Master Economics & Business Understanding the World Economy. Sample Essays and Exercices

Size: px
Start display at page:

Download "Master Economics & Business Understanding the World Economy. Sample Essays and Exercices"

Transcription

1 Master Economics & Business Understanding the World Economy Sample Essays and Exercices Examples of short exercises 1. Decreasing Marginal Product of Capital and Depreciation Consider two sectors using the same type of capital to produce two different goods. Production in sector 1 is characterized by a low depreciation rate whereas production in sector 2 is characterized by a high depreciation rate. Both sectors share the same initial level of capital stock. Using a diagrammatic example, discuss which sector will grow/shrink faster in the short-run and how your answer depends on the exact location of the initial level of capital stock. (please be concise, limit your answer to one graph and 150 words) Answer Output if K starts here, both sectors will grow but low depreciation sector will grow faster as further away from steady state if K starts here, low depreciation sector will expand and the other one will shrink if K starts here, both sectors will shrink but high depreciation sector will shrink faster as further away from steady state Output in both sectors High Depreciation Low Depreciation Savings in both sectors Steady State K high depreciation sector Steady State K Low depreciation sector Capital Stock Different depreciation rates imply that the sector with a higher depreciation rate is characterized by a lower steady state level of capital than the sector with low depreciation rate. If both sectors start at a level of capital stock below the steady state of the high depreciation sector, then the low depreciation sector will grow faster because of the higher net investment. If the initial level of capital is above the steady state of the low depreciation sector, then the high depreciation sector will shrink faster than the low depreciation sector. For levels of initial capital between the two steady states, the low depreciation sector will grow whereas the high depreciation sector will shrink. The pace of these changes will depend from the relative distance from their respective steady states.

2 2. Financial crisis and the UK labour market UK unemployment has been increasing for a sustained period of time. March 2010 figures reveal that it is now at 16-year high. Meanwhile employment and real wages have both declined. Using a diagrammatic analysis, show the channel through which a financial crisis is likely to affect the level of employment as well as real wages. Discuss how your answer depends on the factors affecting the slope of the labour supply and/or rigidities in the labour market. (please be concise, limit your answer to 150 words) Answer: The financial crisis can be viewed as a negative shock which has downward shifted labour demand. If the labour supply is completely inelastic (i.e. substitution effect exactly offsets income effect) and assuming skills are uniformly distributed across workers, then real wages will fall with no change in the level of unemployment. In UK data, however, employment and real wages have both fallen suggesting that the substitution effect is significantly stronger than the income effect (case 1 on the graph). Other possibility is some downward rigidities on wages: a fall in labour demand does not lead to a large enough fall in wages (when the supply curve is vertical) and some workers have to be sacked to keep firm profitable (case 2 on the graph). Real Wage Case 1: Flexible wages but Upward Supply Curve: Substitution Effect Dominates Income Effect Real Wage Case 2: Downward wage rigidity leading to a Short- Run Upward Supply Curve Labour Demand Upward Sloping Supply Curve: Substitution Effect dominates Long-Run Supply Curve (1) w 1 (1) Short-Run Supply Curve due to wage rigidity w 1 (2) (2) w 2 w 2 Financial crisis w 3 (3) Financial crisis L 2 L 1 Employment L 2 L 1 =L 3 Employment Financial crisis moves equilibrium on the labour market from (1) to (2) along the upward sloping curve. Labour market equilibrium moves to (2) in the short-run due to real wage rigidities. Then equilibrium moves to (3) in the long-run after wages fully adjust.

3 3. Uncovered interest parity Assume that the current (annual) UK interest rate is 10% and that of the USA is 5%. Investors expect the exchange rate to be $1 per 1 in a year time. a) What is uncovered interest parity (UIP)? b) The current spot rate is 0.5 per 1$. Should you buy or sell sterling? c) At what expected exchange rate (for a year from now) are you indifferent between investing in USA and UK bonds given the current spot rate of 0.5 per 1$? d) Inflation numbers have just been released which indicate that this afternoon s meeting of the Bank of England will see an increase in interest rates to 20%. How does your answer to b) change? Answers: a) Uncovered interest parity states : r = r* + %e where %e is the expected depreciation of the domestic currency vis-a-vis the foreign currency, r (resp. r*) is the nominal interest rate in the domestic economy (resp. the foreign economy). b) Call r UK rate and r* US rate. Expected depreciation of sterling is (1-1/2)/(1/2)=100%. Differential r-r*is only 10-5=5%<100%. Hence sell sterling. c) Indifferent if 5%=(x-1/2)/(1/2) so x=2.5%+50%= So indifferent if sterling per $1 expected in one year (or $1/0.525 per 1) d) 20%-5%=15%=(x-1/2)/(1/2) so x=57.5% So indifferent if sterling per $1 expected in one year. (or $1/0.575 per 1)

