Compulsory test #2

Autumn 2013
Please do all the 4 tasks specified below, by creating your own words-file
using the figures below. The word-file should replicate the template for
figures below exactly in terms of position and order. Do NT change the
relati!e position of the figures, as they are displayed exactly such that they
can be used for their respecti!e purposes. Then do the analysis asked in the
bullets below the figures using the figures. "lso comment on the analysis in
the bullets indicated for each task. #o exactly follow the template below,
while adding you own analysis by deri!ing cur!es, shifting cur!es etc., but
do not change in the template with respect to order and design of figures$$$
%f two diagrams are side-by-side in a figure, they ha!e to remain so in your
hand-in. %f two diagrams on top of each other, they ha!e to remain so in
your hand-in. &se a font si'e of () and Times New *oman, with margins
of no less than + centimeters. "lso, make sure the analysis in one diagram
is clearly related to the other diagram beside it,on top of it.
-hile doing the analysis follow the template exactly and the page outline
below. This implies that your answers to all four tasks of the .ompulsory
test /( cannot exceed the 3 pages of analysis as designed below 0 not
including this first page. "ny answers in excess of + pages will be
truncated, such that any material in excess of + pages will be disregarded in
the grading.
1ase data of test2
3and-out2 December ), )4(+ at ().44 5#tudieser!ice6
3and-in2 December 7, )4(+ at ().44 5#tudieser!ice6
8roup work allowed2 %n principle, but then indicate which part of test
is done by which student. %ndi!idual may be
easier mode of hand-in. %f handed-in as group
all group members should hand-in the same
three pages indicating which other members
are in group and their exam numbers.
9aximum length2 + pages 0 not including this introductory page
Techonology2 9ust be handed-in electronically
Task 1 AD curve (maximum one page!)
1elow you find three diagrams that can be used to deri!e the "D cur!e.
:9;
9,P; 9,P

i; i; ";
:9
i i
"
%#
<; <
P;
P "D
<; <
Derive the AD curve and explain stepwise??
"s Price increases from P to P;, balance from 9,P to 9,P; is reduced in the :9 relation.
The LM cur!e shifts up, since with this gi!en le!el of output, the lower real money supply
leads to an increase in the interest rate, i to i. "lso, the output Y decreases to Y. #ince the
economy mo!es along the %# cur!e, we get the e=uilibrium 5from A to A6. %ncrease in the
price le!el e!entually leads to a lower demand of goods and lower output.
What does the AD curve express and what is the areviation?
&nder e=uilibrium conditions in the goods and financial market, the "D cur!e expresses
the effect of price le!el on output. "D means "ggregate Demand.
%nterest rate, i
9oney, 9,P
%nterest rate, i
utput, <
Pri!e, P
utput, <
Task 2 AS curve (maximum half a page!)
&se the e=uation for wage determination and the for price determination.
Derive the A! curve mathematically and explain shortly what it dependson.
1y using the e=uation for wage determination 5
W=P
e
F (u !)
6 and the e=uation for price
determination 5
P=((+ ")W
6. "fter eliminating the nominal wage W from the e=uations,
we will set them e=ual2
P=P
e
((+ ") F (u !)
. -e assume that > and ' are constant. Then
we express the unemplyment rate in terms of output2
u=
#
L
=
L$
L
=(
$
L
=(
Y
L
where for a gi!en labor force 5:6, a lower unemployment rate 5u6 implies a higher output
5<6. Then we replace the unemployment rate obtained earlier and we get the "# relation2
P=P
e
((+ ")F ((
Y
L
!)
. The price le!el in the "# relation depends on the expected
price le!el and the le!el of output 5also on >, ' and :, which here should be taken as gi!en6.
What happens i" price expectations increase and why does it happen?
Price expectations increase from P? to P@?A aggregate supply cur!e shifts up. #ince at a gi!en
le!el of output and unemployment the increase in the expected price le!el leads to an
increase in wages, which in turn leads to an increase in prices. Thus, at any le!el of output,
the price le!el is higher 0 "# cur!e shifts up.
Task 3 Mone%ar& polic& in AS'AD (maximum half a page!)
1elow you find a diagram that can be used to analyse monetary policy in "#-"D.
Which curves shi"ts in response to a monetary expansion in the A!#AD diagram
and why $ explain stepwise%
-ith monetary expansion the "D cur!e shifts to the right, from "D to "D@, which
in the short run sets the new e=uilibrium at "@, also the output from <B shifts to a
bigger output <@.
Price, P
utput, <
P
P;
P;;
<n <
"#;
"#
"D;
"D
"
";
";;
Task 4 $e% expor%( an) )eman)( change( (maximum one page!)
1elow you find two diagrams that can be used to analyse net exports and demand
changes.
CC
CC
< <;
< <;

trade
surplus
trade
deficit

Derive the e""ect on net exports o" a "iscal expansion assuming that the initial
e&uilirium in the upper panel is e&uilirium with alanced trade%
'xplain in a "ew ullets what is happening in the "igure% Why do we arrive at a
trade de"icit? (ow can trade de"icit e shown in oth panels aove?
&nder fiscal expansion, the demand for goods will increaseA thus there;s trade deficit, as
consumers demand more than it is being produced2 we ha!e to import more keeping
export the same.
Could we also have analysed the e""ects o" a shi"t in the "oreign demand) and what
*ind o" di""erence in two types o" curves would have to e considered in the upper
panel?
-hen foreign demand rises, it causes higher export for a gi!en domestic importA
net export 5ND6 shifts upwards causing demand for domestic good shifting
upwards as well 5upper panel6.
utput,
<
utput,
<
Demand
Net exports,
ND
+,-./ W-,01 Andrea 2allini 323234) Andre#Daniel 'hte 324315)
Alerte Alexandre 6onsalve 325738