Microeconomics and Macroeconomics: An Economic Analysis

Part-I Microeconomics (50 marks)

1. Consider the residential property market (i.e. buyers and sellers of houses) in Dublin, and the mortgage market for those properties. 

 

A. Describe and explain the type of market structure in which mortgage suppliers operate, including a critical characterisation of the key underlying market characteristics/assumptions. (20 marks)

 

B. Two lenders announced that they will leave the Irish market next year. Use the demand and supply model to predict and explain how such decision of exit can affect competition in the market for mortgages, and how the residential property market might be affected. Make any extra assumption you deem appropriate. Use diagrams to support your arguments. (30 Marks)

Question 2 (50 marks) 

 

Consider the IS-LM model to represent the economy in the short run. 

 

The development of new variants of SARS-CoV-2, the virus that causes covid-19, has challenged the idea amongst many economists that the effects of the early 2020 shock to an economy can be treated as a one-time shock (i.e. the economy is affected by a temporary shock and then would eventually return to the levels pre-pandemic). Consider a new scenario in which the coronavirus pandemic persists over the next few years (e.g. three-five) on a significant scale and, as a consequence, there will be recurrent outbreaks leading governments to oscillate between imposing and lifting sanitary measures. Suppose that people are very likely to change their consumption behaviour due to the perceived risk of infection, even for those who have been vaccinated and/or infected in the past. 

 

A. Suppose no government intervention for the moment. Discuss the possible effects of the new scenario of recurrent outbreaks over the next few years on the composition of both aggregate supply and aggregate demand. Use the IS-LM diagram to show the effect of this new scenario on output and the interest rate. (15 marks)

 

B. Consider now government intervention with the aim not only to protect people and firms but also to sustain the economy. Discuss the role of fiscal policy to sustain demand. Use a diagram to support your arguments. (10 marks)

 

C. According to the last release of the Quarterly Bulletin, October 2021, the Central Bank of Ireland has announced a positive outlook for the economy out to 2023, with domestic activity back to pre pandemic levels by end-2021, despite that uncertainty remains high. Domestic demand is forecast to grow by 5.5% in 2021, and by 7.1% next year. A recovery in consumption will play a substantial role, as household spending relative to incomes normalises (i.e. return to pre-pandemic ratio). Consumption is forecast to grow by 6.2% this year, and by 8.3% and 5.1% next year and in 2023, respectively. 

 

i) Critique the assumption that households will return to the pre-pandemic consumption levels. (10 marks)

 

ii) Go to the Central Statistics Office website https://www.cso.ie/en/ and find the data on household saving from 1995. Calculate and create a graph (e.g. using Excel) showing the household saving rate from 1995. Discuss how the data may, or may not, support your critique in C(i)   (15 marks)

• Graphs and diagrams must be included in your file. They cannot be submitted as separate files. 

 

• You must create your own graphs. Graphs cannot be copied from other sources. 

 

• Graphs can be done manually in a sheet of paper, using a software (e.g. OneNote), or using the draw function in Word. 

 

• Please note plagiarism of any kind will not be tolerated and is considered an academic offense. 

 

• The Bibliography/References should display your sources of information. Try using academic references from management and economics discipline.