to Keynesian type governmental intervention for the purpose of evening out
business cycles. For each of the factors you identified in part (a) above,
is or can there be a role for the government in minimizing business
fluctuations? Explain your answer briefly.
5a. The rational expectations school emphasizes the difference between anticipated and
unanticipated government policies. According to this school, how would an increase in the
money supply affect the following variables, in a situation where that increase was
anticipated, and in one where it was not anticipated? Explanations are not necessary.
Effect of money on: Anticipated Unanticipated
Price level Real GDP Nominal wages Real wages Employment
b). First of all, identify the following as changes aggregate demand or
aggregate supply. Now, follow that through to its effect on the Phillips
curve. Specifically, should each change lead to a movement along the
Phillips curve, or a shift of the entire Phillips curve? Illustrate each
answer with a graph.
i) Computer advances make the entire economy more productive
ii) The newly elected president decides to spend more on defense.
iii) Financial crisis in Asia lowers our exports to those countries.
iv) Oil exporting countries act together to raise the price of oil.
The median on this exam was 63: the high was 87.
Econ 301 Intermediate Macroeconomics Exam # 4 Winter, 2000 Professor
Twomey Please PRINT your name on the BACK of the LAST SHEET. Answer on
these sheets, using the backs if necessary. Questions are equally
weighted. Be sure to label the axes on your graphs. Please ask for
clarification if you do not understand the question. Time: about an hour
and a half. Good luck!
1. Identify the following with a sentence or at most two:
a) Churning
b) Hedge
c) Off-budget item
d) Purchasing power parity
e) Assignment problem
2. Why can the time inconsistency problem lead to an inflation bias in
macroeconomic policymaking when workers and firms contract wages? Explain
your answer a graph may be helpful, but is not necessary.
3a. Consider first the case of a country with high capital mobility in a
situation of floating exchange rates. How will an increase in the money
supply affect the equilibrium of the economy? Explain and illustrate with
a graph.
b. Now consider the case of a fixed exchange rate system, with a very
inelastic BP curve. What happens to the economic equilibrium if the
government increases expenditures?
4. One example of a "rule" that the textbook discusses is fixed exchange
rates. An important example is the European Union's (nearly unanimous)
adoption of the euro. What is the euro? Discuss one advantage, and one
disadvantage, of this scheme.
A different proposal is a currency board. What is this?
Discuss one advantage, and one disadvantage, of the currency board scheme.
5a. Our textbook has a lengthy discussion of (intermediate) economic
policy targets. Choose three examples of potential targets, and discuss in
which macroeconomic contexts these are advantageous, and in which contexts
they make instability worse. It is probably best to illustrate each one
with a graph. B. What is Alan Greenspan doing, followin a target or rule?
What grade do you give him?
The median on this exam was 71; the high was 94.
Econ 301 Exam #1 Fall, 1999 Professor Twomey Please answer on these
sheets, using the backsides if necessary. Ask for clarification if the
question is unclear. Questions are equally weighted. Good luck.
1.Identify the following with a sentence or at most two:
a) Cambridge equation
b) Money illusion
c) Base year
d) Capital Account
e) Countercyclical fiscal policy
2. The purchasing power parity theory is a basic component of the
macroeconomics of exchange rates.
a) This theory is characterized by a formula; state that formula,
explaining what is meant by each of its component terms.
b) State briefly in words no formulas nor graphs an
explanation of why one might believe this formula to be accurate.
c) According to this theory, what happens to a country's exchange rate if
that country's money supply increases? Explain briefly.
d) According to this theory, what happens to a country's exchange rate if
other countries have high inflation, but the home country does not?
3a. Draw a graph of the market for loanable funds, being careful to
identify the variables determining the curves, and to label the axes.
b. Suppose that there is a change in tax laws, making it more attractive for
people to save. Ignore the effect on the deficit. Explain and illustrate
on another graph, how the increased desire to save will affect the
equilibrium in the market for loanable funds.
c. Take a new situation; suppose that the government decreases its deficit, which it finances by
borrowing. Explain and illustrate on another graph how that will affect
equilibrium values of savings and investment, according to the loanable
funds model.
4. Consider now a simple Keynesian model.
a. Using either the 45 degree graph, or the graph of leakages and
injections:
i) explain and illustrate how an increase in exports affects output.
ii) explain and illustrate how an increase in imports caused by a change
in taste, such as a new type of lap-top computer produced overseas affects
output.
b. What is the formula for the multiplier? If the MPS is equal to 0.2, and
the MPIM is equal to 0.4, what is the effect on output of an decrease of
investment of $300 billion?
c. Take a different situation. Suppose there is an increase in
government expenditures which increases income. How will this affect the
level of national savings? How will it affect the trade balance? Explain
briefly.
