economics

Intermediate Macroeconomics Final Exam

Instructor: Kyungtae Lee City College New York

• There are 4 questions on this exam.

• The total score for the Long-answer part of the exam is 40, so the score for each question is 10.

• You can use the textbook or google, but the answer must be in your own word. If I find that more than two students have the same answer, I have to give you a zero on that question.

• You must show your work. If I don’t see any explanation for your answer, you will lose a lot of credit. On the other hand, if you have a wrong answer because of a miscalculation even if you take the right steps, you will get almost full credit.

• Good Luck!

Question 1. Suppose we have the following short-run model. Resource constrain is

Yt = Ct + It +Gt +EXt − IMt

Where Yt is economy output, Ct is consumption. It is investment. Gt is government purchase. EXt

is exports. IMt is imports. Government purchase depends on the current state of the economy. For example, when there is an economic recession, the government will spend more money to support the economy. To incorporate this intuition, we will use the following equations. Also, we will incorporate the consumption multiplier effects.

Ct

Ȳt

= āc + x̄cỸt

Gt

Ȳt

= āg + x̄gỸt

EXt = āexȲt

IMt = ¯aimȲt

It Ȳt

= āi − b̄(R̄t − r̄)

a. Derive IS curve, and draw IS curve. (x-axis: Ỹ , y-axis: R(real interest rate)) What are the slope and the y-intercept?

b. Suppose the multiplier effects for the government purchase changed(xg increase). What is the impact of this change?

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c. Assume, MP(monetary policy) curve is a horizontal line. Suppose, there is a negative demand shock on consumption. (ac decrease) What is the impact of this shock? What is the response of the federal reserve? Use the IS-MP curve graph to explain the impact of this shock.

d. Continue with the previous question. Explain how the change in inflation (∆π) changes when there is a negative shock on consumption. (Use Philips Curve)

Question 2. Consider following Philips Curve.

∆πt = ν̄Ỹt + ō a. Draw Philips curve. (x-axis: Ỹt, y-axis: ∆π) What is the slope and y-intercept of the curve?

b. What is the impact of the ν̄ change? Should government perform a more aggressive policy to stabilize the inflation rate with high ν̄ or low ν̄? If so, why?

c. Suppose there is an inflation shock because a war increased oil prices. (ō>0) What is the impact of the oil price shock? (Use Philips curve graph)

Question 3. Consider policy rule, IS curve, and Philips curve

Policy rule ∶ Rt − r̄ = m̄(πt − π̄) IS curve ∶ Ỹt = 1

1 − x̄c

[ā − b̄(Rt − r̄)] Philips curve ∶ πt = πt−1 + ν̄Ỹt + ō

a. Derive Aggregate Demand(AD) and Aggregate Supply(AS) curve, and draw AD and AS curve. What is the slope and y-intercept for AS and AD curve?

b. Find steady state inflation, π∗, and output Ỹ ∗

c. Suppose there is a positive and temporary demand shock, because of the new technology development. (ā>0) What is the impact of this shock?

Question 4. Consider a production function

Yt = F (Kt, Lt) = ĀKα t L

1−α t (1)

and the resource constraint Yt = Ct + It +Gt (2)

and the capital accumulation equation

Kt+1 = It + (1 − d̄)Kt (3)

Consumers consume a certain fraction of the output so the consumption equation is

Ct = (1 − s̄)Yt (4)

The government spending Gt is a fraction of capital stock, so with the higher capital stock, there is more government spending.

Gt = ḡKt (5)

Assume there is no population growth, so Lt = Lt+1 = L̄

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a. Derive a Solow-Growth model and describe the intuition of the equation.

b. What is the key assumption in this model

c. Find the steady state per-worker quantities of capital, output, and consumption

d. Draw the Solow model (the x-axis is Capital stock, the y-axis is output)

e. Suppose there was a big government spending. Therefore, ḡ increased. What is the new steady state per-worker quantities of capital, output, and consumption?

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