Download Endogenous Variables Exogenous Variables

Macroeconomic Theory
M. Finkler
Spring 2005
FINAL EXAM
The final exam features the same rules as both midterms: open book, open notes, and no
consultations. The Honor Code, however, remains in effect. Be sure to always clearly
show your work; correct answers without supporting work will gain you few points. The
exam counts for 140 points, 35% of the total for the course. You have until five p.m. to
complete the exam.
Answer question 1, two questions in Part II, and three questions in Part III. If you work
on more than required number of questions in Parts II and III, clearly indicate which
questions I should grade.
“Life is full of tradeoffs… But wait: The U.S. is now enjoying low inflation and low
unemployment. Doesn’t this refute the old theory of an inflation-unemployment
tradeoff? Not at all, and Alan Greenspan knows it. The Fed has a single policy level,
and this level pushes inflation and unemployment in opposite directions.” – N. Gregory
Mankiw, Fortune magazine.
Part I. (50 points)
1.
Use the model below to answer parts a – g
Labor Demand:
Labor Supply:
Unemployment:
Wages:
Production:
Consumption:
Investment:
Net Exports
Disposable Income:
Aggregate Expenditures:
Goods Market Equilibrium:
Money Demand:
Money SupplyRule:
Money Market Equilibrium
Real Interest Rate:
Price Expectations:
Endogenous Variables
Ld, W, P,Ls, UR, Pe,Y, C
Yd, I, R, NX, AD, Md, Ms, i
Ld = 600 – 20*(W-P)
Ls = 800 + 10*(W-P)
UR= (Ls-Ld)/Ls + .052
W = 15 + .5*P-1
Y = 10*Ld
C = 1100 + .75*Yd
I = 300 – 10*R
NX = 100 - .125*Yd – 40*R
Yd = Y -.2*Y
AD = C + I + G + NX
Y = AD
Md - P = .1*Y – 5*i
Ms= Mo + .3*(Yp-Y)
Md = Ms
R = i – Pe
Pe = .5*P-1+ .1*(Y-Yp)
Exogenous Variables
G, Mo, P-1,Yp
(6)
(6)
(6)
(6)
(10)
(8)
(8)
a.
Derive the IS Curve.
b.
Derive the LM Curve
c.
Derive the AD Curve and indicate its slope.
d.
Derive the AS Curve and indicate its slope.
e.
Derive the Phillips Curve for this model and indicate the tradeoff between
the price level and the rate of unemployment.
f.
Show how an increase in governmental expenditure affects Y, P, R, & Ld.
g.
Show how an increase in potential GDP affects Y, P, R, & Ld.
Part II.
(24 points each) Answer two of the following three questions. Be sure to
show either the relevant mathematics or graphical representations.
2.
Assume that the basic Solow Growth describes the long term growth for an
economy. Indicate how an increase in the savings rate affects the steady state
values of output per laborer and capital per laborer. Does the rate of change in
output per labor equal, exceed, or fall short of the rate of change of the savings
rate? Explain.
3.
Use Model 4, with excess supply of labor, to determine the effects of a decrease
in autonomous investment demand on output, employment, prices, and real
interest rates.
4.
Use Model 5, with excess demand for labor and adaptive price expectations, to
determine the effects of expansionary fiscal policy on the paths of output,
employment, prices, and real interest rates.
Part III. (14 points each.) Answer three of following questions.
1.
Mankiw shows that the aggregate supply curve can take a variety of shapes.
Explain how the AS curve could be a) flat (horizontal), b) infinitely sloped
(vertical), or c) gradually upward sloping. For each curve, be sure to address the
role played by in the labor market.
2.
True, False or Uncertain? An increased dependence on international trade makes
fiscal policy less effective. Defend your answer in terms of one of the models
developed in the course and in terms of its underlying economic reasoning.
3.
Mankiw’s statement at the top of the exam provides much food for thought. What
“old theory” is he referring to? What does he think Alan Greenspan should
know? What lever does he have? Does the lever always work as Mankiw
suggests? If not, when would it not work?
4.
Define the Natural Rate Hypothesis. What role does this concept play in the
Phillips Curve? How can demand-pull and cost-push inflation be reflected in a
Phillips Curve graph? Why do economists disagree about the use of the Phillips
Curve as the basis for macroeconomic stabilization policy?
5.
What is meant by the term - Sacrifice Ratio? Based on the data provided below,
determine the sacrifice ratio in each case and indicate which country had the
lower sacrifice ratio. Note: use the benchmark entries for the growth of potential
GDP and the natural rate of unemployment. Use the gap between the growth rate
of potential and observed GDP to determine the percentage amount of output loss.
Year
Growth
France
Inflation
1988
GDP
Growth
4.5
1989
United Kingdom
GDP
Growth
5.0
Inflation
2.8
Unemployment Rate
10.0
6.0
Unemployment Rate
8.6
4.3
3.0
9.4
2.2
7.1
7.2
1990
2.5
3.1
8.9
0.4
6.4
6.9
1991
0.8
3.3
9.4
-2.0
6.5
8.8
1992
1.2
2.1
10.3
-0.5
4.6
10.1
1993
-1.3
2.5
11.7
2.1
3.2
10.4
1994
2.8
1.5
12.3
3.8
1.9
9.6
Benchmark
3.0
NA
8.0
3.0
NA
8.0