4 Example of short essays 1) It s all about capital! Figure 1 plots the output per worker as a function of physical capital per worker in USD for selected countries. According to the concepts seen in class, discuss the following interpretation of the graph: "If we want to rise the living standards of poor countries to the level of rich countries, we just have to send them large quantities of capital". [Please do not use more than 800 words] Figure 1: Output per worker as a function of physical capital per worker in 1996 for selected countries. Correction It s all about capital! Some hints: The graph shows that countries with higher capital stock per worker have higher output per worker. But this should not be interpreted as a causal relationship: it does not mean that giving the stock of capital per worker of the US to Zambia would effectively raise income in Zambia to the level of the US. Indeed, capital is also more productive in the US, which allows the US to sustain a large level of capital in the steady-state. This is important because differences in capital per worker between Zambia and the US on this graph can have two potential sources: 1. There is indeed some lack of capital in Zambia (due for instance to low level of private savings) and Zambia is far away from its steady-state (implied by the Solow growth model). In that case, sending capital to Zambia can substitute the low level of local savings and can be efficient to raise output per capita; this would accelerate the convergence of the country towards its steadystate. Note that foreigners would be willing to lend capital as returns to capital are high

5 (because the country is far away from its steady-state + decreasing MPK). In other words, sending capital to poor countries can be an effective policy in countries far-away from their steady-state; in that case, growth can be achieved by increasing production inputs (here you could potentially refer to East Asia). 2. but one can interpret the graph very differently: Zambia has very little capital because returns to capital are very low in Zambia; in other words, Zambia is close to its "bad" steady-state and cannot grow much more through capital accumulation. Sending more capital would not help much in that case! At this point, you could discuss why some poor countries have a "bad" steady-state (institutions, technology, or more boadly TFP and human capital). 2) The Lucas Paradox Using the graphs showing Average Net Capital Inflows per Capita (over the period ) as a function of GDP per capita in 1970 for two different samples of countries ( 45 emerging and developed countries and OECD countries only ) and using the concepts seen in class, explain and discuss the following paradox raised by Nobel Prize R.E Lucas: "Why doesn't Capital Flow from Rich to Poor Countries?" [Please do not use more than 1000 words] Average Net Foreign Capital Inflows per Capita Sample of 45 emerging and developed countries ISR GRC ARG IND URU US JAP NOR GDP per capita in 1970

6 Average Net Foreign Capital Inflows per Capita Sample of OECD Countries ISR PRT GRC SPA US UK GER GDP per capita in 1970 Note: GDP per Capita in 1970 denotes GDP per Capita in USD adjusted for PPP in Average Net Foreign Capital Inflows per Capita denotes Net Capital Inflows per Head in USD averaged over the period Example: 1603 USD for Argentina means that on average over the period , 1803 USD (per head) were lent. A negative number means that on average the country was lending capital abroad (e.g Japan). Correction The Lucas Paradox: 1) Data description I expect student to explain that there is no clear pattern overall on the previous graph: we do not observe capital flowing to the poorer countries in 1970 in a systematic way. More precisely, it seems that the poorest countries do not seem to receive large inflows but above a certain level of income per capita (roughly 5000 USD) we do observe a tendency of capital flowing from the rich to the poor (see graph). The US being somehow an outlier: richest country but borrowing to the rest of the world on average over the period (best answers should try to explain why: quality/liquidity of financial assets provided by the US seems a right way to go). 2) Explaining the Lucas paradox: Assuming decreasing marginal productivity of capital as in the neoclassical growth model, poorer countries with low level of capital stocks should have higher marginal productivity of capital, provide higher returns to foreign investors and attract capital flows: we should observe a negative relationship on the previous graph. 3) Solving the paradox Explain that differences in return to capital are not only driven by differences in capital stock but also by differences in human capital and TFP (institutions, technology differences ). Capital should flow towards poor countries everything else equal. An explanation of the following graph provides a good answer:

