macro tests

8/2/2019 Macro Tests

1/27

fconorn ics 3320" laLTo( '"conom ics

Spring z o o sDr. Doyle

\,rXAMINA nON #1

Shurt Answer Questions:I. \l, hal determ ines the economy s full employment level of GDP in th e long run?

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Karl Marx thought that an increase in capital would increase competition among workersfor increasingly scarce jobs and drive dO\\11 rca I wages throughout the economy. Usemodern labor market theory to show whether he was right or \\ rung.

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2/27

. 3 . During the recent real estate boom many people bought houses with adjustable ratemortgages. That means their monthly mortgage payouts rise when interest rates rise andfall when interest rates fall. Using the closed economy saving/investment framework, ( 5 , " 1 = - )show whether the tax rebates that people will receive this summer will be good news orbad news for people with ARM's. Assume government spending and transfers areconstant. ~,-"7(c{'~>Scl{j : : ; : - - y - t f

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-l. A recent study predicted that the coming "bear" market in real estate will result in theloss of about $2 trillion in homeowner's equity as house prices fall. This willdramatically decrease private wealth. Show how this will affect U.S. national saving andhow this would in turn affect the U.S.'s current account deficit (remember ifNXdecreases the current account deficit increases; ifNX increases, the current accountdeficit decreases).

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5. a. Give an example of th e changes in the three main fiscal policy variables thatwill rcsul t in an increase in the g overnm ent b udg et deticit.1

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4/27

6. Ben Bernankc, the current chairman of the Fed and one of your textbook's authors,recently explained the U.S. 's current situation in the areas of international trade andfinance as being attributable to a "foreign saving glut." In terms of the open economymodel, his assertion can be summed up as involving a situation where the world realinterest rate is significantly below the goods market clearing interest rate in the U.S. Usethe open economy saving/investment framework to show what this situation would implyabout the U.S.'s current account and whether we would be bOITO'I,ing or lending largeamounts in international financial markets.

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EXTRA CREDIT:The growth accounting framework suggests that technological progress is anindispensable prerequisite for rising living standards. Assuming that the population isgrowing by 2% per year, use each of the following scenarios to illustrate why.

a. What will be the rate of growth in per capita GD P if technology is constant and capitaland labor are growing by 2% per year?

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b. What will be the rate of growth in per capita GDP if technology improves by 2% per yearand capital and labor are growing by 2% per year?

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5/27

Use the closed economv Saving/Investment framework to show and tell what will.vhappen to the real interest ratein the U.S. if a decrease in household wealth as aresult of declining real estate prices cause consumers to reduce their consumptionspending at all levels of disposable income.

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Y ~ I ~AEconomics 3320 ((jjMacroeconomics

o1 .FIRST EXAMINATION

What determines the long run, full employment level of GDP?rVOc) I.A ( -hl),," -t.cc V t . V1 D l0 3 JIt1ft l ( S o Co: P \tc. ~o v ' V l c 1 v . . n-\-- ~ I e . . b0r

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Spring 2009Dr. Doyle

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6/27

Explain how any of these fiscal policy changes would affect the governmentbudget assuming that the budget was initially in balance.~T:-;) S & l V T z: T- Ll - Tf< = > dJ_(r(a_ S A - IV\. -b".(' S ; .N I: i !CC{(AS- l 0. ~ SLlVT::=) 5(.1\1T.(.0 = '> btAd?-+ d . J - t ; c c , +

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c. Show and tel! what will happen to the real interest rate and the level ofInvestmentspending in the U.S. following the particular policy change you describe above.~ - r - = . > 1c { r ) f o S ~ \ - ; J l < In i ow -. : :: ) f t: : : ') S . J . . . - to ~ )= > \Jt'",\ + -0 " ::) (SJI)1


7/27

4,(j)Use the labor market framework to show the affect of a large increase in thecapitalstock on real wages and theleveI of employment.

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b. Use the equation of exchange to show what the most serious potential adverseconsequence of the Fed's actions would be. . f:!r M V : : : ' \ 'F '~ ~ ') 1M = > W " : : > 7rlU~DV'-7~-?

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6~",ppose the U.S. is currently running a large trade deficit given the configuration. of Savings/Investment anti the world real interest rate depicted in Diagram 1.Give an example ofa monetary or fiscal policy change that would increase netexports and lower the current account deficit and show how it would work toaccomplish this objective.S< : to . ._ . . \ c:"" - ! I e

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b. Ifthe policy change you described above worked as intended, would you expect itto result in more or less domestic borrowing hom abroad? Use the logic ofbalance of payouts accounting to explain your answer.

