ECON Intermediate Macroeconomics

Transcription

1 ECON Intermediate Macroeconomics January 23, 2009 Final The exam is made of 10 short answer questions, each worth 10 points. You have 80 minutes (1h20m). Points add up to 100. You are given two blue books. Please use the first blue book for the first 5 questions (1-5) and the second blue book for the the last 5 questions (6-10). Good Luck. 1 [10 Points] Problem: 1. Suppose a government decides to reduce spending and (lump-sum) income taxes by the same amount. Using the long-run model of the economy developed in Chapter 3, graphically illustrate the impact of the equal reductions in spending and taxes. Be sure to label: (i) the axes; (ii) the curves; (iii) the initial equilibrium values; (iv) the direction curves shift; and (v) the terminal equilibrium values. 2. State in words what happens to: (i) the real interest rate; (ii) national saving; (iii) investment; (iv) consumption; and (v) output. 2 [10 Points] Problem: The Federal Reserve has three tools to control the money supply: openmarket operations, the discount rate, and reserve requirements. 1

2 1. How should each instrument be changed if the Fed wishes to decrease the money supply? 2. Will the change affect the monetary base and/or the money multiplier? 3 [10 Points] Problem: 1. In April 1995, Michel Camdessus, managing director of the International Monetary Fund (IMF) criticized U.S. economic policy for allowing the dollar exchange rate to fall too low. He recommended that the United States reduce its budget deficit in order to raise the exchange rate. Use the long-run model of a small open economy to illustrate graphically the impact of reducing the governments budget deficit on the exchange rate and the trade balance. Be sure to label: (i) the axes; (ii) the curves; (iii) the initial equilibrium values; (iv) the direction the curves shift; and (v) the new long-run equilibrium values. 2. Based on your graphical analysis, explain whether Mr. Camdessuss policy recommendation will work. Specifically state what happens to the exchange rate and the trade balance as a result of the government budget deficit reduction. 4 [10 Points] Problem: Changes in economic policies will frequently have an impact on the unemployment rate. Explain whether each of the policy changes described is likely to: 1) affect frictional or structural unemployment and 2) increase or decrease the measured unemployment rate. 1. The government reduces the number of weeks of unemployment insurance that unemployed workers can receive. 2. The government raises the minimum wage. 3. The government increases spending on job-training programs. 2

3 5 [10 Points] Problem: Many policymakers are concerned that Americans do not save enough. Using the Solow growth model, with no technological change and no population growth, explain why: 1. for a given production function and depreciation rate, the saving rate determines the level of ouput per worker. 2. a higher saving rate will not necessarily generate more consumption per worker. 3. a higher saving rate will not produce a faster steady state growth rate of output per worker. 6 [10 Points] Problem: Suppose a government is able to impose controls that limit the number of children people can have, Use the Solow growth model of Chapter 8 to graphically illustrate the impact of the slower rate of population growth on the steady-state capital labor ratio and the steady state level of output per worker. Be sure to label the: (i) axes; (ii) curves; (iii) initial steady-state; (iv) terminal steady-state levels; and (v) the direction curves shift. 7 [10 Points] Problem: Two countries, Highland and Lowland, are described by the Solow growth model. Both countries are identical, except that the rate of labor-augmenting technological progress is higher in Highland than in Lowland. 1. In which country is the steady-state growth rate of output per effective worker higher? 3

4 2. In which country is the steady-state growth rate of total output higher? 3. Does the Solow growth model predict that the two economies will converge to the same steady state? 8 [10 Points] Problem: Suppose you are an economist working for the Federal Reserve when droughts in the Southeast and floods in the Midwest substantially reduce food production in the United States. Use the aggregate demand-aggregate supply model to illustrate graphically your policy recommendation to accommodate this adverse supply shock, assuming that your top priority is maintaining full employment in the economy. Be sure to label: (i) the axes; (ii) tcurves; (iii) the inital equilibrium values; (iv) the direction the curves shift; (v) the terminal equilibrium values. State in words what happens to prices and output as a combines result of the supply shock and the recommended Fed accommodation. 9 [10 Points] Problem: 1. An economy is initially at the natural level of output. There is an increase in government spending. Use the IS-LM model to illustrate both the short-run and long-run impact of this policy change. Be sure to label: (i) the axes; (ii) the curves; (iii) the initial equilibrium; (iv) the short-run equilibrium; and (v) the terminal equilibrium. 2. Explain in words the short-run and long-run impact of the change in government spending on output and interest rates. 10 [10 Points] Problem: Policymakers are contemplating undertaking either an increase in government spending or an increase in the money supply. Either policy is forecast 4

5 to have the same impact on income in the short run. Use the IS-LM model to compare the impact on consumption and investment of the two policy alternatives. 5