Economics 32, Sec. 1 Menzie D. Chinn Spring 211 Social Sciences 7418 Universiy of Wisconsin-Madison Noes for Econ 32-1 FALL 21 Miderm 1 Exam The Fall 21 Econ 32-1 course used Hall and Papell, Macroeconomics (Noron) as a exbook. The noaion differs from Blanchard, Macroeconomics 5/2 (Pearson), and we did no cover all he same maerial. In addiion, for he open economy, we did no solve for a parameric soluion. Hence: In Par I, you are no responsible for answering quesions 2, 7, 15. For Par II, Quesion 1, be prepared o answer he quesions in eiher graphical or inuiive form. For Par II, Quesion 2, be prepared o answer he quesion using he AD+Okun s Law/Phillips Curve framework.
Economics 32, Sec. 1 Menzie D. Chinn Fall 21 Social Sciences 7418 Universiy of Wisconsin-Madison Final Examinaion This exam is 8 minues long, and is worh 8 poins. You are given 88 minues o complee i. Par I is muliple choice, Par II is a shor answer. The poins are allocaed in proporion o he ime you should spend on each problem. Par I and Par II, Q1 go ino bluebook A; Par II, Q2 and Q3 go ino bluebook B. BEGIN BLUEBOOK A BEGIN BLUEBOOK A BEGIN BLUEBOOK A PART I: Muliple Choice [4 minues oal, 2.5 poins each]. Do NOT explain. (16 problems) 1. Suppose he Fed decides o resric he rae of growh of he money supply in he Unied Saes. You should expec o see a) an iniial increase in he value of he dollar ha is diminished somewha over he long run. b) an iniial increase in he value of he dollar ha is swamped by a second round depreciaion. c) an iniial increase in he value of he dollar ha coninues unil he Fed changes policy again. d) an iniial decline in he value of he dollar ha is offse somewha over he long run. e) an iniial decline in he value of he dollar ha coninues unil he Fed changes policy again. 2. Wih markup pricing and muliyear conracs saggered across hree-year inervals, a) moneary policy canno influence real GDP even if expecaions are raional. b) moneary policy canno influence real GDP even if wages are oherwise flexible. c) moneary policy can influence real GDP even if expecaions are raional. d) moneary policy canno influence real unemploymen even if wages are oherwise flexible. e) none of he above. 3. Which of he following is a source of growh in poenial GDP? a) Growh in he labor force b) Growh in he capial sock c) Growh in labor produciviy d) All of he above e) None of he above 4. The income ax sysem of he Unied Saes can discourage invesmen. This endency, however, can be offse by he simulaive effecs of a) increasing he ax credi percenage ha firms can subrac from heir ax liabiliies. b) allowing ineres paymens o be deduced from income before ax liabiliy is compued. c) allowing depreciaion o be deduced more quickly from income before ax liabiliy is compued. d) lowering he real rae of ineres hrough macroeconomic policy. e) all of he above. 5. Purchasing power pariy does no hold up as well in he shor run as i does in he long run because a) prices are fixed in he shor run and he resuling inflexibiliy is hard o describe heoreically. b) subsiuion among similar goods is nearly impossible when an inernaional ransacion is involved. c) goods arbirage is no an insananeous, cosless process. d) is conclusions are drawn from price sabiliy, a long-erm phenomenon. e) all of he above. 2
6. Housing invesmen is more sensiive o ineres raes han business invesmen because a) he price of housing rends up over ime. b) he rae of physical depreciaion is greaer for houses. c) he rae of physical depreciaion is greaer for business invesmen. d) all of he above. e) boh a and c. 7. Suppose ha he desired capial sock is always equal o hree imes oal oupu for any year. In ha case, he acceleraor principle implies ha invesmen should always a) equal some consan muliple greaer han 3 imes he annual change in GDP o accommodae depreciaion. b) be precisely equal o hree imes he annual change in GDP regardless of he rae of depreciaion. c) equal some consan muliple less han hree imes he annual change in GDP o accommodae depreciaion. d) be proporional o he annual change in GDP, bu he informaion provided is insufficien o compue he muliple exacly. e) none of he above. 8. For he purposes of inegraing forward-looking business invesmen decisions ino a model of macroeconomic behavior, capial employmen decisions proceed along a leas wo dimensions. The mos imporan of hese consideraions are a) how much capial sock o mainain and how much o depreciae. b) how much capial sock o mainain and how quickly o achieve ha sock by a flow of invesmen expendiure. c) how much capial o ren and how much o purchase. d) how much of he capial ha is rened should be depreciaed and how much should be sen back. e) how fas o expand he capial sock of a growing division and how fas o conrac he capial sock of a failing division. 9. If poin A represens an economy s iniial posiion away from equilibrium a poin E, which of he panels of he figure below displays a recovery rajecory from a maerials price shock ha produced unexpeced inflaion? a) A b) B c) C d) D e) none of he panels 3
