This preview shows pages 1–2. Sign up to view the full content.
Suggested Solutions to EC2102 Macroeconomic Analysis I
Tutorial 8, Week 12, April 48, 2011
Question 1, PART A
(
i
)
Let
W
1
be &xed at
W
1
:
Given price level
b
P
1
;
w
1
=
W
1
b
P
1
, know
b
N
1
and
b
Y
1
:
So we have one
point on
AS
1
curve of
&
b
Y
1
;
b
P
1
±
To derive
AS
1
curve, let price increase from
b
P
1
to
e
P
1
. Since
W
1
is &xed at
W
1
;
real wage falls
to
e
w
1
=
W
1
e
P
1
;
so we move down
N
d
1
curve, and current employment rises to
e
N
1
, and output rises to
e
Y
1
:
Hence we have another point on
AS
1
curve of
&
e
Y
1
;
e
P
1
±
Continually changing prices, we can construct the whole
AS
1
curve.
(
ii
)
Each point on
AD
1
curve shows intersection of
IS
1
and
LM
1
. To construct the
AD
1
curve,
we have to let price vary.
Recall that we drew
LM
1
curve for a given price level
b
P
1
. Suppose that
1
intersects
LM
1
at
&
b
Y
1
;
b
r
1
±
:
We have one point on our
AD
1
curve,
&
b
Y
1
;
b
P
1
±
:
Now suppose that
b
P
1
falls to
e
P
1
:
We
know from above that
LM
1
shifts downwards to
g
LM
1
.
1
now intersects
LM
1
at
&
e
Y
1
;
e
r
1
±
:
So we
now have another point on our
AD
1
curve,
&
e
Y
1
;
e
P
1
±
:
Continually changing prices, we can construct the entire
AD
1
curve.
Question 2
(
i
)
The LM curve, or LiquidityMoney curve, denotes equilibria in the money market, i.e., when
nominal money supply equals nominal money demand at some real interest rate
b
r
1
, i.e.,
c
M
1
=
M
S
1
=
c
M
d
1
=
b
P
1
L
&
b
Y
1
;r
1
±
at real interest rate
b
r
1
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
This is the end of the preview. Sign up
to
access the rest of the document.
 Spring '11
 Tan

Click to edit the document details