NATIONAL UNIVERSITY OF SINGAPORE

Department of Economics
EC3102 Macroeconomic Analysis II
Instructor: Ho Kong Weng
Tutorial 6
Question 1
Determine whether there is a shift in the IS curve, the LM curve, or both, or neither, for
the following cases, separately. Assume expected current and future inflations are zero
and no other exogenous variable is changing.
(a) A decrease in the expected future real interest rate
(b) An increase in expected future taxes
(c) A decrease in expected future income
Question 2
President Clinton won the election in 1992 and government budget deficit reduction was
a top item in the agenda of the new administration.
(a) Explain the implications of a deficit reduction in the medium run and in the long run.
(b) What are the advantages and disadvantages of a deficit reduction package which is
backloaded (for example, reduction of $20b in the first year, and increasing gradually to
a reduction of $131b in the fourth year) ?
(c) When President Clinton presented the budget during a public address in 1993, he had
the chairman of the Fed seated beside his wife, and obviously the media broadcasted the
event and the presence of the VIPs. What was the purpose of this gesture? How can the
Feds decision to use expansionary monetary policy in the future affect the short-run
response of the economy?