7 Marginal Productivity of Capital Poor Countries with Low TFP/Low levels of Human capital Richer Countries with High TFP/High levels of Human capital Required rate of return Country 1 Country 2 Country 3 Capital Stock On the graph, country 1 has a low TFP (due to poor institutions for instance) and/or a low level of human capital: as a consequence for any capital stock, country 1 has a lower MPK than country 2 (and 3) which are on the blue schedule. If country 1 is at the point of the graph, the MPK of country 1 equalizes the world required rate of return and we should not expect the country to receive capital inflows, and thus despite that country 1 is poorer than country 2 and 3. To the opposite, country 2 has also a lower level of capital stock than country 3 but has a high MPK due to high TFP/High level of human capital: we should expect capital to flow towards country 2 since the MPK is higher than the required rate of return. Other valuable points: - Higher risks (expropriation risk, sovereign risk, volatile sectors as primary commodities ) in poorer countries: this shifts upwards the required rate of return for these countries once we adjust for risk. - Poorer countries tend to have more restrictions on capital inflows/more financial repression/capital markets imperfections - Non-decreasing MPK: at low level of income, MPK is increasing Poverty Traps 4) Controlling for TFP/Human capital Best answers should try to put similar countries in a bin to control for TFP/Human capital and see if the Lucas paradox disappears for these countries. One way is to look at OECD countries (as suggested in the spreadsheet), assuming that variations in TFP levels and human capital are not too large between these countries. The following graph seems to confirm that (US being an outlier). This confirms that conditionally on TFP levels/human capital, capital flows towards countries where it is scarce. Similar to the concept of conditional convergence as seen in class.

8 Average Net Foreign Capital Inflows per Capita Sample of OECD Countries ISR PRT GRC SPA US UK GER ) Fiscal policy GDP per capita in Under which conditions fiscal expansions have a large impact on aggregate demand and output? Discuss the implications for a country like Greece running a large austerity plan. [please no more than 700 words] Key elements [see lectures 9-11] - Discuss the Keynesian multipliers and the limits to the effectiveness of fiscal policy as a stabilization tool (Ricardian equivalence, crowding out of investment and net exports) - Implications: fiscal austerity less costly when country more open and with flexible exchange rate regime (as fiscal multiplier is smaller). Greece typically is a country not very open and with fixed exchange rate. Makes adjustment more costly. - Can also add a discussion regarding the crowding in of investment if austerity plan. Depends on the response of real interest rates to the austerity plan. Potentially ambiguous depending on the recessionary effect of the plan. 4) Financial crisis in Iceland What was the impact of the sharp depreciation of the Icelandic Krona in October 2008 on the external debt of Iceland (see fig. 1 and 2)? How did the structure external debt affect investors decisions before the crisis? [600 words maximum] You were expected to talk about the currency composition of external assets and liabilities for Iceland, investigate the capital losses on the external position associated to a devaluation of the Krona with respect to other currencies and discuss how this aggravates external debt of Iceland ex-post. Ex-ante, investors can expect Iceland to be harshly hit in case of a Krona depreciation (financial fragility) which leaves room for multiple equilibria, one where Iceland is hit by a self-fulfilling currency crash (see class notes, lecture 12).

9 Fig. 1: Currency crash in Iceland in October 2008 (nominal exchange rate: Icelandic Krona/Euro) 800% Foreign currency liabilities of banks and CB forex reserves september % 600% 750% GDP 500% 400% 300% 200% CB forex reserves: 21% GDP CB swaps and credit lines: 14% GDP 100% 0% Foreign currency liabilities of the banks CB forex liquidity Fig. 2 : Forex exposure of banks liabilities in Iceland before the crash.

International Finance Master PEI Nicolas Coeurdacier. Sample exam

International Finance Master PEI Nicolas Coeurdacier. Sample exam International Finance Master PEI Nicolas Coeurdacier Sample exam Documents and calculator not allowed. For the essay questions, please be precise but concise in your answers. I. Multiple choice questions

More information

Sample Exam Questions with Answers

Sample Exam Questions with Answers Sample Exam Questions with Answers Question 1 Answer 1 What do economists understand by the concept of money neutrality? Monetary neutrality characterizes an economy in which prices are completely flexible

More information

CHAPTER 7: AGGREGATE DEMAND AND AGGREGATE SUPPLY

CHAPTER 7: AGGREGATE DEMAND AND AGGREGATE SUPPLY CHAPTER 7: AGGREGATE DEMAND AND AGGREGATE SUPPLY Learning goals of this chapter: What forces bring persistent and rapid expansion of real GDP? What causes inflation? Why do we have business cycles? How

More information

1. The Keynesian cross and the IS-LM model [10 points]

1. The Keynesian cross and the IS-LM model [10 points] 1. The Keynesian cross and the IS-LM model [10 points] 1.1. Consumption in the economy is, with 0.8. Furthermore, 400, 0, 200 and, with 300, 2000 and 0.02. 1.1.1. Assume that the saving rate increases

