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    Mock Exam EC1 B3

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    Salma

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    Mock Exam EC1 B3

    Uploaded by

    Salma
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    MockExamEC1B3

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    4 views4 pages

    Mock Exam EC1 B3

    Uploaded by

    Salma

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 4

    Summer 2024 Mock Exam

    EC1B3
    Macroeconomics I

    Suitable for all candidates

    Instructions to candidates

    This paper contains 2 sections. Section A contains 2 questions. Section B contains 1 question. Each
    question and subquestion indicates how many marks the answer will carry.
    Answers should be justified by showing work.
    You have to answer ALL questions.

    Time Allowed Reading Time: 15 minutes


    Writing Time: 2 hours

    You are supplied with: No additional materials

    You may also use: No additional materials

    Calculators: Calculators are allowed in this exam

    © LSE ST 2024/EC1B3 Page 1 of 4


    If during this examination you feel you need to make additional assumptions in order to proceed,
    then please do so stating your assumptions clearly.

    Section A: Short questions


    (Answer ALL questions.)

    Question 1
    Patents and innovation. [This question carries a total of 20 marks]

    The graphs above represent data about patent grants for the country of Sheldonia. In the left panel,
    we see data about the ratio of patent grants to patent applications. In the right panel, we can observe
    the share of each type of patent over the total number of patent grants.

    (a) Explain what the ratio of patent grants to applications tells us in terms the quality of innovation
    in Sheldonia. [7 marks]
    (b) Why would it be misleading to base our judgement of the quality of innovation in Sheldonia only
    on this indicator? [6 marks]
    (c) Focusing on the data presented in the right panel (about the different types of patent grants),
    comment on the evolution of the quality of innovation in Sheldonia in the last 20 years.
    [7 marks]

    © LSE ST 2024/EC1B3 Page 2 of 4


    Question 2
    Covid vaccines and economic growth.
    [This question carries a total of 20 marks]
    Economists have estimated that the vaccination of the population during the Covid pandemic had
    a strong positive effect on economic growth. They believe this effect works mostly by permanently
    increasing total factor productivity: a higher vaccination rate implies that companies can operate
    more efficiently.
    (a) If you believe that the best economic model to explain economic growth is the Solow growth
    model, what would the long run effect of a successful vaccination campaign on the growth of
    living standards be? Support your reasoning with diagrams and equations as needed.
    [10 marks]
    (b) If you believe that the best economic model to explain economic growth is the Romer model,
    would your answer change? Support your reasoning with diagrams and equations as needed.
    [10 marks]

    © LSE ST 2024/EC1B3 Page 3 of 4


    Section B
    (Answer ALL questions)

    Question 3
    Collateral and taxes [This question carries a total of 60 marks]
    Winston owns a house. The value of the house is currently estimated at pH , where H = 1 is the size
    of the house, and p = 1 is the price per square meter. He lives for two periods, and he cannot sell
    the house in the first period. He has an income of 2 in the first period, and 2 in the second period.
    In each period, he pays lump sum taxes to the government (respectively t = 1 in the first period and
    t′ = 1 in the second). He consumes c in the first period and c′ in the second period. The real interest
    rate is r for borrowers and lenders. However, banks only lend against collateral as there is limited
    commitment in this economy.
    (a) Write down the intertemporal budget constraint for Winston, ignoring the limited commitment
    problem and the collateral constraint. Explain how the intertemporal budget constraint is com-
    puted. Draw the intertemporal budget constraint in a diagram. [10 marks]
    (b) Derive the collateral constraint. Explain how you have computed it. In a new diagram, draw the
    true intertemporal budget constraint including the collateral constraint. [10 marks]
    (c) The utility function of the family is given by U (c, c′ ) = ln(c) + ln(c′ ). Ignoring the collateral
    constraint for the moment, calculate the optimal choice of current and future consumption for
    Winston. [10 marks]
    (d) Now look again at the collateral constraint. Is the optimal level for c achievable, given the col-
    lateral constraint? What about c′ ? Explain. [10 marks]
    A new law is passed by the Parliament, stating that if a consumer does not pay its taxes, the govern-
    ment can take its wealth, but not its income. It also says that, if a consumer does not pay its taxes
    and it does not repay its debts to the bank, then the government has to be paid first, and the bank can
    only get whatever remains of the wealth of the consumer after taxes have been paid.
    (e) What would be the maximum amount of future taxes t′ that the government will be able to raise?
    [10 marks]
    (f) Assume that the government will choose t′ to be the maximum possible, as calculated in the
    previous question, while t = 1 as before. How would Winston’s collateral constraint change?
    Draw a diagram of the new intertemporal budget constraint and the collateral constraint. Explain
    the consequences of this law on his optimal choice. [10 marks]

    END OF PAPER

    © LSE ST 2024/EC1B3 Page 4 of 4

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