ECN600-Assignment 2 Winter 2011

Ryerson University Instructor: Dr. David K. Lee

Assignment 2Details

Please make sure that you explain all steps in arriving at your answers to the following questions from your text. All calculations should be shown. You can use Excel or Lotus 123 spreadsheets to verify your answers.

Your marks will be weighted on the basis of your reasoningmore than the exact numerical answer itself.

Assignment Submission Policy:

  1. Submit online onlywith One MS Word File only. Any other format but MS word will not be graded.
  2. Deadline of the assignment is on Thursday March 17th, 2011, Midnight (12:00 AM Friday Mar 18th)

1.{20 marks} Suppose the following two different aggregate expenditure schedules based on the two different price level, P=150 and P=180 and the short run AS is P=50+0.5Y and the long run AS is Y=350.

Table 1: when P=150

National Income
(millions of dollars per year) / Consumption
(millions of dollars per year) / Investment
(millions of dollars per year / Government Expenditure
(millions of dollars per year / Export
(millions of dollars per year / Import
(millions of dollars per year
0 / 80 / 20 / 20 / 100 / 20
100 / 160 / 20 / 20 / 100 / 50
200 / 240 / 20 / 20 / 100 / 80
300 / 320 / 20 / 20 / 100 / 110
400 / 400 / 20 / 20 / 100 / 140

Table 2: when P=180

National Income
(millions of dollars per year) / Consumption
(millions of dollars per year) / Investment
(millions of dollars per year / Government Expenditure
(millions of dollars per year / Export
(millions of dollars per year / Import
(millions of dollars per year
0 / 50 / 20 / 20 / 100 / 20
100 / 130 / 20 / 20 / 100 / 50
200 / 210 / 20 / 20 / 100 / 80
300 / 290 / 20 / 20 / 100 / 110
400 / 370 / 20 / 20 / 100 / 140
  1. Derive the aggregate demand curve from the given information and graph it.
  2. Is this economy in recession or inflationary stage? Explainhow this economy approaches the long run equilibrium position.
  3. Suppose that investment demand is increased by 20 so the gross investment is now $40. Is this economy now in recession or inflationary stage?

2.{20 marks} Consider the following model of the economy:

C=125 + 0.75(Y-T); I=200-10r; G=100; T=100; NX=150-50e

Where, C=consumption, Y=national income, T=tax, G=government spending, NX=net exports, e=nominal exchange rate, etc.

Suppose that the long run national income is 1200 and there is an increase in

government purchases by 100,

  1. Calculate ∆r.
  2. Calculate ∆I.
  3. Calculate ∆C.
  4. Calculate ∆NX.
  5. Calculate ∆e.

3.{20 marks} Suppose there is a decrease in foreign exchange speculators confidence in the currency causing to increase by 30%.

MPC = 0.8, I=5000-900r, NX=0.6e-MPM*Y, t = 0.30

where MPC=marginal propensity to consume, I=investment, r=real interest rate, NX=net exports, e=nominal exchange rate, MPM=marginal propensity to import, t=tax rate, etc.

  1. Calculate ∆r.
  2. Calculate ∆I.
  3. Calculate ∆C.
  4. Calculate ∆NX.

Note: You have to make all necessary assumptions to answer the questions.

Submit your Assignment using the Assignment Dropbox found on the Assignment Link on the course homepage. Submit your Assignment in full in One MS Word document only.

Page 1 of 3