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Tutorial 4 - (3[21 Marks Question 3 Using a diagram of the...

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ECO2004S TUTORIAL 4 4 September 2009 CHAPTER: 7 For Hand-in: Questions 1 - 4 Total Marks: 93 Question 1 a. Derive the AS relation with algebra and explain all the variables in the equation. (5) b. Which are the endogenous variables in this relation? Which are the exogenous variables? (3) c. Explain why the AS curve is upward sloping in max 50 words? (4) d. Explain what causes a shift of the AS curve in max 10 words? (2) e. Explain what happens to the AS curve if individuals revise their expectations of the price level upward in max 90 words? (5) f. At what level of output does P = P e ? Explain in max 30 words. (3) [22 marks] Question 2 a. Derive the AD relation graphically. (5) b. State the algebraic form of the AD relation and explain all the variables. (3) c. Which are the endogenous variables in this relation? Which are the exogenous variables? (3) d. What do all the points on a given AD curve represent? 10 words max. (2) e. Explain why the AD curve is downward sloping in max 80 words. (5) f. Explain what causes the AD curve to shift in max 30 words.
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Unformatted text preview: (3) [21 Marks] Question 3 Using a diagram of the AS-AD model, explain what happens in the short and medium run when the government pursues an expansionary fiscal policy. (20) [20 marks] Question 4 Using a diagram of the AS-AD and IS-LM models, explain what happens in both the short and medium run when the central bank pursues a contractionary monetary policy. [30 marks] Question 5 (Not required for hand-in) Assume that the closed economy of Banaland is currently in recession (output is below the natural level). Fiscal and monetary authorities have decided that an expansionary stance is needed to bring an end to the recession. However, they are also concerned that the interest rate does not increase since this will have adverse effects on investment. Discuss the short and medium run effects of the appropriate actions that the government and the central bank should take using both IS-LM and AS-AD models. [30 marks]...
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