ECO 2201: Mid-Term
Date: 26th October
• Please write your names and IDs clearly on this sheet.
• Question papers must be attached to the answer sheets during submission.
• No clarifying questions allowed. Any possible errors in the paper will be corrected for later.
• Total time = 75 minutes. Total Grade = 25
• No books, notes, or papers can be consulted during the exam.
• Name-
• ID No.-
Question 1 (10 pts)
Suppose that:
C = 60 + 0.8(Y − T )
I = 150 − 10r
G = 250
T = 200
Ms = 100
Md = 30 + 0.1Y − 10r
1. Write the equations for IS and LM schedules (2 pts).
2. Find the equilibrium values for income and interest rate (2 pts).
3. Derive the values of the government expenditure multiplier and tax multiplier (4 pts).
4. What are the new equilibrium values of Y and r, if government spending increases by 60 (2 pts)?
1
Question 2 (4 pts)
Suppose in an economy the LM curve is horizontal, government spending increased by 5 units and this in-
crease was financed by a 5 unit increase in lump-sum taxes. Would equilibrium income change or remain the
same as a result of these two policy actions (2 pts)? If equilibrium income changed, in which direction would
it move, and by how much (1 pts)? Explain (1 pt).
Question 3 (5 pts)
Suppose the economy is characterized by the following equations:
Y = C (Y − T ) + I ( r ) + G
(M s
P ) = L (r, Y − T )
There is a proposal of tax cut in the economy. How will this change the IS curve, and LM curve (2 pts). Provide
graphs (1 pt). Analyse and explain, if and how this tax cut would change equilibrium Y and r (2 pts).
Question 4 (6 pts)
1. Suppose in an economy the investment function is given as : I = f − kr ( f > 0, k > 0). This economy
depends a lot on monetary policy. There is an increase in the absolute value of k, would this make any
expansionary monetary policy more or less effective? Please explain by giving intuition and graphs. (3
points)
2. This economy depends on monetary policy as after a fiscal policy expansion, the economy finds a signifi-
cant decrease in investment. The money demand function of the economy is given by: L(r, y) = mY − nr
(m > 0, n > 0). Please explain if the economy can expect its fiscal policy to be more or less effective after
an increase in absolute value of n? Please explain by giving intuition and graphs. (3 points)
