RECOMMENDED SOLUTIONS TO ECON.
1266 MACROECONOMICS 2 FINAL
EXAMINATION PAPER: SEMESTER | 2012.
,,1 HAVE

INSERTED MY RECOMMENDED
SOLUTIONS IN BOLD ITALICS AFTER EACH
OF THE QUESTIONS ON THIS
EXAMINATION PAPER."
Question

I

For this question you can choose to answer either (A), or (B)' but NOT BOTH.
A.
Assume that the Asset Demand for money is relatively elastic or flat, and that the
Investment Demand Curve, is relatively inelastic or steep.
Compare and contrast the effect of an increase in Money Supply upon the overall level of economic activity, using both the traditional transmission mechanism, and in the IS'LM model. Are there any major differences between these 2 models?

Your answer should include all relevant diagrams.
(20 marks

IN RELATION TO THIS QUESTION, STUDENTS WOALD BE EXPECTED TO

IDENTIFY AND EXPILIIN THE TRADITIONAL TRANSMISSION
MECHANISM AND BRIEFLY EXPLAIN ITS CONSTITUENT PARTS;
NAMELY MONEY MARKET, THE INVESTMENT DEMAND CARVE, AND
FINALLY THE 45 DEGREE LINE PRODUCT MARKET MODEL.

THEY WOALD BE EXPECTED TO BRIEFLY DESCRIBE THE EFFECT OF
AN INCREASE IN MONEY SAPPLY WHEN THE ASSET DEMAND CURVE
FOR MONEY IS RELATIVLY FLAT AND THE INVESTMENT DEMAND
CT]RVE IS RELATIVELY STEEP. BETTER ANSWERS WOALD EXPLAIN
WHAT THE LATTER 2 SLOPES INDCATE ABOUT THE PARTICULAR
MARKETS.
ANSWERING THIS QAESTION STUDENTS SHOALD IDENTIFY THE
2 PARTICULAR WEAKNESSES THAT CHARACTERISE THE TRADITIONAL
TRANSMISSION MECHANISM. THE ARTE THE 2 PROBLEMS OF
TryHEN

INTERDEPENDENT VARIABLES AND IN TARN UNCERTAIN OR
ANPREDICTABLE OR INDETERMINATE OUTCOMES OR RESALTS. OK.
AS PART OF THEIR ANSWERS STADENTS SHOULD CERTAINLY MENTION
THE FEEDBACK EFFECT OR THE RELATION BETWEEN CHANGES IN
GDP OR Y, AND IN TARN CHANGES IN THE LEVEL OF TRANSACTIONS
DEMAND FOR MONEY.

FINALLY STUDENTS SHOALD EXPLAIN THE IS.LM MODEL BRIEFLY
AND SHOW THE EFFECTS