Question Two

1. Explain Hall's approach to consumption theory. How does Hall's approach vary from Ando-Modigliani and Friedman's approach toconsumptiontheory?
2. Explain the role of expectations in a dynamic aggregate demand - dynamic aggregate supply(DAD-DAS)model.
3. Explain why all points above the balance of payment schedule there is a surplus while all points below the balance of payment schedule there isadeficit.

Question Three

1. Indicatepreciselywhenariseinthemoneysupplywillboostoutputineachofthefollowing models. Explain your answer and provide an appropriate graph for each model. (i). Closed IS-LM model (ii). Open IS-LM model
2. Explainwhytheacceleratorprincipleofinvestmentmaynotholdwhenthereisbigcapacity underutilization.
3. Explain what is meant by an "assignment problem" and how it arises. How can an assignment problembeaddressed?

Question Four

1. Explain how the absorption approach vary from the elasticity approach to the balance of payment.
2. Assume the following money market

= () > 0

What is unusual about this equation? What does the LMcurve look like under this assumption? Assume there is a tax cut, how effective willitbe?

Wouldtheeffectivenessofataxcutundertheassumptionsinpart"(b)"changeifthiswere an open economy under fixed exchange rates instead of a closed economy? Explain with the help ofagraph.

Question Five

1. InaMundell-Flemingmodel,discusswhetherasituationwherethecurrentaccountisin continualdeficitmatchedbyacapitalaccountsurplusconstitutes'externalequilibrium'.
2. Assume that each firm has the following productionfunction:

= (())

where is the number of employees, is effort per employee, and is real wage, and

/ > 0. Assume labour is the only input, so that real profits equal:

=

There are identical workers, each of which offers totally inelastic labour supply: Labour supply =

If firms maximize profits, show mathematically what they set the elasticity of effort with respect to the real wage equaltohere.

1. Graph the labour market assuming that the elasticity condition you derived in part "(a)" is satisfied at an above market-clearingrealwage.