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MGEB06 Assignment 2 (FALL 2024)

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98 views

MGEB06 Assignment 2 (FALL 2024)

Uploaded by

tongyuwu01
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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MGEB06 – LEC 01-03

Macroeconomic Theory and Policy: A Mathematical Approach


Assignment 2
Due: On or before Tuesday, December 3rd, 5:00pm
Room: Management department DROPBOX (2nd floor of IC-Building near IC-230)

(Note: Assignments submitted after Tuesday, December 3rd, 5:00pm WILL NOT BE accepted
under ANY circumstance.)

All submissions must be in hardcopy form handed into the department of management Drop-
Box located on the 2nd floor of the IC-building just to the left of IC-230 & just outside the main
entrance to the office wing)

Instructions:
 You may submit an individual or group assignment.
 If you submit a group assignment, there should be no more than FIVE students in your
group (from ANY section of MGEB06 this term) and you must submit just ONE copy.
WORK WITH STUDENTS BELONGING TO THE SAME GROUP ONLY.
 A title page MUST be attached with your assignment; it MUST include the name(s) and
student number(s) of ALL group members. (No names will be added after the fact)
 Staple your assignment (Paper clips are not accepted).
 A PENALTY OF 10% OF THE TOTAL MARKS WILL BE IMPOSED IF YOU DO NOT
HAVE A TITLE PAGE OR STAPLE YOUR ASSIGNEMNT. i.e., up to 20% will be
deducted if both of these tasks are not completed.
 Label all curves, axis & equilibria in your diagrams/graphs; otherwise, marks will be
deducted.
 No credit will be given if you do not show your work.
 Your answer should be structured in a way such that those who know little about
economics will have no difficulty in understanding your argument/answer.
 Total marks: 100 points.

The table below should be the cover page of your submitted assignment.
Group members: Student number
1 1008845546
Tongyu Wu
2 1008966610
Jiaze Li
3

MGEB06 Assignment 2 (FALL 2024) 1


Question 2 (35 points) – Chapters 7, 11 & 12
The closed economy of Temptation Island is characterized by the following equations:
Consumption: C = 6000 + 0.85(Y – T)
Investment: I = 1500 – 300r
Government spending: G = 5000
Taxes: T = 4500
Real money demand: L = 0.65Y – 500i
Expected inflation: e = 0
Production function: Y = K1/2L1/2
The nominal money supply = 35000
Note: Interest rates, both i and r, are expressed in percentage points, i.e., if r = 5.5, then the real
interest rate is interpreted as being equal to 5.5%.

Suppose the IS-LM model can be to describe Temptation Island, and answer the following questions.
Keep your answer to at least THREE decimal points if necessary.
a) Derive the IS and LM equations for this economy. (4 points)
b) Suppose we are in the base period, so the price level is fixed at 1.00. Calculate the resulting
short-run equilibrium values of real output, real interest rate, investment, consumption, the
government budget balance, and price level. (3 points)
c) Suppose, in the long-run, 64000 (real) units of capital are utilized and 36000 workers are
employed. Calculate the resulting full-employment values of real output, real interest rate,
investment, consumption, the government budget balance, and the price level. (3 points)
d) Suppose the government decides to change the level of taxation to create budget surplus of 600.
Calculate the resulting (new) short-run equilibrium values of real output, real interest rate,
investment, and consumption. Determine the unemployment rate that results in short-run
equilibrium. (6 points)
e) Suppose, instead, we are also told that when the economy was in long-run equilibrium (in
part C, above) 1500 people were unemployed. Further, when the shock hit the economy (in
part D, above) in net terms no people have exited the labour force. Determine the
unemployment rate that results in the short-run equilibrium from part D. What portion this
unemployment is represented by cyclical unemployment and what portion is comprised of
those in the natural rate (level of) unemployment (NRU). (4 points)
Hint: Cyclical unemployment is the level of unemployment that results from deviations of
output from the full-employment level (Actual U = Cyclical U + NRU).

f) When the economy returns to long-run equilibrium what unemployment rate should we expect
to see? Explain why/when this makes sense. (4 points)

g) Determine the (new) LR equilibrium values of real output, real interest rate, investment,
consumption, and the real money supply that result due to the shock described in part D
(above). (6 points)

h) Draw one well labeled IS/LM diagram that depicts the initial LR, the new SR and new LR
equilibria for this economy. Be sure to clearly identify the different equilibrium points on your
diagram, but no further written explanation is required. (5 points)

MGEB06 Assignment 2 (FALL 2024) 2


Question 4 (20 points: 10 points for each part, A & B) – Chapter 11 & 12
Presently many European countries are in the middle of an economic slump, where output has fallen
below potential output (by a large degree in the case of some countries). Suppose one of these
countries decides to follow the advice of a noted economic expert who claims what the economy
needs to boost output and employment in the short-run is the passage of a properly designed
government austerity package. By austerity we mean a package where the government attempts to
improve the size of their budgetary deficit. The expert claims that a properly designed and executed
austerity package will create beneficial changes to consumer and business confidence.

We assume this country is large enough that we can easily use the closed economy IS/LM model to
describe its economic conditions.

a) Draw one IS/LM diagram that depicts the initial short-run equilibrium along with any (and all)
shifts in the short-run that are implied by the experts’ arguments. Explain in words how and why
each curve shift has occurred. Does it seem the expert claims are reasonable or not? Explain.

b) Draw a second IS/LM curve that depicts what would occur in the short-run, if in addition to the
shock in part A, agents also tend to demand more money the larger the government budget
deficit and vice versa. Explain in words whether this additional force works to assist or to
undermine the experts’ claim.

MGEB06 Assignment 2 (FALL 2024) 3

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