Assignment 6 Teaching week 9 ECON 202 2010

# Assignment 6 - Question 2(2 marks Using the AS-AD and IS-LM models developed in lectures show the effects of a decrease in business investment

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ECON 202: Tutorial Assignment 6, 2010 To be discussed in tutorials in the week beginning Monday 20 th September. This assignment WILL BE GRADED . Hand in the written answers to your tutor’s box, by 10.30 am Monday 20 th September. Question 1 (3 marks) The closed economy versions of the AD and AS functions developed in lectures are AD Closed Y = Y(M/P, G, T ) AS Closed P = P e (1 + μ ) F(1-Y/L, z ) Variables are as defined in Blanchard and in lectures (a) In lectures it was argued that for a closed economy the slope of the AD function in P/Y space would be downward sloping, i.e. dP/dY | AD < 0, and that the slope of the AS function would be upward sloping, i.e. dP/dY | AS > 0. Explain why, concisely . (b) Specify an equivalent AD function for an open economy with a floating exchange rate regime. Explain why, concisely, it would also have the slope dP/dY | AD < 0. State and explain concisely how an AD curve under a fixed exchange rate regime differs from that of a floating exchange rate regime.
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Unformatted text preview: Question 2 (2 marks) Using the AS-AD and IS-LM models developed in lectures, show the effects of a decrease in business investment confidence on output, the interest rate and the price level in the short run and in Blanchard’s medium run. Explain concisely how the adjustments take place. Assume that, before the changes, the economy was at the natural level of output. Question 3 (5 marks) Assume the wholesale prices of gas and electricity in New Zealand have both risen significantly, and that simultaneously the \$NZ has de preciated significantly against the \$US. Show , using the wage setting-price setting (i.e. WS-PS) and AD-AS diagrams, what happens to a. the natural rate of unemployment and the natural level of output, and b. the output and the price level in the short run and Blanchard’s medium run. Explain concisely how the adjustments take place. Reading: Blanchard (5th ed), Macroeconomics , chapter 7...
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## This note was uploaded on 05/24/2011 for the course ECON 201 taught by Professor Paulclacott during the Fall '10 term at Victoria Wellington.

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