Answer FOUR questions, TWO from SECTION A, and TWO from SECTION B.

Transcription

1 UNIVERSITY OF EAST ANGLIA School of Economics Main Series UG Examination INTRODUCTORY ECONOMICS ECO-4002Y Time allowed: 3 hours Answer FOUR questions, TWO from SECTION A, and TWO from SECTION B. Answer EACH SECTION in a SEPARATE answer booklet. Notes are not permitted in this examination. Do not turn over until you are told to do so by the Invigilator. ECO-4002Y Module Contact: Dr Fabio Aricò, ECO Copyright of the University of East Anglia Version 1

2 Page 2 SECTION A 1. This question focuses on an IS-LM short-term analysis. a) Derive the LM relationship using algebra (equations) and a diagrammatic representation on the (Y,r) diagram. Provide economic intuition for the meaning of the LM relationship, describing all its features and the factors affecting the position and the slope of the LM curve. [7 marks] b) Consider the following information about the goods market and the money market, and calculate the equilibrium income (Y) and interest rate (r). Illustrate this on the IS-LM diagram. C is consumption; I is investment; Ms is money supply; L1 is the transactions plus precautionary demand for money and L2 the speculative demand for money. Goods market: C = 0.6Y I = - 40r Money market: Ms = 1000 L1 = 0.5Y L2 = - 30r [7 marks] c) Suppose that the Central Bank promotes an expansionary monetary policy, and address the following points: i. Describe briefly how the Central Bank can promote expansionary monetary policy, providing at least two examples. ii. Show the effects of the expansionary monetary policy on the IS-LM diagram. iii. Compare the two equilibria (before and after the policy) and discuss the process of adjustment to equilibrium, providing economic intuition. [6 marks] d) Refer to the analysis developed at point (c). Suppose that, after the expansionary monetary policy, the Government wants to re-establish the initial level of equilibrium output (before the expansionary monetary policy). What can the Government do? Describe the possible actions of the Government with the aid of an appropriate diagrammatic representation. [5 marks]

3 Page 3 2. This questions focuses on inflation-targeting. a) Describe the fundamental characteristics of the ADI-ASI model, providing an appropriate diagrammatic representation. In particular, explain why the ADI relationship is negatively sloped on the (, Y) diagram, with particular reference to the underlying assumptions of the model. [13 marks] b) Discuss the principles of inflation-targeting and the linkages between inflation-targeting and the control of interest rates. (Hint: a good answer will also consider the role of the Taylor Rule). [12 marks] 3. This question focuses on the Phillips Curve. a) Write down the equation of the Expectations Augmented Phillips Curve, describing all its components. Represent this relationship on a diagram. [10 marks] b) Discuss the link between inflation and monetary policy (either expansionary or contractionary) according to the Accelerationist theory. [10 marks] c) Suppose that there are two economies: Economy A and Economy B. The two economies are identical. However, Economy B has experienced the effect of an oil-shock (increased oil costs). Represent the Expectations Augmented Phillips Curve of both economies on the same diagram. Which economy displays the highest equilibrium unemployment? Explain your reasoning. [5 marks] TURN OVER

4 Page 4 Start your answer to the next section in a new booklet. SECTION B 4. a) Two identical firms compete in a market with the following demand function: P=300-Q, where Q=q1+q2. The cost of production is C=30qi. Explain what is meant by each market structure and find the quantity, price and profit for each firm when the firms engage in: i. Cournot competition ii. Bertrand competition iii. Collusion. [21 marks] b) Which outcome would the consumers prefer, and which outcome would the producers prefer? [4 marks] 5. The following are all examples of problems that may cause market failure: monopoly, public goods, externalities and asymmetric information. Choose TWO types of market failure and in each case: explain how the market might fail, ways in which the market itself might correct for that failure, and appropriate government intervention in each market. [25 marks]

5 Page 5 6. Consider the demand and supply curves for the sugar market (in tonnes) in the EU: p=300-qd and p=qs. a) Derive the equilibrium outcome for this market (price and quantity), and calculate social welfare in equilibrium, breaking this down into consumer and producer surplus. Show your answers on a diagram. [6 marks] b) Calculate the price elasticity of demand at the equilibrium price and quantity. [3 marks] Now suppose that the EU is considering the following policy interventions in the market for sugar, and that you are an economic adviser to the EU. c) The government provides a production subsidy of 100 per tonne of sugar. Derive the new equilibrium and the new consumer surplus and producer surplus. Calculate the deadweight loss to society that results from this intervention, and show it on the diagram drawn in part (a). [8 marks] d) Suppose that as an alternative to the subsidy, the EU considers a support price of 200 per tonne, with the government buying up any excess supply at this price. Draw a new diagram to compare the outcome in the market to that of the subsidy. Which policy would you recommend to the EU, and why? [8 marks] END OF PAPER