Download Economics 304 - ECON 304 Intermediate Macro

Economics 304
Intermediate Macroeconomics
Spring 2014
FINAL EXAMINATION
Steve Greenlaw
INSTRUCTIONS: Your exam should be no more than six printed, double-spaced pages
(including graphs). Put your name, the date, and "ECON 304 Final Exam" on a cover sheet;
please don't put your name anywhere else. Also, please staple the exam questions to the back of
your answer sheets.
Read all questions carefully. Given the page constraint, you should think carefully about each
question before you begin writing. There may be more than one correct answer so justify
whatever approach you take; in other words, how you approach the problem is at least as
important as the specific answer you come up with. Remember to focus on what the model says,
not necessarily what you think.
Feel free to ask me any questions you have about the exam, but you may not communicate with
anyone else. You may also consult your class notes and the course texts (but please answer all
questions in your own words). Turn in your exam package to my office no later than 4:00pm,
Friday, May 2. Late submissions risk not being graded.
1. a. Consider the IS-LM model. Suppose the economy was in recession, the Fed had pursued
an expansionary monetary policy and while interest rates had fallen significantly, GDP had
not grown substantially. What can you infer about the interest elasticity of autonomous
expenditure? Show graphically and explain the economics involved. (8 points)
b. What type of government policy would you recommend to deal with the situation. Show
graphically using IS-LM analysis and explain the economics. (6 points)
{ Recommended Length: 1 page }
2. a. What are the exogenous variables in Mankiw’s dynamic aggregate demand/ aggregate
supply model? (4 points)
b. What is the purpose of the dynamic aggregate demand/aggregate supply model?
points)
(6
c. Explain the crowding out effect? What is crowding out and what is the mechanism by
which it typically occurs? (6 points)
{ Recommended Length: ½ page }
d. How does crowding out occur in the DAD/DAS model? (6 points)
{ Recommended Length: 1 page }
e. Suppose the government implements an expansionary fiscal policy in the form of increased
government spending. Use the dynamic aggregate demand/aggregate supply model to show
the effects of the expansionary fiscal policy on the macro economy. In particular, what does
the model suggest will happen to U.S. GDP, employment, inflation, consumption and
investment in the short run? (This is the short run equilibrium.) Show graphically and
explain the economics in detail.
(12 points)
{ Recommended Length: 1 page }
f. Use the dynamic aggregate demand/aggregate supply model to show the long run effects of
the fiscal expansion on U.S. GDP, employment, inflation, consumption and investment.
Explain in detail and show graphically how the long run values of these variables compare
with their trend values (i.e. what the values would have been in the absence of the
recession?) Show graphically and explain the economics in detail.
(12 points)
{ Recommended Length: 1 page }
g. What is the value of the expenditure multiplier in the long run? Why? (4 points)
{ Recommended Length: ½ page }