ECON 302 Intermediate Macroeconomics Questions

Econ 302 – Intermediate Macroeconomics Spring 2020

Assignment 4

Z. Janko

T / F 1. Once the Price level changes, the price adjustement causes a movement along the AD curve. T / F 2. When the economy is outside its full-employment level of output, IS and LM together

determine the equilibrium level of output in the macro economy.

PART II. – Analytical Questions and Problems – 18 POINTS Answers do not need to be typed for these questions

1. Discuss Money Neutrality (the concept); i.e. discuss what it says. Only after you discuss the concept, discuss what Keynesian Theory argues with respect to Money Neutrality and compare it to

DUE: May 5th, 2020 By 10pm on iLearn. 25 points. Covers ch.9

PART I. – True False – 2 POINTS

what Classical Theory states about Money Neutrality.

2. Consider the following economy: C=1275+0.5(Y-T)-200r

I=900-200r

L=0.5Y-200r

Expected inflation = 0.

Government Budget = T-G (by definition).

ECON 302 Intermediate Macroeconomics Questions

Full-Employment level of output ( Y ) = 3100.

Assume the economy is initially ABOVE full potential.

3 points

7 points

SHOW ALL WORK!!!

- Suppose that T=450, G=450, Ms=9000 and P=4. Solve for the IS curve, LM curve and the
equilibrium values of r and Y. Then solve for the equilibrium values of C, I, and the Government Budget (i.e. calculate).

- Now suppose that T and G still equal 450, but Ms=4500, and P=4. Solve for the new IS curve, new LM curve and the new equilibrium values of r and Y. Then solve for the new equilibrium values of C, I, and the Government Budget (i.e. calculate).
- Clearly, in b) there is a change in policy. Identify the policy (state the precise policy change) and illustrate the impact of the policy change on the IS-LM diagram and on the AD-AS diagram.

d. Did the policy bring the economy back to full-employment? Why? Discuss briefly.

3. Suppose the economy is at full potential. 8 points

- Use the IS-LM model (diagrams) to illustrate the impact of a rise in money supply in the
SR. Discuss the impact on the economy as a whole, providing detailed economic intuition. As part of your answer, make sure to discuss the channel that leads to a rise in output.

- What is the impact of the policy above on the AD-AS diagram? Just briefly state; do not draw the diagram.
- Now use the IS-LM diagram from above to illustrate the impact on the economy over time, in the LR. (NOTE: you should provide only 1 IS-LM diagram with you answer to questions 3; both SR and LR should be illustrated on the same diagram). Make sure to label the diagram clearly, identifying SR vs. LR movements/changes.
- What is the final impact on Y, C, I, L(i,Y), and r under each policy? STATE (no discussion needed).
- Finally, draw the time diagram for M/P only.

PART III. – 5 points total ANSWERS MUST BE TYPED!

ECON 302 Intermediate Macroeconomics Questions

Read the article posted on iLearn: What We Do and Don’t Know about Discretionary Fiscal Policy. Then answer the following questions based on the article:

- Which policy (fiscal or monetary) was predominantly used for the past 40 years to deal with economic downturns? Brief answer.
- When addressing economic downturns, what are the 3 possible policy responses by policy makers? Briefly discuss each.
- What are the challenges with using tax cuts to expand the economy? Under what condition can a tax cut be fairly expansionary? Discuss.
- What are the challenges with using higher government spending to stimulate the economy? Discuss three (hint: starts on page 2!)
- What is the conclusion reached in the article with respect to using fiscal vs. monetary policy to restore output in the economy?