Assignment 1

Faiz Ur Rehman

Instructions
Kindly respond to the following questions, clearly labeling each part of every question. Ensure that all
answers are handwritten and submitted as PDF files on the LMS.

Questions
1. Given the following model;

Y =C +I +G (1)

C = C((1 − k)Y ) (2)

I = I(Y, r) (3)

M
= L(Y, i) (4)
P

Ṗ (Y − Ȳ )
= H[ ]+π (5)
P Ȳ
dY dY dY dr dr dr
2. Derive the values for dG , dM , dP , dG , dM , & dP .
3. Explain the outcome of each multiplier in detail.
4. Derive (mathematically and graphically) the stability condition for the model from the AD-AS, and
IS-LM and explain the signs of each of the above multipliers derived in point 2.
5. Considering the full equilibrium properties with static expectations π = 0, Ṗ = 0 & Y = Ȳ , alter the
IS and LM equations and write down in Matrix algebra (endogenous variables: dP dr and exogenous
variables: dG &dM ). Show the impact of fiscal and monetary policies on economy in the long run.
6. What if the central bank decides to take dM as endogenous variable and dr as exogenous along with
other exogenous (dG & dP ), analyze the stability condition and policy effects in such a situation. Also,
explain your answer through the graph.