Question

1- Suppose that consumers in Turkey became more pessimistic about the health of the Turkish economy due to the bad news from Europe and they started to expect a decline in their future income. Use AD-AS analysis to answer the following questions.

a) What happens to the output and price level in the short run. Does the economy enter to a bust or boom period? (10 pts)

b) Explain the long run adjustment process without the intervention of policymakers. (15 pts)


2- In Burgazistan, desired consumption, taxes, government spending, investment and net exports are given as follows:

                                                           C=800+0.8 YD,
                                                      T=200,
                                                                  G=200,
                                                                  I=300,
                                                               NX=200

a) State the equilibrium condition and find the equilibrium income. (10 pts)

b) How much does the equilibrium income increase if government spending increases by 100? (15 pts)

3- Explain the impact on the following events on the money market equilibrium and equilibrium interest rates. (25 pts):

a) Real GDP increases due to an increase in exports (12.5 pts)

b) Central bank sells government bonds in the private financial markets. (12.5 pts)


4- State whether the following actions increase, decrease or do not change the money supply. (5 pts each, Total : 25 pts):

- Central bank made an open market purchase of 1 Million TL. ___________
- Central bank increased the required reserve ratio. ___________
- Central bank provided 1 Million TL worth of loans to the banking system. ___________
- Banks decreased their excess reserves because the economy is in the expansion phase. ____________
- Agents increased their curreny holding due to a financial panic. ___________

Answer 1

1.

a.) In the short run, the aggregate supply is upward sloping and the aggregate demand curve intersects with it to establish the equilibrium level of national income and price level in the economy. When there is pessimistic trend in the economy, then the demand curve wil shift to the left, as shown in the figure. As a result, the immediate affect will be that the national income will come down and the price level will also come down, which means the economy enters into a bust period.

b.) In the long run, the aggregate supply curve is a vertical line, because in the long run the economy is expected to function at full employment levels. The aggregate demand curve intersects with it to establish the equilibrium level of national income and price level in the economy. When there is pessimistic trend in the economy, then the demand curve wil shift to the left, as shown in the figure. As a result, the immediate affect will be that the price level will also come down. In this case, there is no change in the national income, and only the price level will reduce.