ECON-1042 MACROECONOMICS 2: SEMESTER 1 2009 Demonstration Lecture 1: Suggested Solutions 1. True. By definition in the 2 e!

tor "ode#$ % & C ' S (nd ( )e## % & C ' I$ (nd o it therefore fo##o) th(t S (#)(y e*u(# I. +o)e,er for out-ut to .e (t (n e*ui#i.riu" #e,e# it i ne!e (ry th(t S & Io (nd in turn Iu & 0. Note th(t you need to di tin/ui h .et)een (!tu(# 0or re(#i ed1 in,e t"ent (nd -#(nned in,e t"ent. A!tu(# I & -#(nned I ' un-#(nned I$ (nd th(t e2-#(in )hy (t e*ui#i.riu" one of the !ondition th(t "u t .e "et i th(t Iu & 0. It i (# o the !( e th(t there (re 2 other e*ui#i.riu" !ondition th(t "u t .e "et. They (re -#(nned A//re/(te E2-enditure hou#d e*u(# Out-ut$ or AE- & %. Se!ond#y$ tot(# )ithdr()(# or #e(3(/e e*u(# tot(# in4e!tion or 5 & 6. 2. USING TABULAR INF R!ATI N T D"RI#" T$" % NSU!&TI N AND SA#INGS FUN%TI NS IN%LUSI#" TA'ATI N

7ATA SO8RCE: T+E 6AC9SON TE:TBOO9 - 6(!3 on$ 6$ M!I,or$ R$ (nd M!Conne##$ C$ ;E!ono"i! ; 0<ifth Au tr(#i(n Edition$ M!=r()-+i##$ 199>1 $ %$A&T"R 12( TABL" 12.) A. D"RI#ATI N C & Co ' !%d C & Co ' ! 0%-T1 E:AMINE TAB?E 12.@ IN T+E 6AC9SON TE:TBOO9 I< MAC & CB % T+ERE<ORE AS =7A INCREASES <ROM @C0 TO @90$ C INCREASES B% 1D. T+ERE<ORE T+E MAC & 1DB20 5+IC+ EE8A?S .CD I.E.$ T+E S?OAE O< T+E CONS8MATION <8NCTION +ENCE @CD & Co ' .CD %d @CD & Co ' .CD 0@90 - 201 @CD & Co ' .CD 0@C01 @CD & Co ' 2CC.D Co & @CD - 2CC.D F T$" % NSU!&TI N FUN%TI N

Co & 9C.D )hi!h i the FERTICA? INTERCEAT Therefore C & 9C.D ' .CD 0%d1 To te t the re u#t$ t(3e the =7A #e,e# of D@0 fro" T(.#e 12.@G C & Co ' ! %d C & 9C.D ' .CD %d C & 9C.D ' .CD 0% -T1 C & 9C.D ' .CD 0D@0 - 201 C & 9C.D ' .CD 0D101 C &9C.D ' @>2.D C & 4>0 ( i the (n )er in T(.#e 12.@.

B.

D"RI#ATI N F T$" SA#INGS FUN%TI N FR ! T$" % NSU!&TI N FUN%TI N

I< C & Co ' ! %d AN7 % & C ' S ' T 0=IFEN T+AT %d IS NOT T+E SAME AS % 1 AN7 %d & % - T % & %d ' T S&%-C-T S & %d ' T - C - T S & %d - C S & %d - 0 Co ' ! %d1 S & %d - Co - ! %d S & -Co ' %d 01 -! 1 =i,en th(t 1-! i the ("e ( the M(r/in(# Aro-en ity to S(,e 0MAS1 S & -Co ' "- %d

S & -Co ' %d A&&L* T$IS T T$" TABULAR INF R!ATI N IN TABL" 12.)

C(#!u#(te the MAS or 1-! MAS & SB % A =7A in!re( e fro" @C0 to @90$ (,in/ in!re( e fro" -10 to -D. Therefore the MAS & DB20 i.e.$ .2D$ OR T+E S?OAE O< T+E SAFIN=S <8NCTION. S & So ' .2D %d A S & -D$ it fo##o) th(t G -D & So ' .2D %d -D & So ' .2D 0 % - T 1 -D & So ' .2D 0 @90 - 20 1 -D & So ' .2D 0 @C0 1 -D & So ' 92.D So & -D - 92.D So & -9C.D )hi!h i the FERTICA? INTERCEAT. T+ERE<ORE S & -9C.D ' .2D %d S & -9C.D ' .2D 0 %- T 1 TO TEST T+E RES8?T$ TA9E A =7A ?EFE? A=AIN O< D@0 fro" T(.#e 12.@ S & So ' .2D %d S & -9C.D ' .2D 0%- T1 S & -9C.D ' .2D 0D@0 -201 S & -9C.D ' .2D 0D101 S & -9C.D ' 12C.D S & @0 ( i the (n )er in T(.#e 12.@ IN CONC?8SION

C & Co ' !%d or C & Co ' ! 0% - T 1 AN7 S & So ' %d or S & So ' 0% - T 1

@.

