sample questions of ISI ME 2 , 2010

Posted by vishruti on May 01, 2010; 5:04pm
URL: http://discussion-forum.276.s1.nabble.com/sample-questions-of-ISI-ME-2-2010-tp4990586.html

QUESTION 1

(a) Imagine a closed economy in which tax is imposed only on income. The
government spending (G) is required (by a balanced budget amendment
to the relevant law) to be equal to the tax revenue; thus G = tY , where t
is the tax rate and Y is income. Consumption expenditure (C) is proportional
to disposable income and investment (I) is exogenously given.

(i) Explain why government spending is endogenous in this model.

(ii) Is the multiplier in this model larger or smaller than in the case in
which government spending is exogenous?

(iii) When t increases, does Y decrease, increase or stay the same? Give
an answer with intuitive explanation.

(b) Consider the following macroeconomic model with notation having usual
meanings: C = 100 + 1.3Y (Consumption function), I = 500
r (Investment function), MD = 150Y +100−1500r (Demand for money function)
and MS = 2100 (Supply of money). Do you think that there exists an
equilibrium? Justify your answer using the IS-LM model.