JKT Selec, ‘THE UNIVERSITY OF THE WEST INDIES [EXAMINATIONS oF pucuMEaR a4 code and anes: ECON 2002 emediste Marscoomis| Pape oawanstine Thursdy WA Decerrber, aos + "Baton: 2 nous INSTRUCTIONS TO CAMSDATES:Thispaperhas 9 pages and abso. Answer all Questions 2The University of the West nes Course Code ECON 2002 __14.1, Assume that an economy is characterised by the following equations: C= 300 + 0.8(Y -T); T= 100; G= 50 ‘8, Using the Keynesian cross model, find the equilibrium level of ¥ when r= 5 and raph the results. [5 marks} ’, Calculate the IS and LM equations. Use the IS-LM model to find the equilibrium level ofr and Y. Graph the results, [12 marks} ¢. Find the equilibrium Ievels of consumption, investment, and national saving. ‘Does national saving equal investment? (4 marks] 44. What is te size of the budget surplus? Ifthe Government wishes to stimulate the ‘cconomy, which fiscal policy tool - goversment spending or taxes - would be ‘most effective and why? [5 marks] 2. Explain the following: ‘a. Classical dichotomy and money neutrality (4 marks} Okun's Law [4 marks] Debt deflation [4 marks] Sacrifice ratio [4 marks} ‘State and explain te Fisher equation [4 marks] With the aid of diagrams, use the IS-LM model to explain the following: The impact of eontrationary fiscal policy like a reduction in govemment spending, while the Central Bank commits to maintaining the level of the money supply. [4 marks} 'b. The impact of eontrationary fiscal policy ike a reduction in government spending, while the central bank commits to maintaining a fixed interest ate (Srmarks] . The impact of expansionary fiscal policy like # reduction in taxes, while the ‘Central Bank keeps the output level fixed. [5 marks} The University ofthe West Indien Course Code ECON 2002 14.page 3 4. a. Use the Quantity Theory of Money (QTM), derive and graph the Aggregate ‘Demand (AD) curve. Explain why the curve is downward sloping according to the QTM. [10 marks} b. Briefly explain the difference between structural and frictional unemployment. [Smarks] ©, Briefly explain thee reasons why real wages temain above the equilibrium level ‘that equilibrates labour supply and labour demand, (5 marks} END OF QUESTION PAPER othe Univers of the West nding