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ECON 102 Tutorial: Week 20 Ayesha Ali www.lancaster.ac.uk/postgrad/alia10/econ102.html a.ali11@lancaster.ac.uk office hours: 8:00AM – 8:50AM tuesdays LUMS C85
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Today’s Outline Week 20 worksheet – IS-LM Model: Please make sure you review all of problems on your own and ask if you have any questions. If you’re unsure of any solutions here, please see Chapter 24 in your textbook – it provides detailed explanations and examples. If you didn’t receive your 2 nd exam, you may collect it from my office. Exam 3 will be available some time after Easter holidays.
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IS-LM Model: Some Important Equations
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Question 1
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Question 2
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Question 3
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Question 4
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Question 5 Assume that MD = 0.2Y – 1,000i, Y = 4,000, i = 5%. By how much would the central bank have to reduce the money supply if it wished to increase the interest rate by 1%? In equilibrium MS = MD MS = 0.2Y – 1,000i If we assume a constant income level Y, then the change in the money supply ΔM is related to a change in interest rate Δi as follows: ΔM = -1,000 Δi ΔM = -1,000 * 0.01 ΔM = -10 So the central bank would have to reduce the money supply by 10. Alternatively, we could get the same result by inserting the value for Y and the two different values for i into the MS = MD equation and calculating the two money supply values, and then fining the change in money supply required.
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Question 6 Assume that MD = 0.2Y – 1,000i, Y = 4,000, i = 5%. By how much would the central bank have to let the interest rate change if it cuts the money supply by 100? In equilibrium MS = MD MS = 0.2Y – 1,000i We re-arrange to isolate i: i = (-1/1,000)(0.2Y + M) So, if we hold income, Y, at a constant, then the change in the interest rate Δi is related to a change in money supply ΔM as follows: Δi = (-1/1,000) ΔM Δi = (-1/1,000) * (-100) Δi = 0.1 = 10% So the interest rate would rise by 10 percentage points.
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Question 7
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Question 8
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Question 9
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Next Class Week 21 Worksheet - Fiscal Policy & Monetary Policy Looks at Policy Applications of the maths that we used in this week’s tutorial. Chapters 25 and 26 in the Textbook Have a nice Easter Break!
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