ECS2602-Exam-pack.pdf

Table of Contents GOODS MARKET MODEL ............................................................................................................................... 4 IMPACT OF FISCAL POLICY TO EQUILIBRIUM ............................................................................................ 7 PRACTICE OF THE CONCEPT FROM PAST PAPERS ................................................................................... 16 May 2012 ............................................................................................................................................ 16 Nov 2012 ............................................................................................................................................. 19 May/June 2013 ................................................................................................................................... 21 Nov 2013 ............................................................................................................................................. 24 FINANCIAL MARKETS .................................................................................................................................. 27 Wealth ................................................................................................................................................. 27 Money Demand ...................................................................................................................................... 27 PRACTICE OF THE CONCEPT FROM PAST PAPERS ................................................................................... 35 May 2012 ............................................................................................................................................ 35 Nov 2012 ............................................................................................................................................. 38 May 2013 ............................................................................................................................................ 38 Nov 2013 ............................................................................................................................................. 39 IS-LM MODEL .............................................................................................................................................. 41 LM ....................................................................................................................................................... 45 IS-LM: The model ................................................................................................................................ 47 PRACTICE OF THE CONCEPT FROM PAST PAPERS ................................................................................... 53 ............................................................................................................................................................ 53 May 2012 ............................................................................................................................................ 53 ............................................................................................................................................................ 57 ............... 58 Nov 2012 ............................................................................................................................................. 59 ............................................................................................................................................................ 59 May 2013 ............................................................................................................................................ 63 Nov 2013 ............................................................................................................................................. 66 .................................................................................................................................................................... 67 OPENNESS IN GOODS, FINANCIAL AND IS-LM MODEL ............................................................................... 68 PRACTICE OF THE CONCEPT FROM PAST PAPERS ................................................................................... 68 May 2012 ............................................................................................................................................ 68 Nov 2012 ............................................................................................................................................. 69 ............................................................................................................................................................ 69 May 2013 ............................................................................................................................................ 70 ............................................................................................................................................................ 71 Nov 2013 ............................................................................................................................................. 71 LABOUR MARKET ........................................................................................................................................ 76 Bargaining Power ................................................................................................................................ 76 Real Wage & Unemployment rate ...................................................................................................... 78 ............................................................................................................................................................ 79 PRACTICE OF THE CONCEPT FROM PAST PAPERS ................................................................................... 86 May 2012 ............................................................................................................................................ 86 Nov 2012 ............................................................................................................................................. 86 May 2013 ............................................................................................................................................ 87 ............................................................................................................................................................ 87 ............................................................................................................................................................ 87 ............................................................................................................................................................ 88 Nov 2013 ............................................................................................................................................. 90 AD-AS MODEL ............................................................................................................................................. 91 The Neutrality of Money ....................................................................................................................... 107 PRACTICE OF THE CONCEPT FROM PAST PAPERS ................................................................................. 109 .......................................................................................................................................................... 109 GOODS MARKET MODEL • Endogenous variables - depends on other variables within the model • consumption depends on income endogenous • exogenous variables - constant, not explained within the model, taken as a given The full model will consist of four sectors: households, firms, the government, and the foreign sector. Households earn income from firms, which they spend on private consumptions and savings. Firms produce goods sold on the goods market, and pay the revenue to households for factors of production. The government collects taxes which finance transfers and public consumption. Goods are also exported to and imported from the foreign sector. The first version of the model, however, is simplified as far as possible. It contains only the household- and firm sectors. It is closed in the sense of having no trade with the rest of the world, and private in the sense of having no government. According to the system of national accounts, GDP, denoted by Y, can be alternatively expressed in terms of production, expenditure, or income. The national account balance identity define GDP from the expenditure approach. It states that firm production, Y, will be used for either household consumption, C, or investments, I. Y = C + I Total Demand for Goods, (Z) (total = aggregate) The total amount of goods and services demanded in the goods market. This total demand for goods and services determines the level of income and output in the economy. Total amount of goods: (total = aggregate) All goods and services produced even if they replace depreciated or worn out products. Gross domestic expenditure (GDE) The total value of spending within the borders of a country including imports but excluding exports, since spending on exports takes place outside the borders of the country. Consumption Function This is the spending by private firms and households. Households are assumed to consume a fixed proportion of their income. Since income is equal to production (Y ), this simple rule can be expressed by the following consumption function: C = co+ cYd co- autonomous consumption, which is the consumption independent of income level and is the intercept or vertical component of the consumption curve cYd- is the induced consumption, the spending which is directly linked to income level; disposable income (Yd) - income remaining after paying taxes, receiving gov't transfers The parameter c, called the marginal propensity to consume (MPC), specifies how much is consumed out of an income increase. It is assumed to be constant and known, and to lie in the interval 0 b 1. It is the slope of the consumption curve Investment Investments I are assumed to be constant, in the sense of being independent of production (or income).