School of Humanity and Social Science (lie Lahore University Of Management Sciences 3 (including this page) Roll Total Pages: Name: Quarter: Spring Semester Mathematical Application of Course Title: Economics Academie Year: 2009-2010 Course Code: “Eeon-262 3 = Date: "20" March Instructor; “Ayesha Khalid Time Allowed: 100 minutes ‘Exam: “Midterm ‘Total Marks: "65 ‘The instructions below must be followed strictly. Failure to do so can result in serious grade loss. => DO NOT OPEN THIS EXAM UNTIL = Keep your epes00n your own paper. TOLD To DO sO, > You pray nor => Rect alt questions very carefully before answering «talk to anyone once the exam begins. them. © Jeave the examination room and then return. = Check the number of papers in the question sheet cand make sure the paper is complete, ‘Specific instructions: ed book/notes, help sheet: Caloulator ‘There are four questions and you have to answer all of them. ‘Show ALL working (Le. all steps). BEST OF LUCK! &ECON-262— Midterm Exam ‘Question 1: Let fes%) = and aba) ‘Are flaypm)and g(%%,) finetionally ; dependent? (15 marks} GFA) ‘Question 2: 1 t function, 2+ —1 Given the ina i y Gryey 8) Can the implicit function thearem be used to calculate dyfdx at x= y =<1? Explain your answer [2 marks] ') Based on your answer in part a) eslenlate dyidx at x = y= -1, [6 marks] Question 3: a) A bank offers an interest rate of 12% compounded monthly for the first 2 years of investment, If the money is invested for longer than 2 years, the bank compounds it continuously AFTER the end of the second year. What is the value of an investment of $250 in this bank after 3 years? (7 marks] 'b) Suppose that you own a rare book whose value at time ¢ years from now will be B(g} = 2 dollars. Assuming an interest rate of 5%, which is continuously compounded, what is. the best time to sell the book? (10 marks] ¢) Find the instantaneous rate of growth of y= 2'(¢7) [S marks}Question 4: ‘Consider a simple open macroeconomic model in which there is goods market and money trarket, The goods market us characterized by the following equations: @1=16) ((avacy 7, <0] S=8(¥,0) [0 <(@sevy's,< 1; (eSlery/S,> 0] i) M=M(¥) (0 < (aM vy. M, <1) (X= xX, [Xois exogenously fixed) WG=G, [Gy is exogenously fixed] where _|: investnent expenditure 1= interest rate $ =national saving Y= national income M-= expenditure on imparts X= level of exports G= goverment expenditure ‘The money market is characterized by the following equations: @Mé=kY +10) (k> 0; (ULMéry'Z, <0] Gi) Ms= at, (Mais determined by central bank] where Md = money demand Ms = money supply 8) Write the equilirium condition for both the goods and money market [5 marks} +b) Analyze the effectiveness of monetary policy i.e. whether an increase in money supply brings about an increase national income or not. (15 marks}