Mid-term exam: Econ F243: Macroeconomics 15th March 2019

BITS PILANI K. K. BIRLA GOA CAMPUS

II SEMESTER 2018-19 MID SEMESTER EXAM
COURSE NO. ECON F243 COURSE TITLE: MACROECONOMICS
15/03/2019 Time: 90 minutes Total Marks: 30
Instructions
1. Write your answers legibly
2. All relevant calculations must be clearly shown
3. Graphs should be properly constructed and labeled. You can use pen/pencil to draw the graphs
4. If you need to make any assumption, then clearly state it and proceed with your analysis

1 Using properly constructed diagram(s), explain how the interest rate works in the classical
system to stabilize aggregate demand in the face of an autonomous decline in investment [5]

2.1 Using IS-LM curves, diagrammatically derive a Keynesian aggregate demand schedule when
price level is flexible. [3]
2.2 Comment on the slope of an LM curve when the central bank follows the policy of a given
‘interest rate rule (i.e, the policy of ‘interest rate targeting’) [2]

3.1 In the simple Keynesian model, explain why the tax multiplier is smaller in absolute value than
the government expenditure multiplier. [Your answer should reflect the proper economic intuition, in
addition to mathematical derivations of the relationship between both the multipliers] [3]
3.2 Suppose that for a particular economy and period, Investment (I) = 200, government
expenditure (G) = 100, Taxes (T) were fixed at 150, and consumption (C) was given by the
consumption function C = 50 + 0.6YD. What is the level of equilibrium income? [Marks will be
awarded only if the final answer is supported with all the necessary preceding steps] [2]

4.1
Using a properly constructed diagram, explain the Keynesian theory of speculative demand for
money [3]
4.2
Other things remaining, an increase in money supply would lead to a decrease in rate of
interest. Why? (Your answer should reflect the proper economic intuition behind the
relationship rather than a simple diagrammatic interpretation) [2]

5 The following equations describes an economy:

C = 60 + 0.8YD ; I =150 - 10r
Government spending = 250; Tax = 200; Money Supply = 100;
Money Demand = 40 + 0.2Y – 10r
5.1 What are the equilibrium levels of income and the interest rate? [4]
5.2 Compute (estimate) the ‘crowding out effect’ of an increase in Government Spending of 100
(that is, ΔG=100). (Important notes: i) No diagrammatic explanation is required to answer this question
(Q 5.2), only numerical estimation; ii) Marks will be awarded only if the final answer is supported with all the
necessary preceding steps] [3]
5.3 Using properly constructed IS-LM diagram, show (mark) clearly and explain systematically the
‘crowding in effect’ of an increase in Tax. [3]

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