Macroeconomics

Instructions:

Answer all questions. Apart from the theoretical rigour of your responses, marks are allocated to the overall presentation of your assignment. Specifically, when needed or asked, only computer-generated diagrams will be accepted. Also, clearly mark your responses with respect to the questions that you are answering. Your responses should be typed in 12pt Times New Roman font, double-spaced and justified alignment, with each question starting on a new page. Failure to adhere to these guidelines may result in your assignment being returned without comments.   

Question 1 (10 marks)

The financial crisis that hit the United States first and then the world economy starting in fall 2007 meant that the future prospects of many firms looked gloomy at best for some time. Comment on the effect of a recession on the investment curve (only) and on the level of savings, investment, and the equilibrium real interest rate. Show your answer using a graph.

 Question 2 (10 marks)

How will a fall in domestic investment affect the trade surplus and net capital outflows in the domestic economy, the trade deficit and capital inflows in the rest of the world, investment in both economies, and the world real interest rate?

 Question 3 (10 marks)

Some developing countries have suffered banking crises in which depositors lost part or all of their deposits (in some countries there is no deposit insurance). This type of crisis decreases depositors' confidence in the banking system. What would be the effect of a rumour about a banking crisis on checkable deposits in such a country? What would be the effect of on reserves and the monetary base?

 

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