More information

Aggregate Supply and Aggregate Demand

Aggregate Supply and Aggregate Demand Aggregate Supply and Aggregate Demand Econ 120: Global Macroeconomics 1 1.1 Goals Goals Specific Goals Be able to explain GDP fluctuations when the price level is also flexible. Explain how real GDP and

More information

Chapter 13. Aggregate Demand and Aggregate Supply Analysis

Chapter 13. Aggregate Demand and Aggregate Supply Analysis Chapter 13. Aggregate Demand and Aggregate Supply Analysis Instructor: JINKOOK LEE Department of Economics / Texas A&M University ECON 203 502 Principles of Macroeconomics In the short run, real GDP and

More information

Demand in the Open Economy

Demand in the Open Economy Aggregate Demand in an Open Economy 1. Demand in the Open Economy 2. Goods Market Equilibrium 3. Goods and Forex Market Equilibria: Deriving the IS Curve 4. Money Market Equilibrium: Deriving the LM Curve

More information

5) According to the interest parity condition, if the domestic interest rate is 10 percent and the foreign interest rate is 12 percent, then the expec

5) According to the interest parity condition, if the domestic interest rate is 10 percent and the foreign interest rate is 12 percent, then the expec Econ 330 Final Exam There are 50 multiple choice questions to this exam, each worth 2 points for a total of 100. You have 2 hours to complete the 50 questions. Good luck. 1) Suppose that the latest Consumer

More information

Short solution proposal to the compulsory assignment in ECON1910

Short solution proposal to the compulsory assignment in ECON1910 ECON 1910 Spring 2012 Lind / Willumsen Short solution proposal to the compulsory assignment in ECON1910 Problem 1: Harrod-Domar vs. Solow. In the Harrod-Domar model a change in the savings rate (s) has

More information

Chapter Outline. Chapter 13. Exchange Rates. Exchange Rates

Chapter Outline. Chapter 13. Exchange Rates. Exchange Rates Chapter 13, Business Cycles, and Macroeconomic Policy in the Open Economy Chapter Outline How Are Determined: A Supply-and-Demand Analysis The IS-LM Model for an Open Economy Macroeconomic Policy in an

More information

Name: Date: 3. Variables that a model tries to explain are called: A. endogenous. B. exogenous. C. market clearing. D. fixed.

Name: Date: 3. Variables that a model tries to explain are called: A. endogenous. B. exogenous. C. market clearing. D. fixed. Name: Date: 1 A measure of how fast prices are rising is called the: A growth rate of real GDP B inflation rate C unemployment rate D market-clearing rate 2 Compared with a recession, real GDP during a

More information

Chapter 13: Aggregate Demand and Aggregate Supply Analysis

Chapter 13: Aggregate Demand and Aggregate Supply Analysis Chapter 13: Aggregate Demand and Aggregate Supply Analysis Yulei Luo SEF of HKU March 25, 2013 Learning Objectives 1. Identify the determinants of aggregate demand and distinguish between a movement along

More information

7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Chapter. Aggregate Supply

7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Chapter. Aggregate Supply Chapter 7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Aggregate Supply Topic: Aggregate Supply/Aggregate Demand Model 1) The aggregate supply/aggregate demand model is used to help understand all of the following

More information

Goals of Topic 9. What is the exchange rate? NX back!! What is the link between the exchange rate and net exports? What is the trade deficit?

Goals of Topic 9. What is the exchange rate? NX back!! What is the link between the exchange rate and net exports? What is the trade deficit? TOPIC 9 International Economics Goals of Topic 9 What is the exchange rate? NX back!! What is the link between the exchange rate and net exports? What is the trade deficit? How do different shocks affect

More information

Assignment 5. Deadline: July 28, 2005

Assignment 5. Deadline: July 28, 2005 ECON 1010C Principles of Macroeconomics Instructor: Sharif F. Khan Department of Economics Atkinson College York University Summer 2005 Assignment 5 Deadline: July 28, 2005 Part A Multiple-Choice Questions

More information

A country s economy is in a short-run equilibrium with an output level less than the full-employment output level. Assume an upwardsloping aggregate

A country s economy is in a short-run equilibrium with an output level less than the full-employment output level. Assume an upwardsloping aggregate ADAS Practice A country s economy is in a short-run equilibrium with an output level less than the full-employment output level. Assume an upwardsloping aggregate supply curve. (a) Using a correctly labeled

More information

INTRODUCTION TO ADVANCED MACROECONOMICS Preliminary Exam with answers September 2014

INTRODUCTION TO ADVANCED MACROECONOMICS Preliminary Exam with answers September 2014 Duration: 120 min INTRODUCTION TO ADVANCED MACROECONOMICS Preliminary Exam with answers September 2014 Format of the mock examination Section A. Multiple Choice Questions (20 % of the total marks) Section

