ASSIGNMENT 2

BEEB2023 MACROECONOMICS
SEMESTER I 2018/2019 SESSION (A181)

Instruction: Answer all the questions. Your answers must be typed. You are required to submit
your tutorial assignment before or on 09 December 2018 (Sunday).

QUESTION 1

Given:
Money supply function: MS = 600
Money demand function: MD = 350 + 0.5Y – 200r
If the income level, Y is 1000,

a) Find equilibrium quantity of money and interest rate levels. (5 marks)

b) Suppose that MS decrease to 375, find new equilibrium quantity of money and interest rate

(5 marks)

c) Suppose that MS and Y are remain constant but the autonomous MD increase to 400, find
new equilibrium quantity of money and interest rate.
(5 marks)

d) Show your answers to parts (a)(b) and (c) in an appropriate diagram.

(5 marks)

1
QUESTION 2

a) By using expenditure approach derive the IS curve.

(5 marks)

b) Explain two factors that determine the slope of LM curve.

(5 marks)

c) If the money demand is interest inelastic, explain graphically the crowding-out effect.
(5 marks)

d) Given the information:

Saving (S) = –400 + 0.15Yd

Taxes (T) = 200
Investment (I) = 400 – 100r
Government’s spending (G) = 500
Money demand for transactions (Mdt) = 0.6Y
Money demand for speculations (M ds) = 3000 – 600r
Money supply (Ms/P) = 2225
Harga/Price (P) = 3
Unit: RM million

Based on the above information:

i. Derive an expression for the IS and LM curve. (5 marks)

ii. Calculate the equilibrium levels of output (Y) and interest rate (r). (5 marks)

iii. Based on initial data, assumed autonomous money demand increase by 60 million. Find
the new equilibrium levels of output (Y) and interest rate (r)?
(5 marks)

iv. Draw and explain the answers in (ii) and (iii).

(5 marks)

2
QUESTION 3

a) Distinguish between currency devaluation (revaluation) and currency depreciation

(appreciation).
(5 marks)

b) With the aid of an appropriate diagram. analyze the effect of the followings on the exchange
rate between Malaysian ringgit (MYR) and Chinese yuan (CN¥):

i. Malaysian prefer to travel to China. (5 marks)

ii. Malaysian financial assets are more profitable relative to those of China.
(5 marks)

c) “To increase the aggregate income level, a country which adopts a flexible exchange rate
system with imperfect capital mobility should implement expansionary fiscal policy”. Do you
agree with this statement? Why and why not? Explain.
(10 marks)

END OF QUESTIONS