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EXTRA CREDIT: Many people seem concerned that China has dramatically increasedits holding of U.S. government debt securities (T-Bills, Treasury Bills, etc.) over the lastfew years. Some seem to think that it is part of some sinister plot to topple the U.S.financial system. Explain how this is simply a logical corollary of the large trade deficitsthe U.S. has been running with China over the last few years .. (7 points possible)

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11/27

J) a) Suppose the Fed engages in large, sustained open market purchases of U.S.Government Securities which increase the annual rate of money growtll!..lO%.Use the equation of exchange to show and explain what will happen 10 the rate ofG.1fiation if real GDP is growing by 3% annually, and Velocity is neitherincreasing nor decreasing. c:___.". ~-..... ..,= , I - e . . . . . . . . . - 1 . ..Sl__\ C a .rt- ~ r"""'-.o-b-

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12/27

4) a) Suppose that Government Spending on the wars in Afghanistan and Iraq increasesignificantly. Show how thiswi!l affect National Saving and Net Exports.'S &- -'W (> ..............~ ~"" ......"l (,'0 S I : S":)

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b) Does the change in Net Exports you describe above imply an increase or decreasein the large Current Account deficits the U.S. is currently experiencing?~~~~~~~(.:s~~ ~,__~ c-.. ;._.~ u ": . . . , ~ J " (

c) Will the change in the Current Account balance you describe above result inmore or less U.S. borrowing from abroad?~ Ic.: boP::::.. c.Pt- ..- tF-A

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13/27

5) Many 19th century economists argued that an increase in the capital stock wouldmake workers worse off by allowing the re racement Of\\"orkers with machines, whichwouler-increase competWon among workers for increasingly sc-arce jobs. which would inurn reduce the level o f eIlwloYITI_entand decrease real wages. Use th~ labor market. _ _ . _ ~~_ framework to show how an increase in Capital \',lill REALLY affect real wages and the

-,- level of employment in the long run.~''-.l'\' \'1 = A~lt.\~ ') _... ~ ~ (pill O~D ~ LL~t-o....Sl.,J ~\

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Current Account deficit and the amount that the U.S. borrows from abroad: higher globals~vings, which would lower the World Real Interest Rate, or lower global savings, whichwould increase the World Real Interest Rate? Explain. I-!INT: Set up the problem so thatthe goods market clearing interest rate in the U.S. is initially equal to the World Reall~~>--- --- .s..~~ '-1u.; V'-e,J r.lh~;;,J'0vJ- L . _ c . . + t 'u-- G \ 't J ; 'v' A I{"''"' \

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14/27

. 1 ing on traveling throughEXTRA CREDIT (5 points possible): ~~p~~se ~'~l~~I~!;11:d cannot urchase EurosEurope next summer. You curren~Jy 10, o.n Jd . .'. 1 t S ate of inflatlOE If there IS a sustame 111creasen .befo~e you go to urop:. " '" ow and when you leave for Europe, wOl~ldrelative to .the rest o!the world betV\ec~ n ORE oods and services in Europe durmgthis result Inyou being able to purchase M. hglue of the Dollar relative 10 theyour travels or LESS as a result of changes m t evaEuro?~ h..'---.>Q 0... ~""'-~ ~ ~ ~ n..._ '""'_"::,_"~~ ~=' )~~~dcc,~~~,\\ 'pc> ~~"' )"Q)>1;.) ( ~6- ~ ~~~'\~ ~~ --r-r-o,~ u . . . . : . " i \ \ ~C'__)_.~ _ ; _ f " " \y~ 'bec_ ~~ ~cJ ~ ' t : > . " \Yv:ot . . . . . o , ~ < k ~ ~ . . u . s : : : . . . < " " ' < : : > 1 - - - '= '";....\ ~b~~~~~

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15/27

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z : ! \ rt/ J Fall 201 ()J Dr, Doyle

I\~ .dK~"A Cv--cl .: -A t -Fe - 33 20 Intcrmed iate Mae roeconom ic Theory

Exam #1

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2) Use the closed economy Saving-Investment framework to show and explain how adecrease in taxes ....ill affect National Saving. the real interest rate, and the level o rInvestment spending in the long rW1.

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16/27

3) a) Suppose the Fed engages in large. sustained open market purchases of U.S.Government Securities which increase the annual rate of money growth to 30%.l I se the equation .of \ ' " : 2 ( _ d l . a n g s , . ~ to show and explain what wi I I happen to the rate ofinflation i f real GUP is growing by 3% annually, and Velocity is neitherincreasing nor decreasing.

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b) Ir the real interest rate is 3%. and the expected rate of inflation _. the actualrate of inflation following the monetary expansion described in "


17/27

4 ) it) S upp ose that G ov ernm en t Spending on the wars in A fghanistan and I raq decreasesign ifican tly, Show how this will affect National Saving and Net Exports.

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11) W !I! the change in the C urrent A ccount balance you describe above ICSU.\t inmore or less U .S . b orro win g from abroad')

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18/27

5) M any 19th century econom ists argued that an increase in the capital stock wouldm ake w orkers worse offby allow ing the replacement of workers w ith m achines, vvhichwould increase competition among workers for increasing ly scarce jobs, which would inturn reduce th e le ve l of employment and decrease real wages. Usc the labor n1I" _( , I J@ .IL..

