concepts

(a) Expansionary fiscal policy
(b) Contractionary monetary policy
 (c) Liquidity trap
(d) Crowding-out effect

8. Suppose that a closed economy’s national equation is expressed as:

C=1000+0.5 Y D I =200 T =160 G=400
(a) Calculate Equilibrium level of output (Y); Consumption (C); Disposable income;
Aggregate demand (AD).
(b) Suppose that the government increased the expenditure by 25%. Calculate Equilibrium
level of output (Y); Consumption (C); Disposable income; Aggregate demand (AD)
(c) Briefly explain the pros and cons of increase in government spending from economic
point of view.
9. In the Keynesian cross, assume that the consumption function is given by C=100 +
0.75(Y-T). Planned investment is 50, government purchases and taxes are both 50.
(a) Graph planned expenditure as a function of income.

(b) What is the equilibrium level of income?

(c) If government purchases increase to 100, what is the new equilibrium income?

(d) What level of government purchases is needed to achieve an income of 1,600

10. The IS-LM model is a very important model as it shows the relationship between
macroeconomic variables, and how government policies affect the economy.
(a) Define what the LM and IS curves are, and briefly explain why the LM and IS curves
slope upwards and downwards respectively.

(b) Briefly explain and graph the effect of an increase in money supply on the equilibrium
income and interest rate in the IS-LM model.

(c) Briefly explain and graph the effect of an increase in government spending on the
equilibrium income and interest rate in the IS-LM model.
(d) Use the IS-LM model and investment schedule to show (graph and explain) the effect of
an increase in investment subsidies on investment, income and interest rate.

11. Consider an economy described by the following equations: C=100+0.8Yd, I=50-25r, G=50,
T=50, Md/p=Y-25r, Ms/p=200. Calculate the IS and LM curves. Calculate the equilibrium
levels of output and interest rate. Calculate new level of income and interest rate if money
supply increased by 100. (present your solutions graphically)

12. Consider an economy described by the following equations: C=100+0.9Yd, I=600-30r,

1
G=300, T= Y, Md=0.4Y-50r, Ms=520.
3
(a) Derive the IS and LM equations
(b) Find the equilibrium income and interest rate.
 (c) What is the new level of income and interest rate if government spending increases by
100.
(d) Calculate the government expenditure multiplier
(e) Use the government multiplier to find the full multiplier effect of a government spending
increase on income,
(f) Use the above outcome to explain crowding out effect.
(g) (present your solutions graphically)

13. Consider an economy described by the following equations: C=40+0.75Yd, I=140-10r,

G=100, T=80, Md=0.2Y-5r, Ms=85. Derive the IS and LM equations, and calculate the
equilibrium level of income and interest rate. Calculate the new level of income and interest
rate if taxes increase by 20. (present your solutions graphically)

14. Suppose government cuts income tax. Show in the IS-LM model the impact of the tax cut
under two assumptions: 1. The government keeps the interest rate constant through an
accommodating monetary policy. 2. The money stock remains unchanged.