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CCBS4010 Macroeconomics: Theory and Applications

Individual Assignment 2

2024-2025 S1

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(1) Please submit the assignment (in ONE pdf format) via sub-class soul page.

(2) The deadline for the assignment is 14 Dec 2024 (Sat), 23:59. Late submission

is subject to penalties as shown below.

Late by Marks

deducted

1 calendar day (24 hours) after due time 20%

2 calendar days (48 hours) after due time 50%

3 calendar days (72 hours) after due time 100%

(3) Students who are found copying homework or lending work to others for

copying will receive NO mark.

(4) Please clearly put down your class number, name and student ID on the front

page of the assignment.

(5) Answers must be handwritten in blue/black ballpoint pen on plain white

A4 size paper. [Note: Any failure to comply with the requirements here will

result in mark penalty.]

(6) Please make sure enough space is left between each sub-part of the question

and each question to facilitate marking.

(7) Round your final answers to two Decimals Places.

(8) This assignment (30 marks in total) accounts for 15% of the course assessment.

2

1. (10 marks)

Suppose due to supply chain disruptions, firms of a small open economy

increase the level of inventories. Explain the long run effects on the net

capital outflow, real exchange rate and trade balance of this small open

economy.

2. (10 marks)

Suppose an economy is initially described by the following equations:

C = 200 + 0.75 (Y - T)

I = 500 – 50r

G = 200

T = 200

M = 1000

P = 4

L = Y – 200r, where L is real money demand

a. Calculate the equilibrium interest rate (r) and output level (Y).

(6 marks)

b. Suppose the central bank adjusts the money supply (M) to keep the

interest rate (r) at the target interest rate (r*=5). What are the new

output level (Y) and the new money supply (M)? (4 marks)

3. (10 marks)

a. Suppose there is a pessimistic expectation about the future business

environment in an economy.

i. Using the AD-AS model, illustrate the short run effects on price (P) and

output level (Y) of this pessimistic expectation in a well-labelled

diagram. (3 marks)

ii. Explain with the diagram in part (a) what the central bank should do if it

aims at maintaining price stability. (3 marks)

b. Assume that people form expectations rationally and that the sticky-price

model describes the aggregate supply curve in the economy.

The central bank now determines monetary policy after firms have set

prices using information not available at the time prices were set. Explain

whether the above monetary policy can have real effects on the economy.

(4 marks)

The End