北大光华宏观经济学Homework 2

Guanghua School of Management, Peking University Se Yan Intermediate Macroeconomics Spring 2012

Homework Assignment 2

Due on April 12th for Chinese Session and April 18th for English Session Question 1 (30 pts): Suppose prices are sticky in the short run, but fully flexible in the long run (Keynesian model). The economy is initially in the long-run equilibrium. Now suppose that droughts in Yunnan Province and floods in Hubei Province substantially reduce food production in China.

a.(15 pts) Use the aggregate demand – aggregate supply model to illustrate

graphically the impact in the short run and the long run of this adverse supply shock. (Be sure to label the axes, the curves, the initial equilibrium values, the direction the curves shift, the short-run equilibrium values, and the long-run equilibrium values) State in words what happens to prices and output in the short run and the long run.

b.(15 pts) If the central bank of China would like to stabilize the output, should the

bank keep the money supply constant in response to this adverse supply shock?

Explain your answer.

Question 2 (35 pts): In the Keynesian cross, assume that the consumption function is given by

C Y T

=+−

2000.75()

Planned investment is 100; government purchases and taxes are both 100.

a.(10 pts)Graph planned expenditure as a function of income.

b.(5 pts) What is the equilibrium level of income?

c. (10 pts) If government purchases increase to 125, what is the new equilibrium

income? What is the government purchase multiplier?

d.(10 pts) What level of government purchases is needed to achieve an income of

1600?

Question 3 (35 pts): Consider the following model of the economy:

Aggregate Expenditure:

1700.6()

20010040350

C Y T T I r

G =+−==−= Money:

0.7560600d

s M Y r P M P

=−=

a. (8 pts) Derive the expressions for IS curve and LM curve.

b. (7 pts) Find the value of real income and the real interest rate in an IS-LM

equilibrium.

c. (10 pts) Suppose the government expands the money supply. Illustrate the

effects on GDP and the interest rate on a graph of the IS and LM curves. Clearly label the axes, the curves and the points of intersection before and after the change in the money supply.

d. (10 pts) Suppose that the investment function is independent of the interest

rate and is given by the expression 0I I =. The government expands the money

supply. . Illustrate the effects on a new graph and describe briefly why your result is different from part c.