nswer ALL out of the 4 questions.
Each question is worth 1 mark. (Total marks: 4)

Question 1. [1 mark] If nominal GDP, prices and population all increase but real GDP remains the same then:
A. real GDP per capita will decrease.
B. real GDP per capita will increase.
C. we cannot tell what will happen to real GDP per capita.
D. the standard of living will increase.
E. Both B and D are correct.

Question 2. [1 mark] We can expect the IS curve to get steeper as:
A. money demand becomes less sensitive to changes in the interest rate.
B. the marginal propensity to save increases.
C. investment becomes more sensitive to changes in the interest rate.
D. the income tax rate decreases.
E. the expenditure multiplier increases.

Question 3. [1 mark] If money demand becomes more income elastic, the LM curve will:
A. shift to the right.
B. shift to the left.
C. become flatter.
D. become steeper.
E. remain unaffected.

Question 4. [1 mark] Crowding out:
A. cannot happen if the LM curve is horizontal.
B. cannot happen if the IS curve is vertical.
C. is caused by a fall in interest rates resulting from expansionary fiscal policies.
D. Both $A$ and $B$ are correct.
E. All of the answers given here are correct.

PART B: PROBLEM SOLVING QUESTIONS
Answer $A L L$ out of the 5 questions.
Marks are as indicated. (Total marks: 24)

Consider the following model of the labour market:
$Y=25 N-\frac{N^{2}}{2} \quad$ (1) $\quad$ Production function
$N_{d}=100-\frac{W}{P} \quad$ (2) $\quad$ Labour demand
$N_{s}=0.25 \frac{W}{P} \quad$ (3) $\quad$ Labour supply
(4) Labour market equilibrium

and goods market:
$\begin{array}{ccc}Z=C+I+G & \text { (5) } & \text { Planned aggregate expenditure } \ C=40+0.5 Y_{D} & \text { (6) } & \text { Consumption function } \ I=5+0.5 Y-50 i & (7) & \text { Planned investment } \ G=50 & \text { (8) } & \text { Government expenditure } \ Y_{D}=Y-T & \text { (9) } & \text { Disposable income } \ T=25+0.5 Y & \text { Tax function } \ Y=Z & \text { (10) } & \text { Equilibrium Condition }\end{array}$
and money market:
(12) Money demand
$\frac{M}{P}=\left(\frac{100}{P}\right)$
Money supply
(14) Money market equilibrium

Using this model and rounding to 3 decimal places, answer the following questions:

Question 1. [2 marks] Solve for the IS equation (expressing $Y$ in terms of $i$ ).
Question 2. [2 marks] Solve for the LM equation (expressing $i$ in terms of $Y$ and $P$ ).
Question 3. [4 marks] Suppose that the interest rate is exogenously fixed at $i=0.025$. In this case, what is the value of the fiscal multipier and the equilibrium value of output $Y^{*}$ according to the goods market?

Question 4. [4 marks] Suppose, alternatively, that the interest rate is an endogenous variable, but the price level is fixed exogenously at $P=1$. In this case, what are the equilibrium values of $Y^{}$ and $i^{} ?$

Question 5. [12 marks] Suppose, alternatively, that both the interest rate and the price level are endogenous variables. In this case, what are the equilibrium values of $\left(W^{} / P^{}\right), N^{}, Y^{}$, $i^{}, P^{}$ and $W^{*} ?$

Answer ALL out of the 1 question.
Marks as indicated. (Total marks: 8)
Question

Question 1. [8 marks] Evaluate the following statement as true/false/uncertain and explain
According to the Keynesian labour market model studied in class, a reduction in the
disutility of labour will increase the labour supply, will increase unemployment, will not affect
output and will make some workers worse off.
when appropriate.

PART D: RECORD OF DISRUPTIONS QUESTIONS
Answer ALL out of the 1 question if needed.
No marks assigned. (Total marks: 0)

Question 1. [No marks] Specify any assumptions you have made in completing the exam
and to which questions those assumptions relate. You may also include queries you may
have made with respect to a particular question, should you have been able to ’raise your
hand’ in an examination room.

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