(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)