<(# e. If T & To ' t%$ therefore one !(n deri,e the e2-enditure "u#ti-#ier for ( three e!tor "ode# ( fo##o) : C & Co ' !%d %d & % - T T & To ' t% C & Co ' !% - !To - !t% I & Io = & =o %e & C ' I ' = & Co ' !% - !To - !t% ' Io ' =o % - !% ' !t% & Co -!To ' Io ' =o %01 - ! ' !t1 & Co - !To ' Io ' =o %e & 1B 01 - ! ' !t1 H Co - !To ' Io ' =o I The re#e,(nt t(2(tion "u#ti-#ier i deri,ed ( fo##o) : A u"e ( !h(n/e in (utono"ou t(2(tion i.e.$ To )i## #e(d to ( !h(n/e in %e % & - ! ToB 01- ! ' !t1 9t & %B To & -! B 01-! ' !t1

4. <(# e. In ( four e!tor "ode# )here C & @00 ' .>% 7$ Io & 220$ =o & 1J0$ T & 100 ' .2D%$ :o & 2D0 (nd M & 1D0 ' .2D%$ the .ud/et i in defi!it (nd the !urrent (!!ount i in ur-#u .

%&C'I'=':KM N + USING T$" SI!&L" "'&"NDITUR" !ULTI&LI"R A&&R A%$ C & Co ' !%d %d & % - T T & To ' t% %d & % K 0To ' t%1 %d & % K To - t% C & Co ' ! 0% K To K t%1 C & Co ' !% - !To - !t% AND: I & Io = & =o : & :o M & Mo ' "% %e & C ' I ' = ' : - M %e & Co ' !% - !To - !t% ' Io ' =o ' :o K Mo K "% N + IT IS & SSIBL" T D"RI#" T$" R"L"#ANT , S"%T R "'&"NDITUR" !ULTI&LI"R AS F LL +S: % - !% ' !t% ' "% & Co -!To ' Io ' =o ' :o -Mo %01 - ! ' !t ' "1 & Co - !To ' Io ' =o ' :o - Mo %e & 1B 01 - ! ' !t ' "1 L MCo - !To ' Io ' =o ' :o - MoI

T+ERE<ORE TO CA?C8?ATE T+E AAAOROARIATE ?EFE? O< %e IN T+IS CASE$ %O8 SIMA?% INSERT T+E AAAROARIATE AN7 RE?EFANT FA?8ES <OR EAC+ FARIAB?E. %e & Co ' !% - !To - !t% ' Io ' =o ' :o K Mo K "% %e & @00 ' .>% K 0.> N 1001 K 0.> N .2D N %1 ' 220 ' 1J0 ' 2D0 K 1D0 K 0.2D N %1 %e & @00 ' .>% K 0>01 K 0.2%1 ' 220 ' 1J0 ' 2D0 K 1D0 K .2D% %e & @00 K >0 ' 220 ' 1J0 ' 2D0 K 1D0 ' .>% -.2% - .2D% %e & 220 ' 220 ' 1J0 ' 100 ' .J% - .2D% %e & C00 ' .@D% % - .@D% & C00 .JD% & C00 * - 1./0.12 ALT"RNATI#"L* * U % ULD US" T$" R"L"#ANT "'&"NDITUR" !ULTI&LI"R A&&R A%$ IN T$IS &ARTI%ULAR &R BL"! %e & 1B 01 - ! ' !t ' "1 L MCo - !To ' Io ' =o ' :o - MoI %e & 1B 01 - .> ' 0.> N .2D1 ' .2D1 L M@00 - >0 ' 220 ' 1J0 ' 2D0 - 1D0I %e & 1B.JD L M@00 - >0 ' 220 ' 1J0 ' 2D0 - 1D0I %e & 1B.JD L M@00 - >0 ' 220 ' 1J0 ' 2D0 - 1D0I %e & 1.D@>4J1D@>4J1D@>4J1D@>4J1D@>4J1D L C00 %e & 10CJ.92@0CJ92@0CJ92@0CJ92@0CJ922C *e - 1./0.12 N + IN T"R!S F T$" STAT"!"NTS T$AT A%% !&AN* T$IS &ARTI%ULAR &R BL"!23U"STI N( * U SI!&L* INS"RT T$" #ALU" F *e 4 1./0.12 4 INT T$" R"L"#ANT "3UATI NS T S"" IF T$" R"SULTS AR" TRU" R N T. IN T"R!S F T$" BUDG"T( T$" R"SULT +ILL B" D"T"R!IN"D B* T$" #ALU"S F G AND T. T$"R"F R" A BUDG"T D"FI%IT + ULD S"" G B"ING 5 T$AN T. N T$" T$"R $AND A BUDG"T SUR&LUS

+ ULD S"" T B"ING 5 T$AN G. F R A BALAN%"D BUDG"T R"SULT R UT% !"( G - T.

