Download doc Test 3 (Midterm) 2013

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McGILL UNIVERSITY
FACULTY OF ARTS
ECONOMICS 154-330D (02)
MACROECONOMIC THEORY
TEST 3
25 February, 2013
EXAMINER: Prof. Jagdish Handa
TIME: 60 MINUTES
INSTRUCTIONS:
 This exam is only for students in Section 2 (Prof. Handa) of ECON 330D.
 You are allowed the use of non-programmable calculators and dictionaries.
 YOU MUST NOT CHEAT.
 If possible, leave an empty space on either side of you.
 Put your papers and books away (definitely not on your desk or on the shelf in it) from
you. Use the back sides of your answer books (not loose papers) for your rough
calculations.
 Number of pages: 2.
SECTION I (60 MARKS)
DO ANY 2 (TWO) QUESTIONS. EACH QUESTION IS WORTH 30 MARKS.
1.
What is a credit crisis?
Explain the impact of a credit crisis on (i) aggregate demand, (b) aggregate supply, (c) output and
unemployment in the economy.
2.
What is the difference between a monetary policy rule and discretionary monetary policy?
What is the difference between stabilization and pro-active demand-management policies?
3.
The United States currently has higher unemployment than its long-term level. Is it due to 'excess' or
'deficient' aggregate demand? Define 'excess' and 'deficient' aggregate demand.
Given your assessment of whether there was excess or deficient demand in the USA since 2008, specify and
explain the demand-management policies that the USA government and central bank have followed since
2008.
SECTION II (40 MARKS)
DO ALL QUESTIONS IN THIS SECTION.
The following equations describe the commodity and money markets of an open economy for which the central bank
uses the interest rate as its operating monetary policy instrument.
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[Notes: Real investment here depends on both the level of income and the real interest rate. Further, government
expenditures fall as income rises.
These mean that the IS equation derived in the textbook will not be applicable to this model. To correctly derive the
IS equation, start with the general form of the income-expenditure equilibrium condition, which is y = e.
The symbols have the meanings assigned to them in the textbook.]
MODEL:
c = 0.8 yd
t = 10,000 + 0.20 y
i = 10,000 + 0.01y – 50r
g = 50,000 – 0.1 y
xc = 20,000 – 5r
zc/r = 1,000 + 0.2 yd
[Note that the left side of this equation has z c/r.]
PF = 4
=2
md = 0.25y + 210 – 5000R
[R is the nominal interest rate, r is the real one, and, by the Fisher equation, which is:
R = r + e. Assume e = 0]
The central bank follows an interest-setting monetary policy rule, which is: r = rT = 0.01.
Full-employment output: yf = 119,000
4.
For the above Model, derive the relevant functional forms for:
i.
The real exchange rate in terms of the domestic price level.
ii.
Disposable income in terms of y.
iii. The IS equation.
iv. The aggregate demand function.
What does your calculated AD function imply for the direction of the slope of the demand curve? Show
diagrammatically this slope.
v.
Calculate the long-run equilibrium price level.