Submission should be typed in 12-point font, 1.5 spaced.

If using any references, please use the Harvard referencing style (e.g. Surname, 1950, title, pp. 50-9, place, publisher, etc.)  and please use sources which are easily available and accessible.

References should be placed in brackets and at the end of the document, not as footnotes.

The assignment has five questions, with sub-parts in each question – answer all questions.

If you need any additional information on how questions should be solved, I can provide more material.

Graphs/Figures should be inserted in the appropriate places in the text.

This year we were covering:

(i) Neo classical model with two markets using – Robinson-Crusoe centralised and decentralized allocations of goods (this one with 1 agent and 2 markets).

Keynes of General Theory with introduction and assumptions including differences between Neo classical and Keynesian theories and discussing the saving-investment causation issue (the lecturer was explaining that Investment drive Savings and not the other way). Also understanding differences between ‘”Keynes economics and Keynesian economics” and building Keynesian cross and deriving ISLM model from it.

Keynesian Economics including Aggregate demand curve (AD) analysis; Keynesian under-full employment equilibrium - why wage cut is not the solution to the problem of unemployment, with introduction to Michal Kalecki and the Post Keynesians.

Aggregate supply curve, Philips curve and natural rate of unemployment.

Hysteresis, Sacrifice ratio, Monetary policy: New consensus Macro I including: Hysteresis in the NRU (numerical example) and the Sacrifice ratio and Monetary policy with Preference function, Loss function, MR-AD and IR rule.

Debt, deficit, and fiscal policy using debt deficit budgetary arithmetic (new consensus analysis) and Ricardian equivalence model.

(I can provide additional materials for it.)

Sources/books that has been provided to us as a source of information (and could be used as sources to solve questions):

1.       Mankiw, G. N (2005). Macroeconomics, VI edition, New York: Worth Publishers.

2.       Hillier, Brian (1990). The Macroeconomic Debate: Models of the Closed and Open Economy, Oxford: Blackwell.

3.       Bhaduri, A (1986). Macroeconomics: The Dynamics of Commodity Production, London: Macmillan4. Wendy Carlin and

4.       Wendy, C., Soskice, D (2015). Macroeconomics: Institutions, Instability, and the Financial System, Oxford University Press: Oxford, UK.

       5.   King, J.E. (2015). Advanced Introduction to Post Keynesian Economics, Edward Elgar: Massachusetts

Questions:

1.Consider the following IS/LM model for a closed economy:

? = ?(? − ?) + ?(?) + (? − ?)

(M / P)d = L(i,Y)

Assume that the real interest rate (?) is given by ?=?−?e, where ?e represents expected inflation, and ? denotes the nominal interest rate. Answer the following:

(i) What happens to output and interest rate in this model, when a fall in the price level is expected in the future?

(ii) Suppose that the economy is in recession and the government tries to bring down the deficit by reducing its expenditures. Using this model, explain what kind of monetary policy the Central Bank should pursue to complement government’s fiscal policy to steer the economy out of recession.