B87=ET RES8?T & T K = B87=ET RES8?T & 0To ' t%1 K =o B87=ET RES8?T & 0100 ' .2D%1 K 1J0 B87=ET RES8?T & 100 ' 0.2D N10CJ.921 K 1J0 B87=ET RES8?T & 0100 '2J9.2@1 K 1J0 B87=ET RES8?T &@J9.2@ K 1J0 BUDG"T R"SULT - 2.1.2) +$I%$ IS A SUR&LUS 6AND S D"FI%IT7 N TA

AS T T$" TRAD" BALAN%" R T B" ! R" % RR"%T( T$" %URR"NT A%% UNT R"SULT( %AN B" %AL%ULAT"D B* % !&ARING T TAL "'& RTS 6 R 'o7 AND T TAL I!& RTS 6!o 8 m*7. IN TURN A %URR"NT A%% UNT SUR&LUS R"SULTS +$"N ' 5 !. ALT"RNATI#"L*( A %URR"NT A%% UNT D"FI%IT %%URS +$"N ! 5 '. FINALL* A %URR"NT A%% UNT BALAN%" %%URS +$"N ' - !. C8RRENT ACCO8NT RES8?T C8RRENT ACCO8NT RES8?T & : K M C8RRENT ACCO8NT RES8?T & :o K 0Mo ' "%1 C8RRENT ACCO8NT RES8?T & 2D0 K 01D0 ' H.2D N 10CJ.92O C8RRENT ACCO8NT RES8?T & 2D0 K 1D0 - H.2D N 10CJ.92O C8RRENT ACCO8NT RES8?T & 2D0 K 1D0 K 2J9.2@ C8RRENT ACCO8NT RES8?T & 100 K 2J9.2@ C8RRENT ACCO8NT RES8?T & - 1J9.2@ %URR"NT A%% UNT R"SULT - 9 101.2) D"FI%IT % N%LUSI N: T$" STAT"!"NT R"9 3U"STI N , IS FALS"

D. <(# e. The re,er e i true. Moreo,er e2o/enou ,(ri(.#e (re tho e )ho e ,(#ue$ the ( o!i(ted -e!ifi! e!ono"i! theory or "ode# doe not (tte"-t to e2-#(in. It i i/nifi!(nt to note for e2("-#e in the =ordon te2t.oo3 th(t the (--ro(!h (do-ted to e2-#(in the deri,(tion of the IS-?M "ode# i to di tin/ui h .et)een endo/enou (nd e2o/enou ,(ri(.#e (t different t(/e . Therefore in Ch(-ter @ of =ordon 0Cth Edition1$ REA? =7A (nd CONS8MATION (re ( u"ed to .e initi(##y endo/enou ,(ri(.#e )hi# t INFESTMENT E:AEN7IT8RE$ INTEREST RATES$ (nd ARICES$ ( ,(ri(.#e $ (re !#( ified ( e2o/enou ,(ri(.#e 0refer to T(.#e @.1 in .oth the Jth (nd Cth edition of the =ordon te2t.oo31. The e !#( ifi!(tion !h(n/e ( the IS-?M "ode# i de,e#o-ed e*uenti(##y o,er the ne2t fe) !h(-ter . J. True. Thi *ue tion i"-#y re*uired tudent to under t(nd (nd (--re!i(te the #in3(/e of the "oney (nd -rodu!t "(r3et ,i( the In,e t"ent 7e"(nd Cur,e. Thi i often referred to ( the Tr(n "i ion Me!h(ni " or (#tern(ti,e#y inte/r(tin/ the "oney (nd -rodu!t 0or /ood 1 "(r3et . Student )(ntin/ to e2("ine thi (re( in "ore det(i# hou#d #oo3 (t <i/ure 2J.1$ 2J.2$ 2J.@$ (nd 2J.D in the 5(ud te2t.oo3$ Third Edition. A 3ey -oint th(t tudent hou#d re!o/ni e i th(t the re#(ti,e e#( ti!itie re#(tin/ to .oth the Money 7e"(nd (nd In,e t"ent de"(nd !ur,e )i## h(,e "(4or effe!t u-on the iPe of the !h(n/e in .oth the intere t r(te (nd the ( o!i(ted ,(ri(tion in In,e t"ent e2-enditure due to the ori/in(tin/ !h(n/e in Money Su--#y initi(ted .y Centr(# B(n3 "onet(ry -o#i!y (!tion . 5ith the #(tter in "ind tudent hou#d re,i e the re#e,(nt e!tion in either the 6(!3 on (ndBor 5(ud te2t.oo3 )hi!h de(# )ith thi (re(. In ter" of the 6(!3 on te2t.oo3 0Dth edition1$ it i u//e ted th(t you re(d -(/e 1C.1D to 1C.22. In the 5(ud te2t.oo3 0@rd edition1$ Ch(-ter 2J i the !riti!(# !h(-ter to .e re(d.

