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Tutorial 3 - Macro

The document contains tutorial questions and answers for an intermediate macroeconomics class. Question 1 defines the IS and LM curves and finds the equilibrium interest rate and output. Question 2 discusses how shifts in the IS, LM, and AD curves impact output and prices. Question 3 analyzes the direct and indirect effects of: a) an increase in government spending on the IS curve, b) a reduction in taxes on the IS curve, and c) an expansion in the money supply on the LM curve. Question 4 prompts the student to analyze the impact of a price decrease.

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Jiahui Xiong
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45 views5 pages

Tutorial 3 - Macro

The document contains tutorial questions and answers for an intermediate macroeconomics class. Question 1 defines the IS and LM curves and finds the equilibrium interest rate and output. Question 2 discusses how shifts in the IS, LM, and AD curves impact output and prices. Question 3 analyzes the direct and indirect effects of: a) an increase in government spending on the IS curve, b) a reduction in taxes on the IS curve, and c) an expansion in the money supply on the LM curve. Question 4 prompts the student to analyze the impact of a price decrease.

Uploaded by

Jiahui Xiong
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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ECON 20020: Intermediate Macroeconomics

Tutorial 3

Xiong Jiahui 22209647

Answer 1
a) IS: Y = C + I + G = 200 + 0.25 (Y - 200) + 150 + 0.25Y – 1000r + 250
So that IS curve is: Y = 1100 – 2000r

LM: Md = Ms, 2Y – 8000r = 1600


So that LM curve is: Y = 800 + 4000r

In equilibrium, 1100 – 2000r = 800 + 4000r,


r* = 0.05, Y* = 1100 – 2000*0.05= 1000

b) IS curve: Y = 1100 – 2000r, so r = 11/20 – Y/2000


New LM: Md = Ms/P, 2Y – 8000r = 1600/P, Y = 800/P + 4000r
Substitute r, Y = 800/P + 4000(11/20 – Y/2000),
AD curve is: Y = 800/(3P) + 2200/3

c) when price P increases from P1 to P2,


real money supply MsR = Ms/P
decreases, shifting the LM curve to the
left.
In equilibrium, the output Y decrease as
well. Connect two points, which is the
AD curve.
Answer 2
a) A wave of immigration increases the labour supply and will lead to an increase of
the equilibrium labour L in the long run, which will shift the long-run AS curve to
the right. The output Y will increase.

b) The minimum wage will increase the real wage W/P and shift the short-run AS
curve to the left because of the higher production cost. But at the same time, due
to the higher income, the AD curve will shift to the right. In the long run, prices
and wages will adjust accordingly to reach the full capacity and the long-run AS
curve will not be affected.
c) The destruction of a large number of factories leads to a decrease in capital K, and
the production function will change from Y(K1, A, L) to Y(K2, A, L) so that the
long-run AS curve will shift to the left. The output Y will decrease.

Answer 3
a) Direct effect: an increase in government spending G leads the IS curve to shift to
the right.
The output Y and the interest rate r will increase in the short-run.
Due to the increase of output Y, consumption and investment will increase; Due to
the increase of interest rate r, the investment will decrease.
So the overall effect of consumption is increasing, but the investment is
ambiguous.
b) Direct effect: Reducing taxes T leads the disposable income Yd to increase, so the
IS curve will shift to the right.
The output Y and the interest rate r will increase in the short-run.
Due to the increase of output Y, consumption and investment will increase; Due to
the increase of interest rate r, the investment will decrease.
So the overall effect of consumption is increasing, but the investment is
ambiguous.

c) Direct effect: Expansion in money supply Ms leads the LM curve to shift to the
right.
The output Y will increase, and the interest rate r will decrease in the short-run.
Due to the increase in output Y, consumption and investment will increase;
Due to the decrease in interest rate r, the investment will increase.
So the overall effects of consumption and investment are increasing.
Answer 4
a) Suppose price P decrease from P1 to P2

b)

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