tutorial6solutions - Suggested Solutions to EC2102...

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Suggested Solutions to EC2102 Macroeconomic Analysis I Tutorial 6, Week 10, March 21-25, 2011 Question 1 In the goods market, an expected increase in z 2 means higher MPK 2 , so higher return to investment, so I 1 increases investment component of Y d 1 % ; so Y d 1 % from Y d 1 to e Y d 1 Since for tomorrow, w 2 = MPN 2 = z 2 F 2 ( K 2 ;N 2 ) ; an % % in lifetime wealth )% Y d 1 % , so Y d 1 shifts further out from e Y d 1 to b Y d 1 In the labour market, an increase in ! d implies N s 1 ( r 1 ) shifts in to e N s 1 ( r 1 ) ; and this causes a leftward shift of Y S 1 to e Y S 1 : As the increase in wealth is small, this leftward shift of Y S 1 to e Y S 1 is small relative to the rightward shift of Y d 1 to b Y d 1 : At the original equilibrium interest rate of r 1 , output demand (point A on b Y d 1 ) exceeds output supply (point B on e Y s 1 ). Hence, goods market cannot be in equilibrium. To restore equilibrium, interest rate needs to rise because a rise in interest rate means that consumers
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This note was uploaded on 01/18/2012 for the course ECONOMICS 2102 taught by Professor Tan during the Spring '11 term at National University of Singapore.

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tutorial6solutions - Suggested Solutions to EC2102...

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