C.

True. Student hou#d .e (.#e to !o"-rehend (nd (--re!i(te th(t the Tr(n (!tion 7e"(nd for Money i .( ed on ( fi2ed -ro-ortion of no"in(# =7A$ ( e2-re ed .y the for"u#( MTB- & 9%. Thi then deter"ine the #o!(tion of the o,er(## "oney de"(nd !ur,e. On the other h(nd the A et 0or S-e!u#(ti,e1 de"(nd for "oney i ( ne/(ti,e fun!tion of the -re,(i#in/ intere t r(te$ i.e.$ M(B- & -f 0 i 1. <(# e. Thi i due to the f(!t th(t the fir t t)o e,ent )i##$ ceteris paribus$ hift the IS !ur,e to the ri/ht. On the other h(nd$ the in!re( e in (utono"ou (,in/ )i## hift the IS !ur,e to the #eft. Thi hou#d .e intuiti,e#y !#e(r ( the IS #ine i .( ed on the ide( th(t (t (## -oint (#on/ the #ine$ the -rodu!t "(r3et i in e*ui#i.riu". +en!e (n in!re( e in (utono"ou (,in/ tr(n #(te into ( redu!tion in (utono"ou !on u"-tion. The #(tter effe!ti,e#y -rodu!e ( hift in (utono"ou !on u"-tion e2-enditure to the #eft (nd o e*u(##y hift the IS !ur,e to the #eft. A## tudent hou#d .e (.#e to ho) the e !h(n/e di(/r(""(ti!(##y (nd e2-#(in in /ener(# the effe!t of (ny ,(ri(tion of

>.

Autono"ou E2-enditure 0Co$ Io$ =o$ To$ :o$ (nd Mo1 !o"-onent in ( 2$ @$ or 4 e!tor 9eyne i(n "ode# on the #o!(tion of the re#e,(nt IS !ur,e.

9.

True. The intere t e#( ti!ity of the IS !ur,e de-end -ri"(ri#y ho) "u!h I 0or A- ( referred to in Ch(-ter @ of the =ordon te2t.oo3$ @rd edition1 )i## !h(n/e for ( /i,en !h(n/e in i$ (nd e!ond#y on the re#(ti,e i"-(!t of the !h(n/e in I on % 0or re(# =7A1. The re#(ti,e#y "ore e#( ti! i the In,e t"ent 7e"(nd Cur,e$ (nd the /re(ter i the iPe of the re#e,(nt e2-enditure "u#ti-#ier$ then the re#(ti,e#y "ore e#( ti! i the IS !ur,e. Of !our e the re,er e ho#d true. Student hou#d therefore note th(t in re/(rd to the e2-enditure "u#ti-#ier th(t it re#(ti,e -o)er )i## .e deter"ined .y the iPe of the indu!ed #e(3(/e u!h ( the "- 0M(r/in(# Aro-en ity to S(,e1$ "rt 0M(r/in(# R(te of T(21$ (nd the "-i 0M(r/in(# Aro-en ity to I"-ort1$ de-endin/ on )hether it i ( 2$ @$ or 4 e!tor "ode# th(t i .ein/ e2("ined. True. The TRANSMISSION MEC+ANISM in!or-or(te the Money M(r3etG the In,e t"ent 7e"(nd Cur,eG (nd fin(##y$ the 9eyne i(n 4D de/ree #ine Arodu!t M(r3et "ode#.. The r(tion(# .ehind thi trio of di(/r(" i th(t ( !h(n/e in "oney "(r3et !ondition )i## #e(d to ( !h(n/e in the -re,(i#in/ intere t r(te #e,e# )hi!h in turn )i## (ffe!t the !o t of fund th(t (--#y to fir" (ndBor other .u ine enter-ri e th(t (re !on iderin/ -e!ifi! in,e t"ent e2-enditure . The #(tter )i## then (ffe!t the o,er(## #e,e# of A#(nned A//re/(te E2-enditure in the e!ono"y. Thi inturn )i## deter"ine the #e,e# of EE8I?IBRI8M =7A 0or %e1.

10.