Question

Explain very briefly if the following statements are true or false. Mathematical or graphic treatment will be appreciated wherever possible or necessary.

5. In Keynes’ model the labor market clears at such a real wage rate at which both households and firms maximize their utility and profit respectively.

6. In the classical model, the quantity theory of money holds at all times postulating that real money balances are demanded in proportion to real income. Therefore, we can express this as follows: .

7. In the classical model, aggregate supply conditions uniquely fix the level of output and employment which imply that both monetary policy and fiscal policy changes in money supply and government expenditures respectively do not have real effects.

8. A rise in the propensity to consume, implying an increase in the multiplier, rotates the IS curve anti-clockwise and makes it flatter.

9. A fall in the interest-sensitivity of investment function rotates the IS curve anti-clockwise and make it flatter.

10. A rise in the interest sensitivity of the demand for money has no effect on the intercept of the LM curve with the y-axis; it shifts the intercept with the vertical axis upward, rotating it clockwise direction about the horizontal intercept and making it flatter.

11. Given nominal money supply, a rise in the price level shifts the LM curve leftward with no change in the slope.

12. Aggregate demand in the classical model is determined by consumption demand, investment demand and excess of real money balances over the full employment level of output. This may be represented by the following equation:  

Answer 1

Answer 5.) True.

Answer 6.) True. The price level (and the nominal wage rate) depends on the level of the money supply. The rate of inflation depends on the rate of growth of the money supply.

[Since the equation was not given in the question, this answer is only an assumption.]

Answer 7-12.) PFA .

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