a) Using the IS-LM and the AS-AD model, fully explain and show diagrammatically the short-run and medium-run effects of a monetary expansion on output, price level, interest rate, consumption and investment. When you start your analysis, assume that the economy is at its natural level of output (Yn). [20 marks] b) Briefly explain what a liquidity trap is. Then, suppose a liquidity trap exists and output is below its natural level. Using the IS-LM model, graphically illustrate and explain if a monetary expansion will allow the economy to return to its natural level of output. [10 marks] Question 2 [30 marks] You must answer all parts ( a,b and c ) if you choose this question. a) Using the Solow growth model with no population growth and no technological progress, and with the aid of a diagram, explain the effects of an increase in the savings rate on: i. The level of investment per worker ii. Long-run level of output per worker iii. Long-run growth of output per worker [15 marks] b) Discuss the role of human capital and technological progress in the process of economic growth. What might be some of the determinants of technological progress? Explain. [10 marks] c) Discuss the critical difference between the Solow growth model and the Endogenous growth model. [5 marks] a) Using the IS-LM and the AS-AD model, fully explain and show diagrammatically the short-run and medium-run effects of a monetary expansion on output, price level, interest rate, consumption and investment. When you start your analysis, assume that the economy is at its natural level of output (Yn). [20 marks] b) Briefly explain what a liquidity trap is. Then, suppose a liquidity trap exists and output is below its natural level. Using the IS-LM model, graphically illustrate and explain if a monetary expansion will allow the economy to return to its natural level of output. [10 marks] Question 2 [30 marks] You must answer all parts ( a,b and c ) if you choose this question. a) Using the Solow growth model with no population growth and no technological progress, and with the aid of a diagram, explain the effects of an increase in the savings rate on: i. The level of investment per worker ii. Long-run level of output per worker iii. Long-run growth of output per worker [15 marks] b) Discuss the role of human capital and technological progress in the process of economic growth. What might be some of the determinants of technological progress? Explain. [10 marks] c) Discuss the critical difference between the Solow growth model and the Endogenous growth model. [5 marks]
