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EPPE6024 - Exercise 1
EPPE6024: Macroeconomics
Exercise 1
Instruction: Please answer all questions to enhance your knowledge about the subject matters
The Demand Side
1. Given the following information
C= a + B(Ya)
1 = ?- ??
G = Go
T = TY
where C = consumption, Ya = Disposable income, I = Investment, G = Government Expenditure
and T = Tax.
(a) Derive IS equation and draw the IS curve.
(b) Derive all multipliers and explain each of them.
(c) Find the slope of IS curve.
(d) Explain the factors that shift the IS curve.
2. (a) What are the essences of Permanent Income Hypothesis (PIH)?
(b) Differentiate PIH with respect to Keynesian consumption function.
(c) What is Tobin's Q?
(d) What are the factors that affect investment according to Tobin's Q?
The Supply Side
1. (a) State the WS and PS functions.
(b) Derive the PS equation with and without tax wedge.
(c) Explain all the factors affecting WS and PS.
2. (a) Derive PC curve mathematically (from wage inflation and price inflation equations) and
graphically.
(b) Using IS, WS-PS and PC curves, explain the effect of a negative aggregate demand shock in
the absence of stabilizing policies.
(c) Using IS, WS-PS and PC curves, explain the effect of an increase in union power.
The 3-Equation Model and Macroeconomic Policy
1. (a) Explain the central bank's preference.
(b) Define the central bank's constraints.
(c) Derive the Monetary rule (MR) graphically.
2. (a) Using the 3-equation model, explain the path to equilibrium when there is a negative
permanent aggregate demand shock.
