Institute of Business Management

Semester:
Course Instructor: Irfan Lal Total Marks:100 weighted 10
Date:
Assignment No.4

Q#1. Explain Business cycle and cyclical behavior of macroeconomic variables (direction and timing)?

Q#2 When a recession occurs, do economists expect it to be a temporary phenomenon? Or is there some
degree of permanence? What is the empirical evidence?

Q#3 What is the business cycle? Graph the real business cycle of Pakistan for the period 1960 to 2019. label the four
phases of the cycle. Explain what is happening during each phase of the cycle with: output, employment and inflation.
(Data hint: Download data from ministry of finance website)

Q#4
a) Differentiate Demand pull and cost push inflation with the help of graph which one you suggest for economy and
why?
b) Define Hyperinflation, Stagflation?

Q#5 Who determines the nation's money supply? Explain how the money supply could be expanded or reduced in an
economy in which all money is in the form of currency.
a) Explain quantity theory of money?

Q#6 Define general equilibrium and show the general equilibrium point in the IS-LM diagram. If the economy isn't in
general equilibrium, what determines output and the real interest rate? What economic forces act to bring the economy
back to general equilibrium?

Q# 7 Suppose the central bank’s short-run response to any change in the economy is to change the
money supply to maintain the existing real interest rate. What would happen to money supply if
there were a reduction in government purchases? Given the Fed’s policy, what would happen in the
very short run (before general equilibrium is restored) to output and the real interest rate? What must
happen to the LM curve and the price level to restore general equilibrium?

Q#8 Drive aggregate demand (AD) curve? Why does the AD curve slope downward? Give two examples of
changes in the economy that shift the AD curve up and to the right and explain why the shifts occur?

Q#9 Suppose you were a forecaster of the real wage rate, employment, output, the real interest rate,
consumption, investment, and the price level. A shock hits the economy, which you think is a
temporary adverse supply shock.
(a) What are your forecasts for each of the variables listed above (rise, fall, and no change)?
(b) What if the shock was really due to people’s reduced expectations about their future income.
Which variables did you forecast correctly, and which did you forecast incorrectly?

Q#10 Use the IS-LM model to determine the effects of each of the following on the general equilibrium values of the
real wage, employment, output, real interest rate, consumption, investment, and price level.
a. A reduction in the effective tax rate on capital increases desired investment.
b. The expected rate of inflation rises.
c. An influx of working-age immigrants increases labor supply (ignore any other possible effects of
Increased population).
d. Increased usage of automatic teller machines reduces the demand for money.

Q#11 Desired consumption and investment are Cd = 4000 - 4000r + 0.20Y;

Id = 2400 - 4000r.
As usual, Y is output and r is the real interest rate. Government purchases, G, are 2000.
a). Find an equation relating desired national saving, s, to r and Y.
b). i) What value of the real interest rate clears the goods market when Y = 10,000? Use both forms of the goods market
equilibrium condition.
ii) What value of the real interest rate clears the goods market when Y = 10,200? Graph the IS curve.
c). Government purchases rise to 2400. How does this increase change the equation for national saving in Part (a)? What
value of the real interest rate clears the goods market when Y = 10,000? Use both forms of the goods market
equilibrium condition. How is the IS curve affected by the increase in G?

Q#12
a) What determines the position of the FE line? Give two examples of changes in the economy that would shift the FE
line to the right.
b). What relationship does the IS curve capture? Derive the IS curve graphically and show why it slopes as it does. Give
two examples of changes in the economy that would cause the IS curve to shift down and to the left.
c). What relationship does the LM curve capture? Derive the LM curve graphically and show why it slopes as it does. Give
two examples of changes in the economy that would cause the LM curve to shift down and to the right.