Question 1

In this question, assume that the home country is a closed economy. Please, draw your graphs by hand.

a) Give an example of one shock where an increase in GDP is associated with a concurrent increase in national saving. Clarify whether the increase in GDP is the cause or the effect of the increase in saving and whether you are referring to a short-run or a long-run model. Illustrate your example on the graph of the market for loanable funds, the IS-LM-FE graph and the asset markets graph. Use letter A to represent the equilibrium before the shock and letter D to represent the equilibrium after the shock. Assume that before the shock, all markets were in equilibrium.

b) Given an example of one shock where a drop in GDP is associated with a concurrent increase in national saving. Clarify whether the drop in GDP is the cause or the effect of the increase in saving and whether you are referring to a short-run or a long-run model. Illustrate your example on the graph of the market for loanable funds, the IS-LM-FE graph and the asset markets graph. Use letter A to represent the equilibrium before the shock and letter D to represent the equilibrium after the shock. Assume that before the shock, all markets were in equilibrium.

c) Give an example of one shock where an increase in GDP is associated with a concurrent increase in real demand for money. Clarify whether the increase in GDP is the cause or the effect of the increase in real demand for money and whether you are referring to a short-run or a long-run model. Illustrate your example on the graph of the market for loanable funds, the IS-LM-FE graph and the asset markets graph. Use letter A to represent the equilibrium before the shock and letter D to represent the equilibrium after the shock. Assume that before the shock, all markets were in equilibrium.