2018F_ECON303_midterm_sol - UNIVERSITY OF CALGARY DEPARTMENT OF ECONOMICS ECON 303(L3 MIDTERM TEST with Suggested Solutions Student Name Student

2018F_ECON303_midterm_sol - UNIVERSITY OF CALGARY...

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UNIVERSITY OF CALGARY DEPARTMENT OF ECONOMICS ECON 303 (L3) MIDTERM TEST with Suggested Solutions Student Name: ____________________________ Student Number: _______________________ Fall 2018 Instructor: Aamir Ra°que Hashmi Marks: 30 Time: 1 hour, 15 minutes INSTRUCTIONS: 1. Do not start the exam until you are told to do so. 2. Write your name and student number above and on the answer booklet. 3. This examination consists of 3 questions and 4 printed pages (in- cluding the title page). 4. Clearly show your working to get full credit. 5. You are allowed to use non-programmable scienti°c calculators in this exam. 1
1. Consider the following economy:C=c(Y°T);I=°I;G=°G;andT=tC:(a) Find an algebraic expression for equilibrium income. [Hint: Firstsolve forCas a function ofYbefore substitutingCinto the equi-librium condition.][6 marks](b) What is the expenditure multiplier? Compare this multiplier withthe multiplier whent= 0and comment. [4 marks] [ Question 1 total marks: 10 ] Question 2 is on the next page ... 2
2. Consider theIS-LMmodel that you learnt in class.(a) Draw theISandLMcurves in a graph with income(Y)onxaxisand interest rate(i)onyaxis. Mark the equilibrium output andinterest rate in the graph.[3 marks](b) Consider an expansionary °scal policy.Speci°cally, assume thatthe government increases its expenditure(G).What happens totheIScurve?What happens to theLMcurve?Draw the newcurve(s) on the same graph that you have drawn for part(a)above.[2 marks](c) The expansionary °scal policy has two e/ects on output: the mul-tiplier e/ect and the crowding-out e/ect.The multiplier e/ect ispositive and the crowing-out e/ect is negative. The °nal e/ect on

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