Posted: May 8th, 2015

Economics

Assignment

MAE 202: National Economic Policy

T1, 2015

Due: 15th May 2015

This assignment is worth 20% of your overall assessment in this unit.

Submission: Before commencing the assignment you must read the notes below and also in page 3.

• No referencing is required for citation from the textbook.

• Answer all three of the questions.

• You must not scan diagram from the textbook, or any other electronic or printed sources. You must draw it.

• 1500 word limit is not binding. But please note that a long answer is not always a good answer; a good answer is concise and to the point.

You must also read the following sections in the Unit Outline:

• Submission and assessment policy
• Plagiarism

Question 1

Suppose that the policymakers want to increase the level of output while keeping the interest rate unchanged. What policy or policy mix would you recommend to achieve the above goal? Using the IS-LM framework, explain clearly why you would recommend it and how it would work.

[5 marks]

Question 2

Consider a situation in which a country has suffered from a large negative shock to aggregate demand but at the same time is facing very low interest rate.

1. a) Explain, using the IS-LM diagram(s), the likelihood of restoring the economy through an expansionary monetary policy.
2. b) Compare the effectiveness of fiscal policy relative to monetary policy in the above context.

[5 + 3 = 8 marks]

Question 3

The Solow growth model is based on the assumption of an exogenous technological progress. We relax this assumption and consider that technological progress is, to a large extent, determined by Research and Development (R&D). Now suppose, the government has increased its expenditure on R&D. Explain the long-run impact of this policy onboth growth and living standards.

[7 marks]

(In all questions, draw diagram if necessary)