GUIDELINES TO ANSWER THE OCT/NOV 2019 EXAMINTION PAPER: Unique
number
SECTION A: COMPULSORY (60 marks: 30 x 2 = 60)
QUESTION 1 (5 marks) (x2 = 10 marks)
a. It is where the change in G is equal to the change in T (∆G = ∆T) and the equal increase in
government spending and taxes will still ...
ECS2602
GUIDELINES TO ANSWER THE OCT/NOV 2019 EXAMINTION PAPER: Unique
number 474911
SECTION A: COMPULSORY (60 marks: 30 x 2 = 60)
QUESTION 1 (5 marks) (x2 = 10 marks)
a. It is where the change in G is equal to the change in T (∆G = ∆T) and the equal increase in
government spending and taxes will still have a stimulatory impact on the level of output and
income
.
b.
DIAGRAM:
Value 200 must correlate with 1000 and
Value 120 must correlate with 600 (check equilibrium point where ZZ intersect 450 line)
BACKGROUND:
Value of the multiplier is = 5.
Assume G↑ with 100 and T↑ with 100.
Given: G = 100 and Y = 500 on the diagram.
, 2
G↑ with 100: increase in income is therefore 5 x 100 = 500 and Y0 = 500 + 500 = 1 000) T↑
with R100: change in autonomous spending is c(T) = 0.8(100) = 80 and Y0 = 80 x 5 = 400.
Then Y0 = 500 + 400 = 900.
The net effect is 100 [calculation: Y0 = 1 000 – (80 x 5) = 1 000 – 400 = 600]
NOTE: Student can also use Y0 = α (c0 + Ī + G – cT)
OR
DIAGRAM: Value 120 must correlate with 600
QUESTION 2 (2 marks) (x2 = 4 marks)
The interest rate and the level of output and income are two important variables that influence the
demand for money.
Use the following demand for money curve to explain the impact of (i) the interest rate and (ii) the
level of output and income on the demand for money.
Clearly indicate on the diagram the shifts and/or movement along the curve(s).
, 3
Correct sequence important and no change of M to Y on the diagram.
(i) The interest rate: ↑ i
Md↓
↑ interest rate (i) causes ↓ in demand for money Md or
↓ interest rate causes ↑ in demand for money Md
(On diagram: movement along the Md curve)
(ii) The level of output and income:
Y↓ Md↓
↑ in income (Y) causes ↑ demand for money Md ↓ in
income (Y) causes ↓ demand for money Md
(On diagram: rightward or leftward shift of the Md curve)
QUESTION 3 (5 marks) (x2 = 10 marks)
a. LM curve shows combinations of interest rates (i) and Y where the financial market is in
equilibrium given that real money supply is fixed. b. Y↓ Md↓ i↓
c. Derive the LM curve by assuming that the level of output and income decreases.
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through EFT, credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying this summary from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller vinimusic254. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy this summary for R76,07. You're not tied to anything after your purchase.
