Intermediate macroeconomics test
2 hours
25 September 2024
Question 1 (50 marks)
1.1. Define the IS curve and graphically show and explain how it is derived. (8)
1.2. Define the LM curve and graphically show and explain how it is derived. (8)
1.3. An economy shows the following features:
C =50+0.9𝑌𝑑
T=100
I=150−5𝑖
G = 100
L =0.2𝑌−10𝑖
M/𝑃 =100
X =20
M=10+0.1𝑌
Where Y = income, 𝑖 = 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒, I = investment, G = government spending L = 𝑀𝑜𝑛𝑒𝑦
𝑑𝑒𝑚𝑎𝑛𝑑, 𝑀 𝑃 = real money balance, X = exports and M = imports.
(a) Derive the equation of IS (4)
(b) Derive the equation of LM (3)
(c) Calculate the equilibrium level of interest rates and income (4)
d) illustrate equilibrium level of interest rates and income on a graph (3)
(e) Find the balance of trade (BOT) (3)
(f) Use the answer obtained in (c) find consumption and investment. (3)
(g) Verify whether these figures are right by using the identity: Y = C + I +G + X – M (3)
1.4 If autonomous investment increases by $35 billion. What will be the new equilibrium level of
interest rate, income, consumption, and investment. (8)
1.5. If Autonomous investment increases by $35 billion, what will be the multiplier? (3)
Question 2 (40 marks)
2.1.Define the AD curve and show graphically and explain how the AD curve is derived. (8)
2.2 Use the WS (wage-setting) and PS (price-setting) relations to examine the effects of the following
events on the natural rate of unemployment and on the real wage. Be sure to explain the effects of
each event on the WS and PS relations and draw a graph.
(a) Less stringent anti-trust enforcement. (4)
(b) An increase in the minimum wage. (4)
2. 3. 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 when the aggregate supply curve is upward sloping.
Your answer must include a graph and explanation in words.
a) Government spending increases. (4)
b) New technology increases the productivity of workers. (4)
2.4 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)
2.5 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)
2.6. 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)
