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LUBS1951
Economic Theory and Applications
Semester 2 Mock 2023/2024
Answer all of questions
1. This question concerns a person in an economy in which they only consume
two commodities, coffee and cake. This person always consumes these commodities together in a fixed ratio; whenever they drink a cup of coffee, they eat a single cake.
This person has a budget of £99 to spend on coffee and cake.
a. Draw a single diagram showing the relevant indifference curves and budget lines for this person to show their optimal consumption bundle for the three different examples of prices for coffee and cake listed below. Put the quantity of coffee on the horizontal axis of your diagram. Fully label your diagram, identifying the quantities of coffee and cake for the three optimal consumption bundles.
i. Price of coffee is £2 and the price of a cake is £1.
ii. Price of coffee is £8 and the price of a cake is £1.
iii. Price of coffee is £10 and the price of a cake is £1. [16 Marks]
b. Using the information from part a, draw an individual demand curve for coffee for this person. Briefly explain how you used the information from part a to create the demand curve. [4 Marks]
2. Explain in words the similarities and differences between initial US policy
responses to the 1930s Great Depression versus the 2008 Financial Crisis and include a short explanation of whether this could help explain why there was no second Great Depression after 2008. Use the three-panel graph of the IS- LM-PC model to illustrate and explain how a deflationary spiral developed in the US in the early 1930s. Illustrate, explain, and critically discuss the strengths and limitations of the response of President Franklin Delano Roosevelt to try to solve the deflationary spiral. [50 marks]
3. Provide a broad overview of the evolution of cross-country income differences between different groups of countries between 1950 and the present. Use the two-panel Solow growth model to illustrate, explain, and critically discuss whether capital accumulation or technological progress is the most likely driver of long-run economic growth. With reference to other models taught on the module, critically discuss the strengths and limitations of the original Solow growth model with technological progress. [50 marks]