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I. Hakan Yetkiner
http://www.hakanyetkiner.com/
Izmir University of Economics
Department of Economics
ECON 300
Advanced Macroeconomics
2012
11 January 2012
Dr. Yetkiner
Key to Final Exam
1. (40 Points) Suppose that firms in Turkey are become infected with pessimism due to
global financial crisis, and they expect that uncertainty will be higher in the current
period.
(a) Determine how does this affect current macroeconomic variables in a Real
Business-Cycle model? (=what will happen to current values of N, I, C, Y, w, r,
and APL)
(b) Following the shock in (a), suppose now that government would like to
stabilize fluctuations in GDP by increasing government spending temporarily.
What will happen to current values of N, I, C, Y, w, r, and APL?
(c) Following the shock in (a), suppose now that the monetary authority wants to
stabilize the price level in the face of increasing uncertainty. Determine what it
should do and how will it affect current macroeconomic variables?
Hint 1: Do not forget to illustrate and discuss equilibrium effects and verify how this fits
the stylized facts of the business cycle, whenever applies.
Hint 2: In (b), stabilization of GDP must guide you in magnitude of changes.
You may find the answer to this question at p. 383-386 and in Figure 10.28. In short,
your answer should include those: When uncertainty increases, investment demand
function shifts left. This causes output demand to shift left. decreases and
increases. When uncertainty increases, investment demand decreases.
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I. Hakan Yetkiner
http://www.hakanyetkiner.com/
Izmir University of Economics
Department of Economics
2. (20 Points) Suppose that world economy is in year 2050 and you are the economic
advisor to the president of the United States of World. The USW has the technology to
produce robots that are two times more productive than human workers. The president is
planning to replace human workers one-to-one with robots (this replacement can happen
instantly) and asking you macro implications of the replacement. What will happen to
current values of N, I, C, Y, w, r and APL in a monetary intertemporal model? Does the
mechanic treatment of the question miss an important contribution of this replacement
(recall the ultimate decision criterion of an economist)? Show. Do not forget to illustrate
and discuss equilibrium effects and verify how this fits the stylized facts of the business
cycle.
Read p. 419-420 and learn in detail Figure 11.11
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I. Hakan Yetkiner
http://www.hakanyetkiner.com/
Izmir University of Economics
Department of Economics
3. (20 Points) How does an unexpected decrease in the money supply affect
macroeconomic variables in a segmented markets model? Show. Do not forget to
illustrate and discuss equilibrium effects and verify how this fits the stylized facts of the
business cycle.
Read p. 449-456 and learn in detail Figure 12.5
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I. Hakan Yetkiner
http://www.hakanyetkiner.com/
Izmir University of Economics
Department of Economics
4. (20 Points) How does an increase in the money supply affect macroeconomic variables
in a New Keynesian model (=show the non-neutrality of money)?
Hint: Do not forget to illustrate and discuss equilibrium effects and verify how does this
fit the stylized facts of business cycle?
Read p. 480-481 and learn in detail Figure 13.2
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