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EC201 : Intermediate Macroeconomics

Semester 1, 2024
Tutorial 2
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Question 1

Suppose that the economy of Tokela is characterized by the following behavioural equations:

C = 160 + 0.6YD
I = 150
G = 150
T = 100

Based on the above information, solve for:

a) Equilibrium Output (Y)

b) Disposable Income (YD)
c) Consumption Spending (C)
d) Private savings (S)
e) Total demand (Z)

Question 2

Given below is the consumption function of the economy Thoma.

𝐶 = 𝑐0 + 𝑐1 (𝑌 − 𝑇)

𝑌 is income, while 𝑇 denotes taxes. Assuming that investment spending (𝐼 ̅ ) and government
spending (𝐺) are exogenous, derive and discuss the algebraic expression for output when
inventory investment is zero and production is equal to equal to the demand for goods Z. You
can assume the economy is closed.

Question 3

Show that in a closed economy, investment is equal to private savings and public savings.
Question 4

Suppose money demand for the economy of SugarLife is given as:

M d = $Y (0.25 − i)

Where $Y is $100. Also, suppose that the money supply is $20. Assume that the financial market
in SugarLife is in equilibrium.

a) Compute the value of the equilibrium interest rate.

b) Now assume that the Reserve Bank wants to raise the interest rate by 10%, at what level
should it set the money supply?

Question 5

Suppose that a person’s wealth is $50,000 and his yearly income is $60,000. His money demand
is given by the expression:

M d = $Y (0.35 − i)

Based on the above information:

a) Derive an expression for demand for bonds ( B d ) .

b) Determine the impact of an increase in interest rate by $10% on demand for bonds.
c) What is the impact of an increase in wealth on money and bond demand?

** The End**