More information

Lecture 5: Open Economy Macroeconomics 1 The Exchange Rate and the Balance of Payments. Reading: BFD ch. 29

Lecture 5: Open Economy Macroeconomics 1 The Exchange Rate and the Balance of Payments. Reading: BFD ch. 29 Lecture 5: Open Economy Macroeconomics 1 The Exchange Rate and the Balance of Payments. Reading: BFD ch. 29 Key issue: That when agents (consumers & firms) in different countries trade with each other,

More information

Final Examination ECON 4020/ SPRING 2005 Instructor: Dr. M. Nirei 1:30 3:20 pm, April 28, Part I (45 points; Mark your answers in a SCANTRON)

Final Examination ECON 4020/ SPRING 2005 Instructor: Dr. M. Nirei 1:30 3:20 pm, April 28, Part I (45 points; Mark your answers in a SCANTRON) Final Examination ECON 4020/ SPRING 2005 Instructor: Dr. M. Nirei 1:30 3:20 pm, April 28, 2005 Name: Part I (45 points; Mark your answers in a SCANTRON) (1) The GDP deflator is equal to: a. the ratio of

More information

AP Macroeconomics UNIT 3 Aggregate Demand and Aggregate Supply; Fluctuations of Output & Prices

AP Macroeconomics UNIT 3 Aggregate Demand and Aggregate Supply; Fluctuations of Output & Prices AP Macroeconomics UNIT 3 Aggregate Demand and Aggregate Supply; Fluctuations of Output & Prices AP Exam Significance Students must understand t he graphs used in this unit. Students will be required to

More information

Econ 336 - Spring 2007 Homework 5

Econ 336 - Spring 2007 Homework 5 Econ 336 - Spring 2007 Homework 5 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The real exchange rate, q, is defined as A) E times P B)

More information

Practice Problems: Chapter 15 Monetary Policy

Practice Problems: Chapter 15 Monetary Policy Practice Problems: Chapter 15 Monetary Policy 1. If the interest rate on CDs increases from 5% to 10%, the opportunity cost of holding money will and the quantity demanded of money will. A) increase; decrease

More information

ECON101_Final_2012. Name: Class: Date: Multiple Choice Identify the choice that best completes the statement or answers the question.

ECON101_Final_2012. Name: Class: Date: Multiple Choice Identify the choice that best completes the statement or answers the question. Class: Date: ECON101_Final_2012 Multiple Choice Identify the choice that best completes the statement or answers the question. 1. Suppose a bank has $200,000 in deposits and $190,000 in loans. It has loaned

More information

how to build a model to explain an open economy s trade balance and exchange rate.

how to build a model to explain an open economy s trade balance and exchange rate. 19 A MACROECONOMIC THEORY OF THE OPEN ECONOMY LEARNING OBJECTIVES: By the end of this chapter, students should understand: how to build a model to explain an open economy s trade balance and exchange rate.

More information

Week 14 Tutorial Questions Solutions (Ch9&10)

Week 14 Tutorial Questions Solutions (Ch9&10) Chapter 9: Week 14 Tutorial Questions Solutions (Ch9&10) Q1: Macroeconomics P.324 Review Questions #4 Q2: Macroeconomics P.324 Review Questions #5 Q3: Macroeconomics P.325 Numerical Problems #6 a) and

More information

Consider the following economy in which only two (types of) firms operate. The activities of the two firms can be summarized as follows:

Consider the following economy in which only two (types of) firms operate. The activities of the two firms can be summarized as follows: Translated exercises for lecturers and TA English classes THE SHORT RUN Exercise 1 Calculating GDP Consider the following economy in which only two (types of) firms operate. The activities of the two firms

More information

THE PORTFOLIO BALANCE APPROACH TO EXCHANGE RATES

THE PORTFOLIO BALANCE APPROACH TO EXCHANGE RATES THE PORTFOLIO BALANCE APPROACH TO EXCHANGE RATES We will utilize the following assumptions, which provide one simple version of the portfolio balance approach. The availability of foreign bonds and lack

More information

Aggregate demand and aggregate supply analysis

Aggregate demand and aggregate supply analysis 3.2.2.2 Aggregate demand and aggregate supply analysis Aggregate demand is the total demand in the economy. It measures spending on goods and services by consumers, firms, the government and overseas consumers

More information

Practice Problems: Chapter 12 Aggregate Demand and Aggregate Supply

Practice Problems: Chapter 12 Aggregate Demand and Aggregate Supply Practice Problems: Chapter 12 Aggregate Demand and Aggregate Supply 1. The aggregate supply curve shows the relationship between the aggregate price level and: A) aggregate output supplied. B) the aggregate

More information

. consumption and investment spending.

