Assume the model: |

Assume the model: And pay attention to the model in answering the questions

Y = C + I + G + X – M

C = a + b Yd   where a > 0 and 0 < b < 1

I = f (i)             but I ≠  f (Y)        ie, MPI = 0

G = Go

Ms = Mso       Ms = money supply/stock

Tx = Txo ……..meaning that Tx ≠ f ( Y )

Md = Mt(Y)+ Ml(i)  [Mt = transactions demand; Ml = liquidity preference demand]

X = Xo     X = exports

M = Mo + mY  where Mo is autonomous imports, and m is the marginal propensity to import

In each of the following cases, indicate the effect of the given autonomous change (or policy measure) on each of the listed variables. In each case indicate whether the listed variable increases in value, decreases, or does not change.

Note: Answer beside the listed variable. For example, if in I an increase in the money supply does not bring about a change interest rates, write “does not change” beside “interest rates” at I, 1. And if an increase in the money supply causes a decrease in the level of income, write “decreases” beside “level of income” at I, 2

I.     An increase in the money supply:

1.   Interest rates

2.   Level of income

3.   Imports

4.   Investment

5.   Government spending

II.   A decrease in the public’s liquidity preference:

6.    Level of income

7.    Investment

8.    Saving

9.    Consumption

10.        Exports

III. An increase in the marginal propensity to import:

11.        Income

12.        Amount of money demanded for transactions purposes

13.        Bond prices

14.        Saving

15.        Investment

16.        Consumption

17.        Money supply

18.        Exports

IV.   An increase in exports:

19.        Income

20.        Interest rates

21.        Imports

22.        Money supply

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