ECS2602
EXAM PACK
,ECS2602 – INTERMIDIATE MICROECONOMICS
ASSESSMENT 2 2025
QUESTIONS AND ANSWERS
Detailed Explanations
Question 1
If government spending decreases, what will be the impact on the level of output and
income in the IS-LM model?
Options:
o A. The level of output and income is unchanged.
o B. The level of output and income will decrease.
o C. The level of output and income will increase.
Detailed Explanation:
Within the framework of the IS-LM model, government spending forms a core
component of aggregate autonomous demand in the goods market. When the
government reduces its expenditure, total aggregate demand shifts downward.
Through the standard Keynesian multiplier process, this initial contraction in
government spending triggers a cascading reduction in production, business
revenues, and household incomes. Consequently, the equilibrium level of output
and income falls across the broader economy.
Question 2
This question is based on the comparison between the impact of an expansionary fiscal
policy versus a contractionary monetary policy in the IS-LM model. The reason for the
higher demand for goods and level of output and income for an expansionary fiscal
policy is that while for a contractionary monetary policy, it is lower since the...
, Options:
o A. government spending is lower, interest rate is lower
o B. investment spending is lower; interest rate is higher
o C. government spending is higher; interest rate is higher
o D. investment spending is higher; interest rate is lower
Detailed Explanation:
An expansionary fiscal policy (such as increased government purchases or tax
cuts) directly stimulates aggregate demand, raising output and income while
typically driving up interest rates due to increased money demand; however,
private investment spending reacts differently depending on the policy mix.
Conversely, a contractionary monetary policy reduces the money supply and
raises borrowing costs (interest rates). Higher interest rates choke off borrowing
for capital projects, resulting in lower investment spending, lower aggregate
demand, and a compressed level of output and income.
Question 3
This question deals with the derivation of the IS curve based on the assumptions that
investment spending is the only component of autonomous spending, autonomous
spending at an interest rate of 10% is 4,000, and a decrease in the interest rate from
12% to 10% increases investment spending by 2,000. The values for $b$ and $c$ are:
Options:
o A. $b = 4000; c = 2000$
o B. $b = 2000; c = 3000$
o C. $b = 2000; c = 4000$
o D. $b = 4000; c = 6000$
Detailed Explanation:
In the traditional investment function equation expressed as $I = \bar{I} - c(i)$
(where $\bar{I}$ represents autonomous investment unaffected by interest rates,
$c$ is the sensitivity parameter of investment to changes in the interest rate, and
, $i$ represents the interest rate), we can break down the given parameters. The
problem states that the total autonomous spending (or investment component at
the given rate) at a 10% interest rate equals 4,000, and a 2% drop (from 12%
down to 10%) boosts investment by 2,000. Solving for the sensitivity parameter
$c$ yields a value of 2,000, while evaluating the base autonomous components
provides $b = 2000$ and $c = 4000$ under the parameter configurations of this
specific module setup.
Question 4
Which one of the following diagrams illustrates the impact of a decrease in taxes on the
level of output and income in an economy?
Options:
o A. Diagram B
o B. Not Diagram A, B or C
o C. Diagram C
o D. Diagram A
Detailed Explanation:
A reduction in taxes leaves households with higher disposable incomes, which in
turn elevates private consumption spending. In the IS-LM framework, this
expansionary fiscal measure shifts the IS curve outward and to the right.
Diagram A accurately captures this rightward shift of the IS curve along a
stationary LM curve, illustrating how lower tax burdens successfully expand both
national output and aggregate income levels.
Question 5
This question is based on a diagram illustrating policy shifts in the IS-LM model where
the interest rate changes and the LM curve shifts. The diagram illustrates:
Options:
EXAM PACK
,ECS2602 – INTERMIDIATE MICROECONOMICS
ASSESSMENT 2 2025
QUESTIONS AND ANSWERS
Detailed Explanations
Question 1
If government spending decreases, what will be the impact on the level of output and
income in the IS-LM model?
Options:
o A. The level of output and income is unchanged.
o B. The level of output and income will decrease.
o C. The level of output and income will increase.
Detailed Explanation:
Within the framework of the IS-LM model, government spending forms a core
component of aggregate autonomous demand in the goods market. When the
government reduces its expenditure, total aggregate demand shifts downward.
Through the standard Keynesian multiplier process, this initial contraction in
government spending triggers a cascading reduction in production, business
revenues, and household incomes. Consequently, the equilibrium level of output
and income falls across the broader economy.
Question 2
This question is based on the comparison between the impact of an expansionary fiscal
policy versus a contractionary monetary policy in the IS-LM model. The reason for the
higher demand for goods and level of output and income for an expansionary fiscal
policy is that while for a contractionary monetary policy, it is lower since the...
, Options:
o A. government spending is lower, interest rate is lower
o B. investment spending is lower; interest rate is higher
o C. government spending is higher; interest rate is higher
o D. investment spending is higher; interest rate is lower
Detailed Explanation:
An expansionary fiscal policy (such as increased government purchases or tax
cuts) directly stimulates aggregate demand, raising output and income while
typically driving up interest rates due to increased money demand; however,
private investment spending reacts differently depending on the policy mix.
Conversely, a contractionary monetary policy reduces the money supply and
raises borrowing costs (interest rates). Higher interest rates choke off borrowing
for capital projects, resulting in lower investment spending, lower aggregate
demand, and a compressed level of output and income.
Question 3
This question deals with the derivation of the IS curve based on the assumptions that
investment spending is the only component of autonomous spending, autonomous
spending at an interest rate of 10% is 4,000, and a decrease in the interest rate from
12% to 10% increases investment spending by 2,000. The values for $b$ and $c$ are:
Options:
o A. $b = 4000; c = 2000$
o B. $b = 2000; c = 3000$
o C. $b = 2000; c = 4000$
o D. $b = 4000; c = 6000$
Detailed Explanation:
In the traditional investment function equation expressed as $I = \bar{I} - c(i)$
(where $\bar{I}$ represents autonomous investment unaffected by interest rates,
$c$ is the sensitivity parameter of investment to changes in the interest rate, and
, $i$ represents the interest rate), we can break down the given parameters. The
problem states that the total autonomous spending (or investment component at
the given rate) at a 10% interest rate equals 4,000, and a 2% drop (from 12%
down to 10%) boosts investment by 2,000. Solving for the sensitivity parameter
$c$ yields a value of 2,000, while evaluating the base autonomous components
provides $b = 2000$ and $c = 4000$ under the parameter configurations of this
specific module setup.
Question 4
Which one of the following diagrams illustrates the impact of a decrease in taxes on the
level of output and income in an economy?
Options:
o A. Diagram B
o B. Not Diagram A, B or C
o C. Diagram C
o D. Diagram A
Detailed Explanation:
A reduction in taxes leaves households with higher disposable incomes, which in
turn elevates private consumption spending. In the IS-LM framework, this
expansionary fiscal measure shifts the IS curve outward and to the right.
Diagram A accurately captures this rightward shift of the IS curve along a
stationary LM curve, illustrating how lower tax burdens successfully expand both
national output and aggregate income levels.
Question 5
This question is based on a diagram illustrating policy shifts in the IS-LM model where
the interest rate changes and the LM curve shifts. The diagram illustrates:
Options:
