B-Stat Second Year

End Semester Examination 2020

Subject: Macroeconomics
Date: 10.07.2020 .Full Marks 60

Answer the questions below

1. Consider a Simple Keynesian Model (SKM) for a closed economy with government
activities, where all the assumptions of the SKM including that of the fixed exchange rate
hold. Aggregate planned demand for produced goods and services is given by
, where ( ), and DI denotes disposable income.
Marginal propensity to consume out of disposable income is assumed to be , ̅ ,
where ̅ , and ̅ . Moreover, ̅ ̅ ̅
̅ . All these components of aggregate planned demand are fixed. They are autonomous
components of aggregate planned demand, i.e. they are independent of Y, where Y denotes
GDP. Start with an initial equilibrium situation. Now suppose the government raises the lump
sum component of the tax function, ̅ , by units and uses the fund to increase government
expenditure, G. Find out the impact on the equilibrium level of Y, if

(i) the entire additional G is spent on imports.

(ii) 50% of the additional G is spent on imports.

(iii) the entire additional G is spent on domestically produced goods only. [30]

2. Consider the goods market in the Keynesian model where the sectoral functions are given
by the following set of equations: and
aggregate planned investment, I, is constrained by the availability of the commercial bank
credit. Assume that the entire commercial bank credit is used to finance I only. Start with an
initial equilibrium situation, where the goods market is in equilibrium and the banks are fully
loaned up. Now suppose the government takes a loan of 100 units from the central bank and
spends it in raising G, which is spent entirely on domestically produced goods only. It is
given that the CRR and the currency-deposit ratios are 0.5 and 0.5 respectively. Given the
above information

(i) compute the impact of the central bank credit financed increase in G on the levels of high-
powered money (show the associated changes in the balance sheets of the related banks),
money supply, commercial bank credit and the level of Y. (Assume that the initial level of
excess demand for commercial bank loan is adequate for the money multiplier process to
work fully.)

(ii) How will your answer to 2(i) change if the initial excess demand for commercial bank
credit were only 40 units? [30]