. consumption and investment spending. Chapter 10 1. The aggregate demand curve: A. is upward sloping because a higher price level is necessary to make production profitable as production costs rise. B. is downward sloping because production

More information

2009 CHAPTER 11 Self Study Questions

2009 CHAPTER 11 Self Study Questions CHAPTER 11 Self Study Questions 1) The aggregate supply/aggregate demand model is used to help understand all of the following except A) inflation. B) business cycle fluctuations. C) the aggregate value

More information

23.8. Exercises. Exercise 1. Important concepts in the theory of the open economy. 1. Explain what is meant by a small specialized economy?

23.8. Exercises. Exercise 1. Important concepts in the theory of the open economy. 1. Explain what is meant by a small specialized economy? 23.8 Exercises Exercise 1. Important concepts in the theory of the open economy 1. Explain what is meant by a small specialized economy? 2. Define the concept of perfect capital mobility and explain the

More information

Chapter 10 Aggregate Demand and Aggregate Supply

Chapter 10 Aggregate Demand and Aggregate Supply Chapter Overview Chapter 10 Aggregate Demand and Aggregate Supply The aggregate expenditures model developed in Chapter 9 is a fixed-price-level model. Its focus is on changes in real GDP, not on changes

More information

TOPIC 8. The Open Economy

TOPIC 8. The Open Economy TOPIC 8 The Open Economy Goals of Topic 8 The currency market NX is back! What is the link between the exchange rate and net exports? How do different shocks affect the exchange rate and NX? Monetary coordination

More information

Suggested Solutions to Assignment 4

Suggested Solutions to Assignment 4 ECON 1010C Principles of Macroeconomics Instructor: Sharif F. Khan Department of Economics Atkinson College York University Summer 2005 Suggested Solutions to Assignment 4 Part A Multiple-Choice Questions

More information

Economics of Money, Banking, and Fin. Markets, 10e (Mishkin) Chapter 22 Aggregate Demand and Supply Analysis. 22.

Economics of Money, Banking, and Fin. Markets, 10e (Mishkin) Chapter 22 Aggregate Demand and Supply Analysis. 22. Economics of Money, Banking, and Fin. Markets, 10e (Mishkin) Chapter 22 Aggregate Demand and Supply Analysis 22.1 Aggregate Demand 1) The aggregate demand curve is the total quantity of an economy's A)

More information

Deree College Department of Economics Andreas Kontoleon EC 1100 Fall Semester ANSWERS TO HOMEWORK QUESTIONS FOR CHAPTER 11

Deree College Department of Economics Andreas Kontoleon EC 1100 Fall Semester ANSWERS TO HOMEWORK QUESTIONS FOR CHAPTER 11 Deree College Department of Economics Andreas Kontoleon EC 1100 Fall Semester ANSWERS TO HOMEWORK QUESTIONS FOR CHAPTER 11 11-1 Why is the aggregate demand curve downsloping? Specify how your explanation

More information

Macroeconomics: Aggregate Demand & Aggregate Supply

Macroeconomics: Aggregate Demand & Aggregate Supply RGDP HOSP 2207 (Economics) Learning Centre Macroeconomics: Aggregate Demand & Aggregate Supply The level of real GDP attained when an economy is at full capacity is called the full capacity GDP or potential

More information

The cost and consequences of a monetary union with differentiated economies

The cost and consequences of a monetary union with differentiated economies F A C U L T Y O F S O C I A L S C I E N C E S D e p a r t m e n t o f E c o n o m i c s U n i v e r s i t y o f C o p e n h a g e n BA-thesis Morten Buur Madsen The cost and consequences of a monetary

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Suvey of Macroeconomics, MBA 641 Fall 2006, Final Exam Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Modern macroeconomics emerged from

More information

University of Toronto July 22, 2011 ECO 209Y L0101 MACROECONOMIC THEORY. Term Test #2

University of Toronto July 22, 2011 ECO 209Y L0101 MACROECONOMIC THEORY. Term Test #2 Department of Economics Prof. Gustavo Indart University of Toronto July 22, 2011 SOLUTIONS ECO 209Y L0101 MACROECONOMIC THEORY Term Test #2 LAST NAME FIRST NAME STUDENT NUMBER INSTRUCTIONS: 1. The total

More information

Introduction to Macroeconomics 1012 Final Exam Spring 2013 Instructor: Elsie Sawatzky

