Quiz 3(A)_Macro_2011

Quiz 3(A)_Macro_2011 - BSc II Section B Macroeconomics...

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BSc II Section B Macroeconomics Spring 2011 Quiz 3 (A) Lahore School of Economics Macroeconomics II Spring Term 2011 Quiz 3:  BSc. 2, Section B Instructions:  Answer all questions in the spaces provided below. For full marks, make sure to  show all calculations.  Calculators, pencils, pens, rulers, etc. cannot be shared and cell phones  cannot be used as calculators. Total points: 85 Suggested Solutions: If there are any quesries or problems, please email or discuss in class 1. Consider an open economy in which process are flexible (long run), represented by the  following equations. Y = 7500 G = 2000 T = 2000 C = 500 + 0.8(Y-T) I = 2500 – 50( r ) NX = 1000- 500e r = r* = 5% (A) Obtain the equilibrium levels of national  savings, investments, the trade balance and the  exchange rate. Carefully illustrate your answers using a graph. (5 points) National savings = Y – C – S 7500 – [500 + 0.8(7500-2000)] -2000 Student Name and ID Number: Page 1
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BSc II Section B Macroeconomics Spring 2011 Quiz 3 (A) = 600 I = 2500-50(5) = 2250 NX = S – I = 600 – 2250 = -1650 -1650 = 1000 – 500e e = 5.3 (B) Assume now that there is a tax cut so that new taxes fall to 1500. Obtain the new  equilibrium levels of national savings, investment, the trade balance and the exchange rate.  Again, illustrate your answers with a graphs (5 + 5 points) National savings = Y – C – G 7500 – [500 + 0.8(7500-1500)] -2000 = 200 I = 2500-50(5) = 2250 NX = S – I = 200 – 2250 = -2050 -2050 = 1000 – 50e e = 6.1 (C) Suppose now that due to political turmoil the economy shuts its markets to the rest of  the world and that foreign trade in goods and assets is banned. Can the economy now maintain  the investment levels obtained in A and B? Solve the equilibrium and explain your results. (5  points) NX = 0, S = I Student Name and ID Number: Page 2
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BSc II Section B Macroeconomics Spring 2011 Quiz 3 (A) In Part A, S = 600 and I = 2250 which will come down to level of domestic savings. 600  = 2500 – 50(r) r = 38 In Part B, S = 200, I would be equal to 200 at r = 46 (D) Suppose that due to social disorder, firm’s expectation about future profits worsen in 
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