1.   Suppose

   c = 10 + 0.75 y
   i = 5 + 0.125 r
   g = 5

What is the equation for IS?

2.   What is the intercept and the slope of IS curve?

3.   Graph the equation

4.   What is the equation for IS if g = 10 (ie if Dg = +5)?

5.   What is the horizontal shift in IS for question # 4?

6.   Let

   M^d = 70 + 4 y – 0.125 r
   M^s = 100

What is the equation for LM (where M^d and M^s are real)?

7.   What is the intercept and the slope of LM curve?

8.   Graph the LM curve.

9.   What is the new equation for LM if M^s = 110 (ie if DM^s = 10)?

10.   What is the horizontal shift in LM for question#9? How is this shift related to any of the parameter in the M^d function?

11.   What is the equilibrium value of y when M^s = 100 and g = 5?

12.   What is the equilibrium value of r?

13.   Find Dy/Dg. Why is it larger or smaller than the Dy/Dg you calculated in question #5 above?

14.   Find Dy/DM^s.

15.   In a simplified macroeconomic model, income is determined by a straight line aggregate expenditure and a 45 degree aggregate supply line. However, at a higher level of macroeconomic study, income is determined by IS and LM curves.

a.   What are the main differences between the two models?

b.   How is the income determined in the simplified model related to the income determined in the ISLM model?

16.   Briefly explain why there can never be simultaneous excess demand for money and bonds, if these were the only two assets.

17.   You have been asked to make stabilization policy recommendation to deal with a sluggish economy but not to alter the mix between private investment and government spending. What would be your recommendation within the ISLM analysis?

18.   Given that an increase in government spending is decided and that crowding out is also a concern, would you recommend that the increased spending be financed by issue of debt or by increases taxation? Why? Explain clearly.

19.   What effect does a government surplus have on the stock of money and the stock of debt? Explain in detail the mechanism of how the stock of money and bonds are affected.

20.   Briefly explain whether you agree or disagree with each of the following statements:

a.   In the ISLM framework, the balanced budget multiplier (when tax is not collected on income) can vary between zero and one.

b.   On benefit of an increased rate of monetary expansion is that it enables the public to hold more real money balance.

c.   We can avoid the crowding out of investment that arises from an increase in government expenditure by increasing the money supply.

21.   Indicate whether each of the following statements is TRUE or FALSE and state briefly your reasons

a.   It is impossible to distinguish the effects of contractionary fiscal policy (a decline in government spending) from contractionary monetary policy (a decline in the quantity of money) because each one (by itself) causes the equilibrium level of income and interest to decline.

b.   If the LM curve is vertical, the balanced budget multiplier is unity.

c.   If the money demand function is interest elastic and the investment function is interest inelastic, a tax cut financed by debt will necessarily increase real output.

d.   If the interest elasticity of money demand is zero, the LM curve will be vertical and the income velocity of money will be constant.

e.   The stimulating effect on output of an increase in public expenditure is greater when financed by debt issue than by increased taxes.

f.   Monetary policy will have no effect if interest rates do not change in response to the policy.

g.   An increase in inventories accompanied by a decrease in the demand for the stock of money implies an increase in the excess supply of bonds.

h.   A change in the government’s budget deficit (or surplus) necessarily implies that there was a change in fiscal or monetary policy.

22.   Using an ISLM model, show and explain that the monetary effect will be greater

a.   the greater the proportion of expenditure in GDP that are affected by interest rates.

b.   the greater (in absolute value) is the average interest rate elasticity of these expenditures.

c.   the greater is the income elasticity of demand for money.

d.   The smaller (in absolute value) is the interest elasticity of demand for money.

23.   Monetary policy works through changes in interest rate; fiscal policy works through changes in income. Therefore, to get quick changes in GNP, fiscal policy is the better instrument. Evaluate.

24.   Within the ISLM framework, what are the two conditions under which monetary policy is totally ineffective. Explain.