Explain the following questions with detailed answers.

. The 'paredox of thrift' is the argument that an 'I'icrease in desired saving shifts the Lid curve to the left as individuals increase their demand for money. thus lowering real GDP. . The endogenous growth predicted by the AK model is due to the assumption of a constant marginal product of capital. . In the Ali-AS model. monetary policy cannot stabilize both the price level and the level of real GDP following a shock to aggregate supply. . The shoe-leather cost of ination is minimized by targeth'ig a :ero rate of inflation. . The permanent income theory of consumption predicts that saving responds less to permanent changes in income than temporary changes in income. . According to the neoclassical theory of investment, expectations of a fall in the relative price of capital goods should increase investment. . Assuming the real intErest rate is fixed. expectations of higher ination clue to faster moneysupply growth will not have any effect on the level of real money balances. . In the Ben moi-Tobin model. an increase in transaction costs reduces the number of times individuals exchange interestbeeng assets and money, thus lowering the demand for money. SPli}.3 Transfer pricing Due to the expansion of business in Cogoland in recent years, SR Products has set up a marketing division there responsible for selling a new product. The head ofce and manufacnning plant remain in the United States. The company has estimated that the total cost of manufacturing in the USA and the cost of transportation of the product is given by the function: :3 =Q2+20Q+4 {10.151 where C = total cost per week in $ and (,1: units sold \"Ibis cost appears in the accounts of the manufacturing division. The total cost for the marketing division in Cogoland is given by: c =Q2+ 14Q+20 {10.151 \"Ibis includes the $111: per unit which is the transfer price paid by the marketing division to the manufacturing division. This total cost appears in the accounts of the marketing division. The revenue mction for the marketing division is estimated as: R = 50011 sq2 (10.1?) where R = total revenue per week in $. EL Calculate the optimal policy for the company as a whole. showing the price, output and overall prots of the rm. b. Calculate the optimal policies for the marketing division and the manufacturing divisions. assuming a transfer price of 51m. showing the overall prot of the rm in each case. c. Calculate the optimal transfer price in order to make the optimal policies for both divisions the same as that for the company as a whole. d What does the above situation imply regarding managerial strategy? As with all pricingproblems discussed so far. the problemcan be analysed either graphically or algebraically. In this case an algebraic approach will be used. Question 3: The Closed-Economy IS-LM-FE Framework (25 Marks) Consider the following closed economy: 0\"\" = 150 20m + 0.8(1' T) l" = 200 20m Government purchases, G equal 100 and the government runs a balanced budget. The liquidity function is given by: 110", 1'} = 200 + 021' 5003' The nominal money supply, price level and expected ination are: M2300 P22 ire=0.05 (a) Derive the IS curve with the real interest rate r as a function of output 1'. (b) Derive the LM curve with the real interest rate r as a function of output Y for the given price level, P = 2. {c} Find the longrim equilibrium values of the real interest rate 1", full employment output, 17, consump tion C, and investment I. Illustrate the results using 3. IS LM FE diagram to depict the long-run equilibrium. (d) Imagine that a nancial innovation reduces the demand for real money balances so that the new liquidity function is: LG\(For this question you have 20 attempts) Throughout this problem assume that for an industry aggregate demand is given by: Q (p) = 5250 - 250p Also, each firm in the industry has a production function of f(1,k)= vIk. Each firm has a short run capital stock of 100 units and r=7. Initially, w= 2. a. Find the firm's short run cost function (in the first box put the variable costs as a fraction and in the second box put fixed costs). C(q) = *q2+0 b. Find the firm's short run supply function 95 (p) = p c. Suppose there are 20 firms in the industry, find the aggregate supply function. Q'(p) = P d. Using the aggregate demand function above, what is the new equilibrium price? p = 0 e. What is the consumer surplus? cs = 0 f. Now, suppose that a minimum wage law goes into effect and the wage rate changes to w= 4. Find the firm's short run cost function. c(q) = 0*q2+0 g. Find the firm's short run supply function q'(p) = p h. Suppose there are 20 firms in the industry, find the aggregate supply function. Qs (p) = P i. Using the aggregate demand function above, what is the new equilibrium price? phew =0 j. What is the new consumer surplus? (Round to 3 decimal places) CS = k. How much did the equilibrium price increase due to the minimum wage law? Ap =0