5a. Consider the classical model of the labor market. Identify
two exogenous factors that determine labor supply.
b. On a graph of the labor market, with nominal wages on the vertical
axis, explain and illustrate how a change in one of the factors
(identified above) would shift the labor supply curve. Such a change in
the labor market will also affect aggregate supply. Explain and illustrate
on a separate graph the corresponding change in aggregate supply.
c. According to the classical theory, how would an increase in the supply
of money affect aggregate supply and aggregate demand? Illustrate with a
graph.
d. How does an increase in the supply of money affect the labor market,
(with nominal wages on the vertical axis). Explain and illustrate with a
graph.
The median on this exam was 71. The high was 96
Econ 301 Exam #2 Fall, 1999 Professsor Twomey
Please PRINT your name on the back of the last sheet. Answer on these
sheets, using the flip sides if you need space. Questions are equally
weighted. If you are unsure of what is being asked in any question,
please request clarification. Be sure to label all the axes on the graphs.
Good luck!
1. Identify the following with a sentence or at most two:
a) Automatic (fiscal) stabilizer
b) Real balance effect
c) Cambridge equation
d) Political business cycle
e) Regressive tax system
2. What is meant by Ricardian Equivalence?
The textbook argues that the data is not consistent with Ricardian
equivalence. What are two reasons that are proposed to explain that
inconsistency?
Define the BP curve. How does the BP curve move if the exchange rate
depreciates? Illustrate on a graph and explain very briefly.
3a. Explain rigorously, and illustrate on a graph what happens to the IS
curve if government expenditures decline.
b. Explain briefly, and illustrate on separate graphs, how the decline in
government expenditures would be depicted:
in terms of the aggregate supply and demand graph
in terms of the Phillips curve
4a. Suppose the money supply increases. (Graph and/or short explanation
are optional, but recommended) According to the IS-LM/Keynesian model,
how will that affect:
Nominal interest rates
Real income
Investment
Consumption
The price level
b. The textbook rovided two related, but distinct rationales for why the
short run aggregate supply curve might be upward sloping. Explain each one
of them, briefly. No graph necessary
5a.In class it was argued that the IS-LM/aggregate supply/aggregate demand
model includes two different types or reasons for crowding out. Explain
each one, illustrating each with a graph.
b. What is meant by the Laffer curve? Illustrate it with a graph.
Explain very briefly the proposed rationale for this curve.
What important policy prescription is derived from the Laffer curve?
The median on this exam was 77. The high was 100.
Econ 301 Exam #3 Fall, 1999 Professor Twomey
Please PRINT your name on the back of the last sheet. Use the flip sides
of these sheets if you need space. Questions are equally weighted. Be sure
to label the axes on the graphs. Please ask for clarification if the
question is not clear. Good luck!
1. Identify the following with a sentence or at most two:
a) Forward exchange rate
b) Overlapping wage contracts
c) Co-ordination failures
d) Administered pricing hypothesis
e) Policy ineffectiveness proposition
2. If aggregate supply falls due to bad weather, how will that affect
output, employment, and real wages, in a modern Keynesian model in each of
two situations-- with, and without, a full COLA. Explain your answer,
illustrating it with a pair of graphs (for real output, and for the labor
market)
3a. The textbook refers to the observational equivalence of the basic new
classical model, and the modern Keynesian model.
- What is meant by observational equivalence?
- What is the reason for stating that these two
models are observationally equivalent? Explain your answer; use of a
graph is optional.
b. The textbook mentions three reasons mentioned by Keynesian economists
to explain the existence of labor contracting. Mention two of them,
explaining each real briefly. - For one of those reasons, explain how
changes in that variable (in its intensity, frequency, incidence, or
whatever) will change, according to the theory, the (optimal) length of a
contract.
4a. In the Keynesian model, are real wages pro-cyclical or
countercyclical? Why? (Graph optional)
b) What is more general, rational expectations or efficient market theory?
Explain briefly.
c) State and explain briefly two reasons why unionization in the private
sector of the economy has declined.
5a. What is meant by Real Business Cycle Theory? What is it supposed to
explain, and how does it differ from other models? What are the two key
factors that cause changes, according to the Real Business Cycle Theory?
b. The insider-outsider model attempts to explain involuntary
unemployment. What is the basic idea of this model?
According to the insider-outsider model, how would an increase in aggregate
demand affect prices and output, real wages and employment? Explain your answer,
hopefully without graphs.
The median on this exam was 76. The high was 100.
