Scribd
Upload
18 views2 pages

Mock Intermediate Key

Uploaded by

Vir Sethi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
18 views2 pages

Mock Intermediate Key

Uploaded by

Vir Sethi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 2

Midterm Mock Exam Econ UH 2030: Intermediate Macroeconomics

NYUAD, Spring, 2024

Instructions: No books or notes of any kind are allowed, you are not allowed to have a
mobile phone not a calculator with you during the exam. Answer the questions of the exam
sequentially as per the question numbering. Use a black or blue pen to write your answers.
Scratch paper will not be graded. Write your name at the top of every page of your answer sheet.

Question 1: IS-LM
Consider the following numerical example of the IS-LM model:
• C = 300 + 0.6Y D

• I = 270 + 0.2Y − 400i


• G = 320
• T = 220
• ī = 0.05.

Part 1.1 Derive the IS relation and solve for equilibrium Y

Recall output is equal to: Y = C + I + G, then


Y = 300 + .6(Y − 220) + 270 + .2Y − 400i + 320
Solving for Y:
Y = 3790 − 2000i = 3690

Part 1.2 Using the value of Y you just found, derive the equilibrium values of C and I.

C = 300 + 0.6 ∗ (3690 − 220) = 2382


I = 270 + 0.2(3690) − 400 ∗ 0.05 = 988

Part 1.3 Suppose that government spending increases to G = 400. Solve for Y, I, and C.
Describe in words the effects of this expansionary fiscal policy.

New output is:


Y = 300 + .6(Y − 220) + 270 + .2Y − 400i + 400
Solving for Y:
Y = 4190 − 2000i = 4090
C = 300 + 0.6 ∗ (4090 − 220) = 2633
I = 270 + 0.2(4090) − 400 ∗ 0.05 = 1068

Medium Run

Part 1.4 Assume the economy above is in a recession (Y is below potential). Illustrate and
explain the policy mix that can be used to increase output.

See figure 9-4 in the textbook and consider starting from point A’, thus the economy is in a
recession. The, both expansionary fiscal and monetary policies can be used to increase output.
The fiscal expansion shifts the IS curve to the right (IS to IS’). A monetary expansion shifts
the LM curve down (LM to LM’) the policy mix results in higher output (Y to Y’).

Question 2: The Labor Market


Assume the economy of Hobbit Town has 850 inhabitants. The numbers below gives a break-
down of the inhabitants:

1
• 180 Children under the age of 18
• 115 Retired (45 are still physically able to help out at the local community center)
• 70 Have their own business (40 of these business owners have their spouse working in the
business)
• 35 Have lost their job when the local plastic factory shut down (10 have given up all hope
of finding a job)
• The remainder of the inhabitants are employed at the local mine

Part 2.1 Calculate the labor-force participation rate.

The labor force includes full time workers, part time workers, those who run their own
business, and those who do not have a job but are looking for a job. The labor force consists of
(70 + 40 + 25 + 410) 545 people. The working age population consists of the labor force plus
those not in the labor force. The 10 discouraged workers and the 115 retired people are not
in the labor force, but assuming they are capable of working (45) , they are part of the adult
population. The adult population consists of 600 people (70 +40 +25 +410 +45 +10) , so the
labor force participation rate is equal to 545/600 or 90.8 percent.
Part 2.2 Illustrate and briefly explain what would happen to natural rate of unemployment in
Hobbit Town if unemployment benefits were to increase in the country.

An increase in unemployment benefits can be represented by an increase in z (i.e a higher


bargaining power from the workers side). It shifts the wage-setting relation up, from WS to
WS’ (see figure 7.7 in the textbook) causing the new natural rate of unemployment to be higher
at point A’. Because an increase in benefits makes the prospect of unemployment less painful, it
increases the wage set by wage setters at a given unemployment rate. At a given unemployment
rate, higher unemployment benefits lead to a higher real wage in the short run. In the medium
run, only a higher unemployment rate brings the real wage back to what firms are willing to
pay
Question 3: IS-LM-PC

Part 3.1 Derive the equation defining the Phillips Curve from the wage setting and the price-
setting equation.

See Lecture 8: Slides 5 until 19


Part 3.2 Explain how the relation between inflation and unemployment depends on how agents
form expectations of inflation.

If expectations are anchored, as they were in the 1960s and have been again since the
mid-1990s, then the Phillips curve takes the form of a relation between inflation and unem-
ployment. Inflation is higher than expected if unemployment is below the natural rate; it is
lower than expected if unemployment is above the natural rate. If, however, expectations are
unanchored—as they became in the 1970s and 1980s—and expected inflation this year is equal
to inflation last year, the Phillips curve relation becomes a relation between the change in in-
flation and unemployment. Inflation increases if unemployment is below the natural rate, and
it decreases if unemployment is above the natural rate.
Part 3.3 Assume that the economy starts at Y < Yn , define the short-run equilibrium, then
the medium-run equilibrium.

We are given a scenario where output is below potential. The short run equilibrium is
characterized by lower inflation than the target inflation pi,¯ we can clearly see that by the
Phillips curve. In the medium run, the central bank reduces the interest rates to maintain
drive inflation closer to target. This in turn boosts the economy by increasing investment and
thus bringing back output back to potential.

You might also like