Economics
QUESTION ONE
For this question you can choose to answer either (A), or (B), but NOT BOTH.
PART A
Assume that the Asset Demand for money is relatively elastic or flat, and that the Investment Demand Curve, is relatively inelastic or steep.
Compare and contrast the effect of an increase in, Money Supply, Ms/P, upon the overall level of economic activity, in both the traditional transmission mechanism, and in the IS-LM model. Are there any major differences?
Your answer should include all relevant diagrams.
(20 marks)
PART B
In a four sector model where C = 2000 + .9YD, Io = 900, Go = 800, T = 600 + .25Y, Xo = 900 and
M = 500 + .2Y, YOU ARE REQUIRED TO ANSWER THE FOLLOWING QUESTIONS.
REQUIRED:
(a) What is the value of the relevant TAXATIONmultiplier in this model?
(b) What is the initial value of Equilibrium GDP (or Ye) for this economy?
(c) Assume that autonomous consumption expenditure (or Co) increases by $200 million, what is the new value of equilibrium GDP after this change?
QUESTION ONE Part B continued on next page
QUESTION ONE Part B (continued)
(d) What are 3 non-interest rate, and/or non-income, factors, or determinants, that could potentially cause autonomous consumption expenditure to increase within the macro-economy?
(e) Given your results for part (b) above, what conclusions can you reach concerning the economy’s BUDGET RESULT; and the economy’s NET EXPORTS RESULT?
YOUR ANSWERS SHOULD INCLUDE ALL RELEVANT WORKINGS AND/OR CALCULATIONS.
(3 + 6 + 4 + 3 + 4 = 20 marks)
QUESTION TWO
Assuming the Australianeconomy is currently experiencing a period of rapidly increasing unemployment. Which policy options would you recommend to the Government to adopt, and why, given your knowledge of the IS-LM model ONLY?
Are there any potential problems associated with the policy option/s that you would choose or recommend?
Illustrate your answer using the relevant IS-LM diagrams.
(20 marks)
QUESTION THREE
For this question you can choose to answer either (A), or (B), but NOT BOTH.
PART A
It is said” that IS and LM together summarise the entire expenditure side of the economy, and that AD summarises IS and LM”.
Explain in detail what the previous statement means.
Your answer should include the relationship between the IS – LM model and the derivation of the Aggregate Demand Curve.
Your answer should include all relevant diagrams.
(20 marks)
PART B
Explain in detail how the Short Run Aggregate Supply Curve (or SRAS) can be derived from a single competitive firm’s supply curve.
Your answer should include all relevant diagrams and identify those factors, which influence the slope and shift parameters of the SRAS, respectively.
(20 marks)
QUESTION FOUR
“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 also include any assumptions that support of underpin each model.
Your answer should include all relevant diagrams.
(20 marks)
QUESTION FIVE
For this question you can choose to answer either (A), or (B), but NOT BOTH.
PART 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 EXPANSION occurs in the domestic economy, in relation to the IS-LM model.
Your answer should include all relevant diagrams.
(20 marks)
PART B
“The Monetarist model of the business or trade cycle is dependent on the Fooling process.”
Explain in detail how this “Fooling” is said to occur, and how it relates to the Monetarist explanation of the business or trade cycle.
Your detailed answer should include all relevant diagrams.
(20 marks)
QUESTION SIX
In the New-Keynesian model, or School, of economic thought, both prices and wages are assumed to be relatively “sticky”, or rigid, or inflexible downwards, in the short to medium term.
What reasons are provided to explain this behaviour? And what implications do these assumptions have on the product and labour markets?
Your answer should explain these aspects in detail, using all relevant diagrams.
(20 marks)
QUESTION SEVEN
Compare and contrast the Adaptive-Expectations, Accelerationist, or Expectations-Augmented Phillips Curve model as developed by Milton Friedman, WITH the Rational Expectations (or New Classical) model of the Phillips curve, identifying the various components of both models.
Your answer should include all relevant diagrams.
(20 marks)
QUESTION EIGHT
Monetarists, such as Friedman, argue for the implementation or use of a money rule as being the most important anti-inflation policy? However they identify two quite separate types of money rule.
Identify and explain these two types of the Money Rule.
What other policies do they suggest and what role do they play in the fight against inflation?
Your answer should include all relevant diagrams.
(20 marks)
QUESTION NINE
As an alternative to demand-side inflation, there is also the possibility of a supply-side inflation. For a supply-side inflation to occur, it is usually triggered by various supply-side shocks, whether from domestic or international sources. However for a supply-side inflation to occur, a relevant economic model is needed to be explained.
(i) Identify and briefly explain 3 examples of supply-side shocks
(ii) Explain a relevant example of a supply-side model of inflation.
Your answer should include all relevant diagrams.
(20 marks)
QUESTION TEN
Provide a case for the Keynesian type demand-side policy to combat the short-term effects of an incoming recession. Examine this part of the question using your knowledge of the IS-LM-AD framework.
Show how this Keynesian type demand-side policy that you recommended above will become powerless in the long-run. Examine this part of the question within the IS-LM-AD-AS framework.
Your answer to both these parts should include all relevant diagrams.
(10 + 10 = 20 marks)