1. Given he moneary policy rule, r.5 ˆ = π + Y +.5( π π ) + 3 and assuming Y ˆ = and π =, le inflaion increase by 2 percenage poins. By how much would he Fed π increase ineres raes? a) 6 percenage poins b) 2 percenage poins c) 3 percenage poins d) 5 percenage poins e) Less han 2 percenage poins 11. Assume an expecaions augmened Phillips curve holds, and expeced inflaion equals lagged inflaion. Then a) he unemploymen rae mus exceed he naural rae if acual GDP falls shor of is poenial. b) he unemploymen rae is independen of any acceleraed inflaion caused by ouside price shocks. c) he unemploymen rae mus fall shor of he naural rae if acual GDP exceeds is poenial. d) any aemp o keep acual GDP above is poenial mus produce acceleraing raes of inflaion. e) unemploymen can be mainained a he naural rae even given acceleraing inflaion. 12. Purchasing power pariy does no hold up as well in he shor run as i does in he long run because a) prices are fixed in he shor run and he resuling inflexibiliy is hard o describe heoreically. b) is conclusions are drawn from price sabiliy, a long-erm phenomenon. c) subsiuion among similar goods is nearly impossible when an inernaional ransacion is involved. d) goods arbirage is no an insananeous, cosless process. e) all of he above. 13. Le expeced inflaion in he Unied Saes be 5 percen wih a nominal rae of ineres equal o 1 percen; le corresponding inflaionary expecaions abroad equal 1 percen wih a nominal ineres rae of 12 percen. According o ineres rae pariy, a) people mus expec he dollar o appreciae by 3 percen. b) people mus expec he dollar o appreciae by 5 percen. c) people mus expec he dollar o appreciae by 3 percen. d) people mus expec he dollar o appreciae by 5 percen. e) expecaions abou he fuure srengh of he dollar mus sill be undeermined. 14. Which of he following is an assumpion of he informaion-based model of supply developed by Lucas? a) Prices and wages are assumed o be flexible. b) People are no fully informed abou wha is going on in he economy. c) A posiive correlaion beween supply price and quaniy is assumed for firms individual supply curves. d) All of he above are accurae. e) None of he above is accurae. 15. Given he Lucas formulaion of supply Y = h P P) + Y where Y i represens he oupu of some firm i,p i i ( i i represens ha firm s price, P represens an overall price index, and Yi is he ih firm s poenial oupu, he parameer h is a) posiive because prices are sicky going down. b) negaive because he lack of pricing informaion is posiively correlaed wih oupu. c) posiive because, when he relaive price of heir produc rises, firms increase heir oupu. d) negaive because firms implici demand curves are assumed o be negaively sloped. e) none of he above. 4
16. Which of he following is an assumpion of he informaion-based model of supply developed by Lucas? a) Prices and wages are assumed o be flexible. b) People are no fully informed abou wha is going on in he economy. c) A posiive correlaion beween supply price and quaniy is assumed for firms individual supply curves. d) All of he above are accurae. e) None of he above is accurae. PART II: Shor Answer (4 minues oal) 1. (2 minues) Suppose equilibrium income is given by: ~ ) ( d + nv) μ ( d + nv) M [ Y = α A + mwyw, + ] h h P ~ 1 where α 1- b(1- )+ m+(d + nv)k/h ) A a bta + e dr + GO + g nq Noe ha in his model, EP = q + vr and T = TA + Y, C = a bta + b(1 ) Y P w 1.1 (4 minues) Show graphically wha happens if res-of-world income exogenously rises from Y w, o Y w,1 (call his Δ Y w ). Label axes and curve shifs carefully, showing how far he curve(s) shifs in. 1.2. (4 minues) Work ou algebraically he change US income Show your work! Hin: use oal differenials. 1.3. (4 minues) Work ou algebraically he change in US ineres rae. Show your work! Hin: μ M k R = 1 + Y h h P h 1.4. (4 minues) Work ou algebraically wha he change in he real exchange rae. Show your work! 1.5. (4 minues) Show he change in ne expors (or he rade balance ). Hin: he original level of ne expors is given by: EP X = g + my mwyw, n PW Is he change posiive or negaive? END BLUEBOOK A END BLUEBOOK A END BLUEBOOK A Exam coninues 5
BEGIN BLUEBOOK B BEGIN BLUEBOOK B BEGIN BLUEBOOK B 2. (15 minues oal) Suppose we have an economy where he cenral bank follows a Taylor rule: r ˆ = π + βy + δ ( π π ) + R And he macroeconomic policy rule is given by: ˆ δ Y = ( π π ) β + σ Where he IS curve is given by: R R = σyˆ 2.1 (5 minues) Explain wha happens if he cenral bank decreases he arge inflaion rae from.4 o.2, using graphs. Assume he acion akes place in period 2. You can assume price adjusmen akes he form: π = π + f Yˆ 1 1 + Z Be sure o label he curve shifs clearly. 2.2 (5 minues) Ignore your answer o 2.1. Explain using a graph wha happens o he curve(s) if he cenral bank responds only o he inflaion gap, and does no pay aenion o he oupu gap. Explain he economic inuiion behind your answer. 2.3 (5 minues) Compare he impac of an oil shock in he case where he Taylor rule is convenionally defined, and when i is defined as in 2.2. A graph or graphs will be useful. 3. (5 minues) Suppose using a growh accouning equaion, he labor share of oal income is 2/3, and he capial share is 1/3, hen show which oucome will have a bigger effec on GDP growh: eiher 1 percenage acceleraion in labor force growh, a 2 percenage poin acceleraion in capial sock accumulaion, or a 2/3 percenage poin acceleraion in TFP growh. Show your work!. END BLUEBOOK B END BLUEBOOK B END BLUEBOOK B Exam Ends /e32final_f1_annoaed 1.5.211 6