Introduction to Macroeconomics (ECONTWO)

Term/ Year: 3rd Term- AY 2012-2013

Problem Set 3

Question 1: General Equilibrium Model

The following equations describe a three- sectors economy with tax:
This is a three sector economy characterized by the following equations:
Compensation to employees= 105
Durable goods and services = 400
Gross private domestic investment = 600 + 0.1Y- 1000i
Interest Income= 600
Money supply= 400
Non- durable goods and services= 0.8Yd
Public investments = 200
Public services= 100
Taxes (Direct and Indirect) = 125
Transactions Motive = 0.2Y
Speculative Motive = -6000i
1)
2)
3)
4)
5)

Solve for the goods market equilibrium and state the equation for the IS-curve.
Solve for the money market equilibrium and state the equation for the LM-curve.
What are the equilibrium levels of income and the interest rate?
How much will be the change in equilibrium income if BSP increased the real money supply to 900?
How much will be the change in equilibrium interest rate, if BSP increased the real money supply to 900?

Question 2: Balance of Payments

a)

Why would it be important to examine a countrys balance of payments?

b)

For the following transactions, check if it either affects the capital or current account and whether the change is positive
or negative.
Transactions

Capital

Current

+/-

1) A $2 million Philippine aid to Bosnia

2) Payment of $10 million in dividends by San Miguel Corporation to its
investors in Frankfurt
3) Purchase of $60 million in Japanese Govt Bonds by the Bangko
Sentral ng Pilipinas.
4) Foreign tourists spending $8 million in Boracay
5) Sale of Amaya TV series DVD, valued at $.2 million, in Korea
6) Tuition receipts of $3 million received by Philippine universities from
foreign students
7) Payment of $1 million in Social Security to Philippine citizens living in
USA
8) Purchase by Globe Telecom of memory chips valued at $13 million
from Toshiba, in Japan.
9) Payment of $6 million consulting fees to SGV by an Indonesian firm
10)A $22 million investment in Plant expansion at the Laguna
Technopark by a Japanese company

Note: I just realized that the previous lectures I would want to be included in the Final Exam are conceptual rather than
computational so the following lecture notes still included in the Final Examination are: Lectures 1, 4 and 7. Not all are included.
Specific slides included would be mentioned next meeting.