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
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 Spring '11
 Tan

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