ECONTWO

Exam 2
Term 2 AY18-19
Evan Lance C. Li Liao

Instructions:
1. Type your name/s on the answer sheet. If your name is not on the answer sheet, NO
CREDIT will be given to you.
2. Essays must be type-written on short-bond paper. Specifications are Times New Roman,
font size 12, 1.15 spacing, 1in margins all around. For questions with
graphs/drawings/computations, please draw your graphs on bond paper and insert them as
images in your final output.
3. Submit ONLY 1 PDF FILE with all your answers inside. I will not accept several files as
a submission.
4. No solution, no credit especially for problem solving. Round off to 3 decimal places.
5. For graphs, please label initial curves with a subscript of 1.
6. Deadline is on April 9, 6:00pm through email at evan.liliao@dlsu.edu.ph. Late submissions
will not be accepted.
I. Problem Solving. Show all computations and box all final answers.

Given:
Manufacturing 350 Public Service 70
Durable Equipment 150 Direct Tax 50
Undistributed Profits 140 Rental Income 200
Public Investment 40 Indirect Tax 0.25𝑌
Transport and Storage 200 Money Supply 100
Transactions Demand 0.1𝑌 Mining and Quarrying 0.3𝑌
Domestic Loans 25 Breeding Stock & Orchard 30
Dev’t
Autonomous Consumption 200 Merchandise Export 200
Marginal Propensity to Save 0.6𝑌𝑑 Capital Consumption 20 + 0.5𝑌
Allowance
Precautionary Demand 0.1𝑌 Merchandise Import 0.1𝑌
Foreign Loans 125 Marginal Propensity to 0.4𝑌𝑑
Consump
Speculative Demand 20 − 10𝑖 Industrial Sector 300
Corporate Income 200 Construction 170 + 0.5𝑌
Compensation of Employees 300 Private Services 200

A. Determine the equilibrium level of income under a four-sector economy with tax.
B. Determine the values of the multiplier
C. By what percentage will government spending have to increase to achieve a 10% growth
target for next year? Will this improve or worsen the trade and budget standing?
D. Determine the equilibrium interest rate in the money market.
E. Given the original data and new investment data where 𝐼 = 350 − 10𝑖, determine the
equilibrium level of interest rate and income using the IS-LM model.

II. Essay: Answer the following questions with words and graphs (wherever applicable)
1. Comment on the statement: “Inflation does not benefit anyone in the economy.” Do you
agree or not? Explain your answer based on the concepts learned in investment.
2. If the economy is suffering from severe inflationary problems, high unemployment, and
low growth as well as balance of payments deficit, what particular set of policies should
government implement to attain both internal and external balance? Indicate the order in
which monetary/fiscal policies must be implemented and its corresponding effects in the
economy. This number requires graphs and explanations.
3. Explain how low interest rates affect a country in terms of achieving both internal and
external balance. This number requires graphs and explanations.
4. Assume that a country is at full employment. The government decides to cut taxes to give
the economy an extra boost. Using the IS-LM model, show the effect of the tax cut. If
central bank is following a policy of price stability, how should they react to the reduction
in tax? This number requires graphs and explanations.
5. Using the IS-LM framework, explain how government expenditure can help improve or
worsen the economic situation of a country during low levels of growth and high levels of
unemployment. This number requires graphs and explanations.
6. The Philippines is currently experiencing the following:
a. Huge budget deficit
b. High unemployment rate
c. Low levels of investments
d. Depreciating peso vs US dollar
e. Low growth
f. Low inflation
Given these information, propose a comprehensive reform package to address the current
problems of the country. This number requires graphs and explanations.