ASSIGNMENT 02
LEARNING UNITS 4, 5 and 6
DUE DATE: 2021/06/28
UNIQUE NUMBER: 523068
This assignment contributes 40% towards your semester mark.
Please ensure that this assignment reaches the university before the due date.
Answer all questions on a mark-reading sheet.
1. Which of the following are fully exogenous variables in the IS-LM model?
1. Level of output and income, interest rate, investment, consumption spending.
2. Government spending, taxation, marginal propensity to consume, interest rate.
3. Interest rate, demand for money, the quantity of money.
4. Consumption spending, investment, government spending.
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. Which of the following statements are correct?
In the IS-LM model:
a. Investment is influenced by the interest rate only.
b. Investment is influenced by exogenous factors such as expectations, business
confidence and regulations.
c. Investment is influenced by the interest rate and the level of output.
d. Investment is negatively related to the interest rate and the level of output.
e. Investment is negatively related to the interest rate and positively related to the level
of output.
1. Only a and b
2. b, c and e
3. b, c and d
4. a and e
5. Only c and e
2
, ECS2602/001/3/2021
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 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.
3. Which of the following statements is/are correct?
a. The IS curve represents the combinations of the level of output and income and the
interest rate where the financial market is in equilibrium.
b. The IS curve represents the combinations of the level of output and income and the
interest rate where the goods market is in equilibrium.
c. To derive the IS curve, we change the level of output and income to determine the
effect on the interest rate.
d. In deriving the IS curve, we assume that an increase in interest rate decreases the
level of investment spending, shifts the ZZ curve downwards, and reduces the level
of output and income.
1. a and c
2. b and c
3. b and d
4. a and d
5. Only b
The correct option is 3. The IS curve represents equilibrium in the goods market and therefore
statement b is correct and statement a is incorrect. To derive the IS curve we change the interest
rate to determine the effect on the level of income and not the other way round. Therefore,
statement c is incorrect. Statement d is correct. To derive the IS curve, we change the interest
rate to determine the effect on the level of output and income. In the goods market the ZZ curve
will shift downwards because of the decrease in investment spending
Question 4 deals with the derivation of the IS curve and are based on the following information
and diagrams:
The autonomous spending at an interest rate of 10% is 3 000.
A decrease in the interest rate from 10% to 8% increases investment spending by 1
000.
3
, 4. Which of the following statements are correct?
a. The value for a is 3 000.
b. The values for b and c are: b = 2 000 and c = 3 000
c. The values for b and c are: b = 3 000 and c = 4 000
d. The values for d and e are: d = 15 000 and e = 20 000
e. The values for d and e are: d = 10 000 and e = 15 000
f. The values for f and g are: f = 10% and g = 8%
g. The values for f and g are f = 8% and g = 10%
h. The values for h and i are the same as the values for d and e.
4
LEARNING UNITS 4, 5 and 6
DUE DATE: 2021/06/28
UNIQUE NUMBER: 523068
This assignment contributes 40% towards your semester mark.
Please ensure that this assignment reaches the university before the due date.
Answer all questions on a mark-reading sheet.
1. Which of the following are fully exogenous variables in the IS-LM model?
1. Level of output and income, interest rate, investment, consumption spending.
2. Government spending, taxation, marginal propensity to consume, interest rate.
3. Interest rate, demand for money, the quantity of money.
4. Consumption spending, investment, government spending.
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. Which of the following statements are correct?
In the IS-LM model:
a. Investment is influenced by the interest rate only.
b. Investment is influenced by exogenous factors such as expectations, business
confidence and regulations.
c. Investment is influenced by the interest rate and the level of output.
d. Investment is negatively related to the interest rate and the level of output.
e. Investment is negatively related to the interest rate and positively related to the level
of output.
1. Only a and b
2. b, c and e
3. b, c and d
4. a and e
5. Only c and e
2
, ECS2602/001/3/2021
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 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.
3. Which of the following statements is/are correct?
a. The IS curve represents the combinations of the level of output and income and the
interest rate where the financial market is in equilibrium.
b. The IS curve represents the combinations of the level of output and income and the
interest rate where the goods market is in equilibrium.
c. To derive the IS curve, we change the level of output and income to determine the
effect on the interest rate.
d. In deriving the IS curve, we assume that an increase in interest rate decreases the
level of investment spending, shifts the ZZ curve downwards, and reduces the level
of output and income.
1. a and c
2. b and c
3. b and d
4. a and d
5. Only b
The correct option is 3. The IS curve represents equilibrium in the goods market and therefore
statement b is correct and statement a is incorrect. To derive the IS curve we change the interest
rate to determine the effect on the level of income and not the other way round. Therefore,
statement c is incorrect. Statement d is correct. To derive the IS curve, we change the interest
rate to determine the effect on the level of output and income. In the goods market the ZZ curve
will shift downwards because of the decrease in investment spending
Question 4 deals with the derivation of the IS curve and are based on the following information
and diagrams:
The autonomous spending at an interest rate of 10% is 3 000.
A decrease in the interest rate from 10% to 8% increases investment spending by 1
000.
3
, 4. Which of the following statements are correct?
a. The value for a is 3 000.
b. The values for b and c are: b = 2 000 and c = 3 000
c. The values for b and c are: b = 3 000 and c = 4 000
d. The values for d and e are: d = 15 000 and e = 20 000
e. The values for d and e are: d = 10 000 and e = 15 000
f. The values for f and g are: f = 10% and g = 8%
g. The values for f and g are f = 8% and g = 10%
h. The values for h and i are the same as the values for d and e.
4