Econ 301 Intermediate Macroeconomics Exam #4 Fall, 1999 Professor Twomey
Please PRINT your name on the BACK of the LAST SHEET. Answer on these
sheets, using the backs if necessary. Questions are equally weighted.
Please ask for clarification if you do not understand the question. Time:
the entire class period. Good luck!
1. Identify the following with a sentence or at most two:
a) Time inconsistency problem
b) Optimal currency area
c) Transmission lag
d) Nominal GDP targeting
e) FOMC
2. What is Friedman's monetary growth rule? What are its supposed
advantages? Would this work better if the monetary authorities were
altruistic, or if they were self-serving? Explain
3a. Consider an economy has high capital mobility, and maintains a fixed
exchange rate. Suppose this economy finds itself in a circumstance of
high unemployment and a balance of payments surplus. What sorts of
policies should it pursue to eliminate the unemployment and the balance of
payments surplus? Explain, illustrating your argument with a graph.
b. What is a Currency Board? Discuss its advantages and disadvantages.
4. Suppose a country has a floating exchange rate, with imperfect capital
mobility, and that the government lowers taxes. According to the IS-LM-BP
analysis, what will happen in the economy? Explain, illustrating your
answer with a graph.
5. Suppose the head of the Central Bank decides to target interest rates.
A) What is better (specify your criteria for the use of this term), to
target the nominal rate or the expected real rate?
Explain.
B) Is it better to target the interest rate if the source of
instability comes from aggregate demand or aggregate supply Explain
C) Is it better to target the interest rate if the source of
instability comes from the money multiplier or the IS curve?Explain.
D) How would you describe what Alan Greenspan is currently doing at the
Fed? Are his policies consistent with you have said about the sources of
instability in our economy? Explain
The high on this exam was 87; the median was 69.
Econ 301 Intermediate Macroeconomics Exam # 1 Winter, 1998 Professor Twomey
Please PRINT your name on the BACK of the LAST SHEET. Answer on
these sheets, using the backs if necessary. Questions are equally
weighted. Please ask for clarification if you do not understand
the question. Time: the entire class period. Good luck!
1. Identify the following with a sentence or at most two:
a) Mercantilism
b) Means of exchange
c) Exogenous variable
d) Lump sum tax
e) Balanced budget multiplier
2. State and explain briefly, illustrating your answer with the
appropriate graph(s), how, in the classical model, an increase
in the money supply will affect prices, output, employment, and
interest rates.
3a. Suppose the U.S. government decides to raise personal income
taxes, in order to pay for bailing out certain Asian economies.
Explain and show on the appropriate graph(s) what an advocate of
Supply Side economics would predict how that increase in taxes
would affect the economyþs prices, output, employment and
interest rates.
3b. Fill in the blanks in the Table: (Table didn't reproduce)
What is the level of inflation between periods 2 and 3?
What is the rate of growth of real GDP between periods 1 and 2?
4. Suppose that for a particular economy for some time period
with prices constant, investment was equal to 200, government
expenditure was equal to 150, net taxes were fixed at 100, and
consumption C was given by the consumption function C = 30 + 0.8
YD where YD is disposable income.
A) What is the level of equilibrium income (Y)? Illustrate this
equilibrium on a graph.
b) What is the value of the government expenditure multiplier?
C) Suppose investment declined by 50 units to a level of 150.
What will be the new level of income?
5a. State and explain real briefly (no graphs necessary) what
variables/economic factors determine each of labor demand and
labor supply, in a classical world.
5b. Consider a friendly debate between a classical economist and
a Keynesian. Explain (and illustrate with a graph) how each of
them would analyze the effect of a decrease of government
expenditures (without any change in taxes) on interest rates,
prices, output, and employment.
The median on this exam was 64; the high was 95
Econ 301 Intermediate Macroeconomics Exam # 2 Winter, 1998 Professor Twomey
Please PRINT your name on the BACK of the LAST SHEET. Answer on
these sheets, using the backs if necessary. Questions are equally
weighted. Please ask for clarification if you do not understand
the question. Time: the entire class period. Good luck!
1. Identify the following with a sentence or at most two:
a) Real stock of money
b) liquidity trap
c) Monetary-fiscal policy mix
d) Transactions demand
e) Backward looking price expectations
2. In a standard IS-LM model, with a Keynesian (positively
sloped) aggregate supply curve, explain and illustrate with some
graphs (or equations) the effect of an increase in the nominal
quantity of money on:
nominal interest rate
level of investment level of real output
level of tax revenues level of savings
price level level of consumption
3. Explain and illustrate in detail (that is, present a rigorous
derivation) of how an increase in government expenditures will
move the IS curve.
