calculate and explain the answer thankyou
Answer ALL Questions (60 marks) 1. Consider a closed economy that is characterized by the following equations: Y=C+/+G (1) C =120 + 0.3(Y-T) (2) 1 = 0.2Y - 1500r (3) T = 150 ( 4 ) G = 200 (5) M'=M (6) M' =90 (7 ) M/P = L(r, Y) = 0.6Y - 1200r (8) where Y is gross domestic product, C is private consumption expenditure, / is investment expenditure, G is government expenditure, 7 is tax revenues, M" is money supply, M/P is demand for real money balances, / is the interest rate (in % points), and P is the aggregate price level. Al. Derive the /S and LM curves of the economy, expressing Y as a function of r and assuming P is fixed at 1.0 [8 marks] A2. Calculate the short-run equilibrium values of I and r assuming P is fixed at 1.0 [8 marks] A3. Derive the aggregate demand (AD) curve of the economy, expressing Y as a function of P. assuming P is flexible 18 marks] A4. Calculate the long-run equilibrium values of / and P, assuming that the potential level of output (Y*) is equal to 400 monetary units. Use the /5/LM and AD/AS models to illustrate graphically the short-run and long-run equilibrium, and to explain how the economy moves from the short-run to the long-run equilibrium. [18 marks] A5. Suppose the government decides to intervene to stimulate the economy towards potential output in the short run. Use the /5/LM and AD/AS models to illustrate this intervention, and to explain the difference, if any, of the outcome to that in the previous question. [18 marks]5. The government introduces an increase in investment tax credits. In a closed economy with the national saving fixed, the real interest rate will A) fall. B) remain constant. C) rise. D) first fall and then rise. 6. If net exports are negative, which of the following is false? A) Domestic investment exceeds domestic saving. B) S - I is negative. C) There is a balance of trade surplus. D) Net capital outflow is negative. 7. The dilemma facing the policy maker in the event of an adverse temporary supply shock is that monetary policy can either return output to the natural rate, but with a price level, or allow the price level to return to its original level, but with a level of output in the short run. A) higher; higher B) higher: lower C) lower; lower D) lower; higher 8. The /S curve shifts when all of the following economic variables change except: A) the interest rate. B) government spending. C) tax rates. D) the marginal propensity to consume. 9. According to the theory of liquidity preference, if the supply of real money balances exceeds the demand for real money balances, individuals will: A) sell interest-earning assets in order to obtain non-interest-bearing money. B) purchase interest-earning assets in order to reduce holdings of non-interest- bearing money. C) purchase more goods and services. D) be content with their portfolios. 10. An explanation for the slope of the LM curve is that as: A) the interest rate increases, income becomes higher. B) the interest rate increases, income becomes lower. C) income rises, money demand rises, and a higher interest rate is required. D) income rises, money demand rises, and a lower interest rate is required.ll. [3. l4. [5. id. The quantity equation MV = P'i' implies that the AD curve is A} hurizrinlal. B]: vertical. Cl upward sloping. D} downward sloping. When drawn With the interest rate on the vertical axis and income on the horizontal axis, the IS curve Will. he steeper the: A} larger the level of govemment spending. E] smaller the level of government spending. C] greater the sensitivity of investment spending to the interest rate. IZIJI smaller the sensitivity of investment spending to the interest rate. The is\" curve is steeper the the interest sensitivity of money demand and the the effect of income on n'iuney demand. A} greater; greater B] greater; smaller Cl smaller: smaller D) smaller; greater If the slope of the IS curve is close to zero then the IS curve is drawn and monetary policy is said to be A} vertical: elTective E] huri'irunlal; ineffective C] vertical; ineffective D} horizontal; effective If the economy suffers an adverse supply shock then the central bank can stabilize output by A} decreasing the money supply. B} increasing the money supply. C] decreasing government spending. D]: increasing government spending. According to the Mandel] Fleming model an appreciation of the exchange rate will cause the LM\" curve to A} shift to the right. B] shift to the left. C} remain unchanged. D] become atter