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countries as they undergo econom ic development and their econom ies begin 10 growrapidly, This is because capital is very scarce in such countries , and rapid econom icdevelopment is associated with a large increase in the expected future m arg inal producto r capital. U se the open econom y Saving-Investm ent fram ework to show whv it is"normal" len such countries to experience large increases in borrow ing from abroadd u ri n g the carl y stages o r th e j r econorni c de vel 0p m e n t.

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19/27

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l:xnCI\ CRI':])!T (5 points possible): Suppose you are planning on traveling. throughEurope next summer. You currently hold o nly D oll ars . and cannot purchase Eurnsbefore you go to Fu rope. I f there is a sustained increase in the U .S rate of inflationrelative to the rest of the world between now and when you leave for Europe, wouldthis result in you being able to purchase M ORE goods and services in Europe duringyour travels or LESS as a result of changes ill the value of the Dollar relative to theEuro?

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\ 0 G : : : = - l'lt+I C'll , r JMacroeconomic Theory Exam #2-0 Spring 2009Dr. Doyle

1) Many people are concerned about reducing the size of the Federal Governmentbudget deficit.a. Give an example of a change in one of the major fiscal policy variables thatwould lead to a reduction in the government b_u~t deficit.

y < . . c - + l ~(_-, ({ (_(j[l{ ~ (I ) b. In light of the fact that the U.S. is currently in the midst ofa severe recession,

use the IS-LM model to show the effects of the policy changes you describeabove on output and interest rates, and whether this would worsen or alleviatethe current recession. In other words, would this be a good time to try tobalance the federal government budget?

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How will an increase in the money supply effect stock and bond prices? Explainbriefly.

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21/27

3) Could a decrease in household wealth caused by falling real estateprices that causesa decrease in Consumption spending at all levels of income and interest rates be atleast part of the cause of our current recession? Use the closed economy IS-LMframework 10 show whether this might be either likely or unlikely.

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Use the closed economy IS-LM framework to show how monetary policy can becombined with fiscal policy to minimize or eliminate the crowding out problem.

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22/27

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Use the closed economy IS-LM framework to show how a large increase in theperceived risk of non-monetary assets, which results in a massive "fl ight toliquidity", will, affect GDP and interest rates.

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'yUse the open economy IS-LM framework to show how monetary policy can be usedto cause a country's money to depreciate against foreign money, and the effect thatthis depreciation would have on Net Exports and GDP once the economy returns toboth internal and external balance.

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7) EXTRA CREDIT (6 points possible). Use the open economy IS-LM framework toshow and explain why a country's monetary authority loses its ability to conduct adiscretionary monetary policy under fixed exchange rates.

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~;;conolTIies3320 Fall 20 I0Intermediate Macroeconomic Theory Dr. Doyle~ c J .- e .- - : : : -" G

Examination #2--LG:;{-Si G - : : ~ s :I) Many people are concerned about reduc ing the size of the Federal Governmentbudget deficit

u_ Give all example ora change in one of the major fiscal policy variables thatwould lead to a reduction in the government budget deficit.

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b. In light of the fact that (he U.S. is currently in the midst of a severe recession,usc the IS-LM model to show the effects of the policy change you describeabove on output and interest rates. and whether this would worsen or alleviateth e current recession. In other words, would this be a good time (0 try tobalance the federal government budget?

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2) Changes in monetary policy have an immediate and predictable affect on interestra te s. b on d p ric es and stock prices. Usc the liquidity preference framework !Oshow how a large open market purchase of bonds by the Fed will affect theinterest rate, bond prices, and stock prices in the short-run .

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C ould a decrease in household wealth caused by fallin g real estate prices th at c au se sa d ec re as e i n Consumption (C) at all levels of income and in terest rates he atleast pan of the cause of our current recession'? U se the dosed economy lS -LMframework to show whether th is m ight be either likely or unlikely,

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5) Use the open economy IS-LM framework 10 show and explain why a countrysmonetary authority loses its ability to conduct an independent m onetary poli .i:_ __ _(i.e, to ~ monetary policy to stimulate the currency) undCf~~"_~'dcx~h


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You m ay answer only one e xtra c red it q ues tio n:7) EX TRA C REDIT (A ): D raw a Phillips C urve and then select and label a particular

poin t on i t that reflects the particular pole com bination of variables with in the"pbliey trade off" that you consider m ost desirable. Theil b~ienyexplain in wordswlA lt the poin t you have selected indicates about what you consider to he the mostdesirablepolicy trad e o ff. (5 points possible)~,) \

7) EX TRA CREDIT (B): U se the closed economy IS -LM framework to "how how alarge m srcase ill the perceived fisk ofnoo-l11onctary assets, which results in am assive "flight to liquidity". w ill, affect GOP and in terest rates .. HINT: A "flight hrofbliquidity ' m eans a large increase in the dem and for many at all levels ofODP andinterest rates. (5 possible poin ts)

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