Section A: Answer ALL questions

1. Explain the difference between (1) the demand for domestic goods and (2) the domestic demand for goods. (10 marks, 100 words)

2. First, write out the expression for the real exchange rate. Second, explain all factors that determine the real exchange rate. (10 marks, 100 words)

3. First, explain why the money demand curve is downward sloping. Second, explain what factor(s) will cause shifts in the money demand curve. (10 marks, 100 words)

4.

Using the following information, derive the Monetary Rule (MR) for this central bank:

Loss function: L = (yt − ye )2 + 0.5(πt − πT )2

Phillips Curve: πt = πt−1 + α(yt − ye )

In which a is equal to the last digit of your university registration number.

E.g., if your registration number is u2001234, a = 4; if the last digit is 0 then use a = 0.5 instead. (10 marks, show ALL the steps of the calculations)

5.

In the Financial Times article “Two-speed pandemic recovery will worsen inequality, World Bank warns” (11 Jan 2022), we can read:

“Developing countries will fall further behind the rich world as they struggle to recover from the economic impact of the pandemic owing to the spread of coronavirus variants […].

While output in rich countries will return to its pre-pandemic path by 2023, developing countries will still be an average of 4 per cent below their pre-pandemic trend. […]         The feeble rebound from the impact of coronavirus will be especially severe among the most vulnerable countries, […] by next year, output among fragile, conflict affected and small island states will still be 7.5 to 8.5 per cent below its pre-pandemic path.”

Use a Lorenz Curve to explain the pre- and post-pandemic levels of world inequality.

(10 marks, 100 words, excluding the graph)

Section B: Answer TWO questions

6. Assume that an economy is described by:

IS Curve: Y = 3,600 + 3G − 2T − 150r

LM Curve: Y =  + 100r

Investment function: I = 1,000 − 50r

Consumption function: C = 200 +  (Y − T)

Long-run equilibrium output for this economy is 4,000 and the price level is 1.

(a) Assume that the government spending is fixed at 1,200. The government wants to

achieve a level of investment equal to 900 and achieve Y = 4,000. What level of r is

needed for I = 900? What levels of T and M must be set to achieve the two goals?

What will be the levels of private saving, public saving, and national saving?

(10 marks, shows ALL the steps of the calculation)

(b) Now assume that the government wants to cut taxes to 1,000. With G set at 1,200,

what will the interest rate be at Y = 4,000? What must be the value of M ? What

will I be? What will be the levels of private, public, and national saving? Explain.

(15 marks, show ALL the steps of the calculations, 150 words max for the explanation)