Introduction to Macroeconomics 1012 Final Exam Spring 2013 Instructor: Elsie Sawatzky Introduction to Macroeconomics 1012 Final Exam Spring 2013 Instructor: Elsie Sawatzky Name Time: 2 hours Marks: 80 Multiple choice questions 1 mark each and a choice of 2 out of 3 short answer question

More information

Chapter 5. Saving and Investment in the Open Economy. 2008 Pearson Addison-Wesley. All rights reserved

Chapter 5. Saving and Investment in the Open Economy. 2008 Pearson Addison-Wesley. All rights reserved Chapter 5 Saving and Investment in the Open Economy Chapter Outline Balance of Payments Accounting Goods Market Equilibrium in an Open Economy Saving and Investment in a Small Open Economy Saving and Investment

More information

University of Lethbridge Department of Economics ECON 1012 Introduction to Macroeconomics Instructor: Michael G. Lanyi

University of Lethbridge Department of Economics ECON 1012 Introduction to Macroeconomics Instructor: Michael G. Lanyi University of Lethbridge Department of Economics ECON 1012 Introduction to Macroeconomics Instructor: Michael G. Lanyi CH 26 AD & AS Use the figure below to answer the following questions. Figure 26.1.1

More information

Economics Macroeconomic Theory

Economics Macroeconomic Theory Economics 202.04 Macroeconomic Theory Spring 2003 Mid-Term Exam, 27 February 2003 Please answer FIVE QUESTIONS FROM SECTION A and TWO QUESTIONS FROM SECTION B. SECTION A and B each carry 50% of the marks.

More information

I. MULTIPLE CHOICES. Choose the one alternative that best completes the statement to answer the question.

I. MULTIPLE CHOICES. Choose the one alternative that best completes the statement to answer the question. Econ 20B- Additional Problem Set I. MULTIPLE CHOICES. Choose the one alternative that best completes the statement to answer the question. 1.According to the theory of liquidity preference, the money supply

More information

TRADE AND INVESTMENT IN THE NATIONAL ACCOUNTS This text accompanies the material covered in class.

TRADE AND INVESTMENT IN THE NATIONAL ACCOUNTS This text accompanies the material covered in class. TRADE AND INVESTMENT IN THE NATIONAL ACCOUNTS This text accompanies the material covered in class. 1 Definition of some core variables Imports (flow): Q t Exports (flow): X t Net exports (or Trade balance)

More information

NATIONAL INCOME DETERMINATION PART 2: AGGREGATE DEMAND AND SUPPLY TEXT BOOK CHAPTER 10

NATIONAL INCOME DETERMINATION PART 2: AGGREGATE DEMAND AND SUPPLY TEXT BOOK CHAPTER 10 NATIONAL INCOME DETERMINATION PART 2: AGGREGATE DEMAND AND SUPPLY TEXT BOOK CHAPTER 10 PREPARATION FOR DAY 1: Read pages 187-192 in your text. A lot of this is review of the determinants of demand so focus

More information

The Full-Employment Model. Stiglitz, Walsh (2006) Economics Chapter 24 (MA6)

The Full-Employment Model. Stiglitz, Walsh (2006) Economics Chapter 24 (MA6) The Full-Employment Model Stiglitz, Walsh (2006) Economics Chapter 24 (MA6) Macroeconomic Equilibrium all markets are interrelated what happens in one market will have impact on other markets wages, interest

More information

150 points. Please write answers in ink. Allocate your time efficiently. Good luck.

150 points. Please write answers in ink. Allocate your time efficiently. Good luck. Eco 202 Name Final Exam Key 10 May 2004 150 points. Please write answers in ink. Allocate your time efficiently. Good luck. 1. Suppose that Congress passes an investment tax credit, which subsidizes domestic

More information

Practice Final Exam Economics 503 Fundamentals of Economic Analysis 2:30-5:30PM

Practice Final Exam Economics 503 Fundamentals of Economic Analysis 2:30-5:30PM Name Student ID Practice Final Exam Economics 503 Fundamentals of Economic Analysis 2:30-5:30PM Write all of your answers on this white exam paper. Do not hand in the blue books. Multiple Choices (2 points

More information

Fixed versus floating exchange rates with imperfect capital mobility

Fixed versus floating exchange rates with imperfect capital mobility 1 Fixed versus floating exchange rates with imperfect capital mobility ECON4330 Lecture 9-2 Asbjørn Rødseth University of Oslo 04/02/13 April 2, 2013 Outline 2 1 Policy regimes 2 MFT-Model 3 Effects of

More information

Practice Exam 3 Fall 2015

Practice Exam 3 Fall 2015 Global Macroeconomics ::Solutions:: Practice Exam 3 Fall 2015 Do not open this exam until instructed to do so. You have 75 minutes to complete this exam You may use a calculator; you may not use any other