-Define "crowding out," and on that same graph, or with a new
graph, show and explain what is meant by that term.
-Why is crowding out complete with a vertical aggregate supply
curve?
4a. In the standard Keynesian variable price-variable wage model
(with expected prices constant) , what happens to prices and
output if the price of oil falls? Explain and illustrate with a
graph.
ai. In this case of a decline in the price of oil, what happens
to interest rates? Explain.
b. Consider again the standard Keynesian variable price-variable
wage model, with expected prices constant, and now take a
different situation, one where aggregate demand declines. Draw a
graph of the corresponding labor market, and illustrate and
explain how the decline in demand affects employment, nominal
wages, and real wages.
5a. Draw a graph and explain (that is, give the derivation of)
why the LM curve has an upward slope.
b. Explainþbut you do not need a graphþwhether, in the Keynesian
model, fiscal policy has a greater impact on aggregate demand
when the LM curve is steep or when it is rather flat.
c. The textbook suggests that we can consider the classical
loanable funds analysis as a case where the LM curve has an
extreme slope. Is this classical case one of a perfectly flat LM,
or a vertical LM? Explain briefly; once again, a graph is
optional.
The median on this exam was 61; high was 93
Econ 301 Exam #3 Winter, 1998 Professor Twomey
Please PRINT your name on the BACK of the LAST SHEET. Answer on
these sheets, using the backs if necessary. Questions are equally
weighted. Please ask for clarification if you do not understand
the question. Time: the entire class period. Good luck!
1. Identify the following with a sentence or at most two:
a) Costless disinflation
b) Representative agent
c) Efficiency wage
d) Policy Ineffectiveness Postulate
e) Seigniorage
2. Suppose that Bob Dole had won the last presidential election,
and that although he had campaigned on a platform of a balanced
budget, he surprised everybody by lowering taxes, but not
expenditures.
-According to a proponent of the Permanent Income Hypothesis, how
would this affect expected (permanent) income?
-In terms of your answer above, how would this affect the amount
of consumption? the APC?
-Would this create any transitory shock to income? Explain
-According to the accelerator model, how might this affect
investment? Explain briefly.
-Would any effect on investment be bigger or smaller under a
flexible accelerator assumption?
3a. Explain why monetarists believe that monetary policy affects
output and employment in the short run but not in the long run.
What is the crucial difference, for monetarists, between the
short run and the long run?
b. According to the natural rate theory, what happens to
employment and inflation if the government consciously attempts
to peg unemployment below the natural rate? Explain, and
illustrate your answer with a graph.
- What aspect(s) of the current economic situation in the United
States appears to contradict that theory?
4. Suppose there is an autonomous, unanticipated increase in
investment demand (another Bill Gates appears). In parallel
graphs of the output market and the labor market, show and
explain what happens to prices, output, wages and employment.
5. The textbook discusses two new directions in macroeconomics:
Real Business Cycles and new Keynesian economics.
In one or two sentences, explain the major idea associated with
each school: RBC New K
The textbook has a graph of "job leavers" and "job losers" during
the 1980s, which shows these two categories moving in opposite
directions to one another (as they must, because these are the
only two categories considered), and, more importantly, showing
that the fraction of "job leavers" falls during a recession. With
which of these two new schools is this finding consistent?
Explain.
-What would each of these schools say about the effects of
countercyclical monetary policy?
RBC
New K
The median on this exam was 73; high was 97
Econ 301 Intermediate Macroeconomics Exam # 4
Winter, 1998 Professor Twomey
Please PRINT your name on the BACK of the LAST SHEET. Answer on
these sheets, using the backs if necessary. Questions are equally
weighted. Please ask for clarification if you do not understand
the question. Time: the entire class period. Good luck!
1. Identify the following with a sentence or at most two:
a) Bracket creep
b) Endogenous growth
c) Imperfect capital mobility
d) Laffer curve
e) Capital deepening
2. The textbook has a lengthy discussion of the (intermediate
run) supply side position, and the negative effects of high taxes
on both capital accumulation and the labor market. For each of
those subjects, identify a tax with the allegedly negative
effect, and explain and show on a graph what would be the effects
of a reduction of that tax.
3. What is the BP curve? Why does it have an upward slope?
Explain and illustrate on a graph how the BP curve is presumed to
move when the exchange rate depreciates.
If a country has a fixed exchange rate, and the government lowers
its level of expenditures, according to the IS-LM-BP analysis,
what will happen to the balance of payments? Explain and
illustrate on a graph.
4. According to the standard application of the IS-LM model, is
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