ECS2602 ASSIGNMENT 2
SEMESTER 1 - 2022
549754
1
,1. The fully exogenous variables in the IS-LM model are ...
1. government spending and investment spending.
2. investment spending and money supply.
3. interest rate and government spending.
4. government spending and money supply.
5. level of output and income and the interest rate.
Explanation:
The correct option is 4. In the IS-LM model, the most important variables that we wish to
explain are the level of output and income (Y) and the interest rate (i). These variables are
therefore our endogenous or dependent variables.
Any variable that is influenced by these endogenous variables is by implication also an
endogenous variable.
In the IS-LM model, the value of the exogenous variables is determined by the model
builder, while the values of the endogenous variables are determined by the exogenous
variables and the specifications of the model.
2
,3
, 2. Which of the following statements are correct?
a. According to the IS-LM model investment spending will increase if there is a
decrease in the interest rate and/or an increase in income or output.
b. The higher the interest rate, the higher the cost of borrowing will be and the higher
the opportunity cost of holding own funds will be.
c. There is a positive relationship between the level of output and income and the
level of investment spending and a negative relationship between interest rate and
level of investment spending.
d. Investment takes place when firms increase their spending on capital goods.
1. a, b, c and d
2. Only a, b and d
3. Only b, c and d
4. Only a, c and d
5. Only a and d
Explanation:
The correct option is 1. Statement a is correct. Investment spending is a negative function of
the interest rate (i↓ → I↑) and a positive function of the level of output and income (Y↑ → I↑).
Statement b is correct. The interest rate as the opportunity cost of your own funds refers to
the fact that, if you put your own funds into bonds or some other financial assets, or lend
these funds to someone else, you will be able to earn interest on them. Statements c and d
are correct.
4
SEMESTER 1 - 2022
549754
1
,1. The fully exogenous variables in the IS-LM model are ...
1. government spending and investment spending.
2. investment spending and money supply.
3. interest rate and government spending.
4. government spending and money supply.
5. level of output and income and the interest rate.
Explanation:
The correct option is 4. In the IS-LM model, the most important variables that we wish to
explain are the level of output and income (Y) and the interest rate (i). These variables are
therefore our endogenous or dependent variables.
Any variable that is influenced by these endogenous variables is by implication also an
endogenous variable.
In the IS-LM model, the value of the exogenous variables is determined by the model
builder, while the values of the endogenous variables are determined by the exogenous
variables and the specifications of the model.
2
,3
, 2. Which of the following statements are correct?
a. According to the IS-LM model investment spending will increase if there is a
decrease in the interest rate and/or an increase in income or output.
b. The higher the interest rate, the higher the cost of borrowing will be and the higher
the opportunity cost of holding own funds will be.
c. There is a positive relationship between the level of output and income and the
level of investment spending and a negative relationship between interest rate and
level of investment spending.
d. Investment takes place when firms increase their spending on capital goods.
1. a, b, c and d
2. Only a, b and d
3. Only b, c and d
4. Only a, c and d
5. Only a and d
Explanation:
The correct option is 1. Statement a is correct. Investment spending is a negative function of
the interest rate (i↓ → I↑) and a positive function of the level of output and income (Y↑ → I↑).
Statement b is correct. The interest rate as the opportunity cost of your own funds refers to
the fact that, if you put your own funds into bonds or some other financial assets, or lend
these funds to someone else, you will be able to earn interest on them. Statements c and d
are correct.
4
