Intermediate Macroeconomics Final Exam
1. Multiple Choice
CLEARLY indicate which response is the MOST correct.
1) Governments engaged in deficit spending are
a) preparing for an imminent election.
b) incurring expenditures larger than tax revenues.
c) using countercyclical Keynesian policy.
d) supporting an artificially high exchange rate.
2) Which of the following is NOT an accepted method of measuring GDP
a) equivalent profits approach
b) final goods and services approach
c) value added approach
d) income approach
3) Arguably the main disagreement amongst macroeconomists is
a) whether government investment is productive.
b) whether increased taxes are a burden on the private sector.
c) whether rule of law is important for economic security.
d) whether prices adjust quickly to achieve market equilibrium.
4) In general, the larger is the marginal propensity to consume
a) the smaller is the marginal propensity to invest.
b) the smaller is the expenditure multiplier.
c) the larger is the marginal propensity to invest.
d) the larger is the expenditure multiplier.
5) The so-called "Keynesian Cross" or "Income-Expenditure" model
a) describes equilibrium in goods markets only.
b) describes equilibrium in goods and assets markets.
c) has no equilibrium description.
d) has many ambiguous equilibrium descriptions.
6) Standard assumptions for dynamic adjustments in the "IS-LM" model are
a) that output is perfectly elastic responding quickly to economic shocks.
b) that interest rates are subject to long and variable lags.
c) that goods markets are in equilibrium always but not asset markets.
d) that asset markets are in equilibrium always but not goods markets.
7) In general, crowding out refers to
a) government taxation reducing private incentives to invest.
b) policy that raises prices and thus reduces private spending.
c) lisencing and regulation that excludes private interests.
d) policy designed to reduce competition.
8) In theory, real exchange rates.
a) must always equal nominal exchange rates.
b) must follow nominal exchange rates closely.
c) need not equal nominal exchange rates.
d) should always equal one.
9) Compared to a closed economy, an open economy will generally
a) have a smaller expenditure multiplier.
b) experience more inflation.
c) lose control of its monetary policy.
d) all of the above.
10) Model variables which are meant to be explained are called,
a) policy variables
b) aggregate variables
c) endogenous variables
d) exogenous variables
2. Short-Answer
Answer the following four (4) questions in the booklets provided using clear sentences supported by diagrams and/or math as necessary. (10 marks each)
1) Making reference to the concept of interest rate parity explain how a
change in exchange-rate expectations could lead to an immediate change in the actual exchange rate.
2) Explain what is meant by "monetary neutrality" and how it relates to the predictions of both the Classical and Keynesian models of the macro-economy.
3) The adjustment of an economy as a result of a monetary policy change depends on two general responses. Using the IS/LM model of the macro-economy as your basis, explain what these two responses are and under what circumstances monetary policy will be most effective.
4) According to the Keynesian AD/AS model what would the consequences of an increase in natural-resource scarcity be for the macro-economy?
3. Problems.
Answer the three (3) problems below in the booklets provided.
1) Consider the following representation of a model economy, as follows,
C = 600 + 0.9Y G = 90
I = 900 - 40i T = 100
Q = 0 M/P = 100
X = 0 L(i, Y ) = 0.1Y - 10i
i) What is the equation for the IS curve in this model economy?
ii) What is the equation for the LM curve in this model economy?
iii) Solve for the economy's equilibrium income and interest rates.
2) Consider the following model of a macro-economy
C = 1000 + 0.9Y G = 0
I = 700 - 40i T = 0
P = 4W M/P = 800
W/Pe = 0.05Y L(i, Y ) = 0.5Y - 50i
i) Derive the Aggregate Supply curve for this economy.
ii) Derive the Aggregate Demand curve for this economy.
iii) What is the "Medium Run" output for this economy?
iv) If Pe > P would this economy be in a state of underemployment or over employment?
3) Consider the AD-AS model from chapter 10 of the course textbook.
i) Use this model to illustrate (with clear labels) a point of long-run equilibrium at full-employment.
ii) Now, assume that a new technology lowers the costs of production and this shifts Short-Run Aggregate Supply to the right. Clearly illustrate the short-run effects on aggregate output and the price level.
iii) Assuming that this change is long-lasting, illustrate and explain the adjustment of this economy over time to a new long-run equilibrium.
iv) What will happen to the average price-level in this economy as it adjusts to its new long-run equilibrium. Explain.