14.02 Principles of Macroeconomics Fall 2009

Transcription

1 14.02 Princiles of Macroeconomics Fall 2009 Quiz 2 Thursday, November 5 th 7:30 PM 9 PM Please anser the folloing questions. Write your ansers directly on the quiz. You can achieve a total of 100 oints. There are 5 multile-choice questions, folloed by 2 free resonse questions. You should read all of the questions first. Good luck! NAME: MIT ID NUMBER: TA: CLASS TIME: (Table is for corrector use only) Total Multile Choice Questions Long Question 1 Long Question 2 Total

2 1 Multile choice (30 oints) 1. (6 oints) The increase in use of ATMs decreases the currency/deosit ratio (cu). According to the Keynsian theory of sticky rices: (a) outut increases and the interest rate goes don, (b) outut increases and the interest rate goes u, (c) outut decreases and the interest rate goes u. A 2. (6 oints) In the standard IS-LM model, an increase in Government sending (G) ithout changing taxes has (a) a ositive e ect on equilibrium consumtion, (b) a negative e ect on equilibrium consumtion, (c) an ambigous e ect on equilibrium consumtion. C. The increase in G shifts the IS-LM uards and to the right, hich makes both outut and the interest rate higher in equilibrium. Hoever, the nal e ect on consumtion is ambigous since consumtion deends ositively on outut and negatively on the interest rate. 3. (6 oints) According to the misercetion theory, an exected increase in money suly (a) increases outut and increases interest rate, (b) increases outut and decreases interest rate, (c) has an e ect on neither outut nor interest rates. C. 4. (6 oints) Consider a fractional reserve banking system ith a legally required reserve-deosit ratio of m. Suose that an individual deosits ID dollars in one bank. Then, the economyide change in total deosits (a) ill be at most ID = m; (b) ill be equal to ID = m; (c) ill be equal to m ID: 1

3 ANSWER. A. The total change in deosits is equal to ID/m if nobody ants to hold currency and banks lend to their limit. If these to assumtions are relaxed, the increase in deosits is loer. So, in general, the increase in total deosits is at most ID/m. 5. (6 oints) According to the Taylor rule, a ositive outut ga (i.e. real GDP above otential real GDP) ill most likely result in (a) the Fed adjusting its estimate of otential real GDP, (b) the Fed decreasing the nominal federal funds rate, (c) the Fed increasing the nominal federal funds rate. ANSWER. C. The Fed ill increase the nominal FFR to bring back outut to its otential level. 2 IS-LM ith Liquidity Tra (35 oints) Consider the folloing IS-LM model ith rices xed at P = 1 (e are in the short run): M d = Y r P C = 1 + 0:5Y I = 1 0:5r G = G Y = C + I + G = M P P P P, ith M d P r = i e M d e = 0 = P if r > 0 1. (7 oints) Exlain the minimum value that the real interest rate, r, can take. We kno the nominal interest rate has to be ositive. This imlies that the real interest rate must satisfy the non negativity constraint r 0: 2. (7 oints) Derive the IS curve. Using the goods market equilibrium condition e have that the IS curve is r = 4 Y + 2G 2

4 3. (7 oints) Write don the LM curve. Using the Money market equilibrium condition e have ( 0 if Y M r = Y M otherise 4. (7 oints) What are the equilibrium interets rate and outut level in the economy? What is the condition for the equilibrium interest rate to be ositive? The interest rate ill be ositive if M < 4 + 2G The equilibrium interest rate in this case ill be r = 2 + G M 2 Y = 2 + M 2 + G Otherise e ll have r = 0 and Y = 4 + 2G 5. (7 oints) Suose that the economy described above is going through a recession and the government is trying to stimulate the economy. When ill monetary olicy be e ective in stimulating the economy? Exlain hy under certain conditions monetary olicy fails to be e ective as a olicy instrument. Monetary olicy ill be e ective as long as the money suly is lo and maintains the interest rate ositive. In articular the condition is M < 4+2G: If money suy is higher than this value, then monetary olicy becomes an inne ective channel for economic stimulus. The reason for this is that monetary olicy is e ective only hen it is able to loer the interest rate in order to increase investement, hoever this channel is killed once the interest rate constraint binds. 3 AS-AD (35 oints) [Suly side] Consider a labor market characterized by the folloing roduction and labor suly functions: F (N) = 20N N 2 N s = 1 2 3

5 1. (3 oints) Using the fact that the marginal roduct of labor MP N = 20 2N; obtain and grah the labor demand function. = 20 2N N d = (3 oints) Grah the labor suly function and solve for equilibrium ( nd the labor market = = 10 N = 5 and N ) in 3. (5 oints) Take rices as given. Consider the case in hich the government introduces a minimum nominal age = 50:Exlain in ords the qualitative e ects of this olicy on equilibrium ages and emloyment as a function of : (Hint: consider three cases 5; 5 2 < < 5 and 5 2 ). The olicy ill not a ect the labor market equilibrium as long as 50 : That is, as long as 5: = 10 = When 5 2 < < 5 the imlied minimum real age ill bind. There is excess suly and the number of orkers is determined on the demand side. If 5 2 no orkers get hired since the marginal cost is higher than the MP N: 4. (5 oints) Solve for the real age and number of orkers, taking rices as given. Make sure you consider the three cases 5; 5 2 < < 5 and 5 2 : If 5 = 10 N = 5 If 5 2 < < 5 the real age ill be at the minimum 50 1 is given by N = 10 2 = and the number of orkers 4

6 If 5 2 ; no orkers get hired. 5. (4 oints) Solve for the aggregate suly function and grah it. 8 >< 0 if 5 2 y s = if 5 >: 2 2 < < 5 75 if 5 [Demand side] Consider the demand side characterized by the folloing consumtion, investment and real money balances demand functions. Also, government exenditures are g = 50: c = 25 + y 2 r i = 25 2 r = y 2 M d 6. (4 oints) Obtain the IS and LM relations as a function of money suly. y = c + i + g = 25 + y r = y r 2 2 IS: r = 200 y r = y 2 LM: r = (3 oints) Obtain the aggregate demand function. [Equilibrium] + y 200 y = y = y or = y 5

7 8. (4 oints) For = 150, solve for equilibrium outut and rices. What is the e ect on outut of an exansionary monetary olicy? If the equilibrium is in the intermediate region, then = y y y2 = y 0 = y2 + y 100 The solution is: y = 44:64 = 3:36 Exansionary monetary olicy increases outut. 9. (4 oints) For = 450, solve for equilibrium outut and rices. What is the e ect on outut of an exansionary monetary olicy? If the equilibrium is in the intermediate region, then it must solve 0 = y2 + y 100 but the solution is greater than 75, therefore the solution is not in the intermediate region. It must be then y = 75 and = =y = 450=75 = 6: Exansionary monetary olicy has no e ect on outut and increases rices. 6

8 MIT OenCourseWare htt://oc.mit.edu Princiles of Macroeconomics Fall 2009 For information about citing these materials or our Terms of Use, visit: htt://oc.mit.edu/terms.