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1.Suppose that Bruce is observed to behave as follows. When px < py he buys exactly twice as much x as y (so y = 0.5x) and when px > py he buys exactly half as much x as (soy=2x) When px =py hebuyseitheronlytwice or halfasmuch x asy(and x+y is the same for either proportion in this case). He always spends his entire income.

(a) Draw indifference curves which are consistent with Bruce’s behaviour. [Hint: these probably have a part which is “bowed out”.] (5 marks)

(b) Draw Bruce’s demand curve for good x when m = 12 and py = 1. (5 marks) [Hint: for (b) think about the demand for x when px is initially large, then for progressively smaller px until it is equal to 1, and then gets close to zero.]

2.Which of the following statements is/are correct? In the IS-LM, model a change in a government spending will have an impact on the goods market first where it influences a number of variables, which eventually impact on the financial market. b. monetary policy will have an impact on the financial market first where it influences a number of variables, which eventually affect the goods market. C. the nominal money supply will have an impact on the goods market first where it influences a number of variables which eventually impact on the financial market. d. taxes will have an impact on financial market first where it influences a number of variables, which eventually impact on the goods market. .. fiscal policy will have an impact on the goods market first where it influences a number of variables, which eventually impact on the financial market. monetary policy will have an impact on the goods market first where it influences a number of variables, which eventually impact on the financial market. 1. 2. 3. 4. 5. a, b, d and e Only a, b and e c, d and f b and c None of the options 1 to 4 7