INTERMEDIATE MACROECONOMICS-TUTORIAL SHEET 1
1. Explain and graphically show aggregate demand and aggregate supply
2. Explain briefly the wealth effect and the interest rate effect in relation to price changes
3. Using Algebra, derive the autonomous spending multiplier
4. Given the structural equations for an economy to be 𝐶 = 50 + 0.80𝑌𝑑 , 𝐼 = 50, 𝐺 =
50, 𝑇 = 50. (i) calculate and interpret value of the investment multiplier, government
spending multiplier (ii) Find the equilibrium level of Income. (iii) Calculate the new
level of income when government increases its spending to 70.
5. Suppose Zambia is an open economy in the short run described by the following
equations: Y= C+I+G, Y=4000 C= 240+0.8(Y-T) I=740-20r T=800 G=500
r=2%, Where Y is national output/income, C is consumption, I is investment, r=r* is
world interest rate, G is government spending, T is taxes.
a) Solve for national saving, private saving, Investment.
b) Graph the results
6. In the Keynisian Cross, assume that the consumption function is given by
𝐶 = 200 + 0.75(𝑌 − 𝑇)
Planned investment is 100, Government purchases and taxes are both 100
a) Graph planned expenditure as function of income
b) What is the equilibrium level of income?
c) If government purchases increase by 125, what is the new equilibrium income?
d) What level of Government expenditure is needed to achieve an income of 1600?
7. Use the Keynesian Cross to predict the impact of the following on planned expenditure
a) An increase in government purchases
b) An increase in Taxes
c) An increase in the Interest rate
8. Suppose that a closed economy’s national equation is expresses as 𝐶 = 1000 +
0.5𝑌𝑑 , 𝐼 = 200, 𝑇 = 160, 𝐺 = 400
a) Calculate equilibrium level of output (Y), Consumption and Disposable Income
b) Suppose that the government increased the expenditure by 25%, Calculate
equilibrium level of output, Consumption and Disposable income.
9. Suppose that the money demand function is (𝑀⁄𝑃)𝑑 = 1000 − 100𝑟, where r is the
interest rate in percent. The Money Supply M is 1000 and the price is 2
a) Graph the supply and demand for real money balances
b) What is the equilibrium interest rate?
c) Assume the price level is fixed, what happens to the equilibrium interest rate if
supply of money is raised from 1000 to 12000?
d) If the Central Bank wishes to raise the interest rate to 7, what money supply
should it set?
10. Consider the economy of Djibouti.
a) The consumption function is given by 𝐶 = 200 + 0.75(𝑌 − 𝑇), Investment
function is 𝐼 = 200 − 25𝑟, Government expenditure and taxes are both 100.
Derive the IS equation
b) The money demand function is (𝑀 ⁄𝑃)𝑑 = 𝑌 − 10𝑟. The money supply M is
1000 and the price level is 2. Derive the LM equation
c) Find the equilibrium interest rate and the equilibrium level of income
d) Suppose Government expenditure increases to 150. Derive the new IS equation.
What are the new equilibrium interest rate and level of Income?
e) Suppose instead that the money supply is raised to 1200. Derive the new LM
equation. What are the new equilibrium interest rate and income?
f) With the initial values of the monetary and fiscal policy, suppose the price level
rises from 2 to 4, what happens? What are the new equilibrium interest rate and
income?
11. Using the IS-LM model,
a) What would be the impact of an increase in taxes on interest rate, Income,
Consumption and Investment?
b) What would be the impact of an increase in the money supply on interest rate,
Income, Consumption and Investment?
c) What would be the impact of an increase in Government purchases on Interest
rate, Income, Consumption and Investment?
12. Suppose the government wants to increase the investments in Zambia but keep the
current output constant. In the IS-LM model, what mix of monetary and fiscal policies
should the government use to achieve this goal?
13. Suppose you are a member of economic policy advisory team for the government.
Suggest a policy mix to achieve an increase in output while keeping the interest rate
constant. Support your argument with an IS-LM model
