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Scan 120250001 - EACH SHORT ANSWER QUESTION HAS A POSSIBLE...

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Unformatted text preview: EACH SHORT ANSWER QUESTION HAS A POSSIBLE MAXIlVIUM SCORE OF 70 POINTS. THE POINT BREAKDOWN IS INDICATED IN EACH QUESTION Question One: TheClassical Macro-economy as developed in Chapters #3/4 and in Lecture LONG RUN Closed Economy Macroeconomics/Money and Inflation (worth up to 70 points) In your macro-economy, there is a sudden loss of business confidence in the future of economic activity. Business investors throughout the economy cut back on new expansion plans and the demand for new investment falls throughout the economy. (1) Show what this “decrease in investment demand” does to each of the variables in the following list. FOR FULL CREDIT YOU NEED TO JUSTIFY EACH OF YOUR _—_—_—__J___—___——-——-——-——-—-——- ANSWERS. Your choice. You can justify your answers by using any of all of the following: (a) words, (b) the 8/1 graph we developed in lecture (“S” NOT dependant upon the interest rate) or (c) the logic of the national income account identity.) Real interest rate, (5 points possible) National saving, (5 points possible) Level of real investment, (5 points possible) Level of real cansmnptimi, “(5 points’ppssibi’e) Total real output (“Y”) (5 points possible) The nominal interest rate (5 points possible) The income velocity of money. (5 points possible) The level of Real Balances (M/P) in the economy (5 points possible) (2) Now the government suddenly desires to increase the level of lonable funds in the economy (raise the amount of national saving). (a) Explain how the government can do this. (5 points possible) AFTER THE FALL IN INVESTMENT DEMAND FROM (1) above, say in one or two sentences and/or show with the national income accounts identity what happens AND WHY to each the following, if the government is successful in raising the level of national savings? Real interest rate, (5 points possible) Level of real investment (5 points possible) Total real output (“Y”) (5 points possible) The nominal money supply, (5 points possible) The level of real balances (M/P). (5 points possible) Page 2 of 4 ...
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