More information

Intermediate Macroeconomics

Intermediate Macroeconomics Intermediate Macroeconomics Lecture 2 - Growth Facts & the Malthusian Model Zsófia L. Bárány Sciences Po 2014 January Hall and Jones 1999, QJE: In 1988 output per worker in the United States was more than

More information

QUESTION 1: SHORT VERSUS MEDIUM RUN. 30 points

QUESTION 1: SHORT VERSUS MEDIUM RUN. 30 points QUESTION 1: SHORT VERSUS MEDIUM RUN. 30 points Consider an economy that fits the AS-AD model. The labor market equilibrium is given by the AS curve. The equilibrium in the goods market is given by the

More information

MACROECONOMICS SECTION

MACROECONOMICS SECTION MACROECONOMICS SECTION GENERAL TIPS Be sure every graph is carefully labeled and explained. Every answer must include a section that contains a response to WHY the result holds. Good resources include

More information

Macro Economics. Presented By: Priyank Patwari Shikha Rawat F IN G Y A A N S E S S I O N 2

Macro Economics. Presented By: Priyank Patwari Shikha Rawat F IN G Y A A N S E S S I O N 2 and present Macro Economics Presented By: Priyank Patwari Shikha Rawat F IN G Y A A N S E S S I O N 2 1 Basic Introduction Overall Demand and Capacity of an Economy Slowdown, Recession, and Depression

More information

Answer: C Learning Objective: Money supply Level of Learning: Knowledge Type: Word Problem Source: Unique

Answer: C Learning Objective: Money supply Level of Learning: Knowledge Type: Word Problem Source: Unique 1.The aggregate demand curve shows the relationship between inflation and: A) the nominal interest rate. D) the exchange rate. B) the real interest rate. E) short-run equilibrium output. C) the unemployment

More information

2.5 Monetary policy: Interest rates

2.5 Monetary policy: Interest rates 2.5 Monetary policy: Interest rates Learning Outcomes Describe the role of central banks as regulators of commercial banks and bankers to governments. Explain that central banks are usually made responsible

More information

Chapter 22. Aggregate Demand and Supply Analysis Aggregate Demand

Chapter 22. Aggregate Demand and Supply Analysis Aggregate Demand Chapter 22 Aggregate Demand and Supply Analysis 22.1 Aggregate Demand 1) The aggregate demand curve is the total quantity of an economyʹs A) intermediate goods demanded at all price levels. B) intermediate

More information

Answers to Text Questions and Problems in Chapter 11

Answers to Text Questions and Problems in Chapter 11 Answers to Text Questions and Problems in Chapter 11 Answers to Review Questions 1. The aggregate demand curve relates aggregate demand (equal to short-run equilibrium output) to inflation. As inflation

More information

EC 11 Practice Exam No 2

EC 11 Practice Exam No 2 EC 11 Practice Exam No 2 Instructions. Use a number #2 pencil; make clean erasures. In many cases there might be two or more correct answers; be sure to pick the best answer. Also, ask if there are any

More information

Question 1: Deriving and Solving the IS-LM Model (closed economy)

Question 1: Deriving and Solving the IS-LM Model (closed economy) ECON 222 Macroeconomic Theory I Fall Term 2010 Assignment 4 Due: Drop Box 2nd Floor Dunning Hall by noon November 26th 2010 No late submissions will be accepted No group submissions will be accepted No

More information

Chapter 10 (part 1) Exchange Rates, Business Cycles, and Macroeconomic Policy in the Open Economy. Copyright 2009 Pearson Education Canada

Chapter 10 (part 1) Exchange Rates, Business Cycles, and Macroeconomic Policy in the Open Economy. Copyright 2009 Pearson Education Canada Chapter 10 (part 1) Exchange Rates, Business Cycles, and Macroeconomic Policy in the Open Economy Copyright 2009 Pearson Education Canada This Chapter In this chapter we build an open-economy version of

More information

Answers to Text Questions and Problems in Chapter 10

Answers to Text Questions and Problems in Chapter 10 nswers to Text Questions and Problems in Chapter 10 nswers to Review Questions 1. Stagflation is the combination of a recessionary gap and a rising price level. This situation is hard to depict on a Keynesian

More information

10 EXPENDITURE MULTIPLIERS* Chapter. Key Concepts. The Consumption Function

10 EXPENDITURE MULTIPLIERS* Chapter. Key Concepts. The Consumption Function Chapter 0 EXPENDITURE MULTIPLIERS* Key Concepts Fixed Prices and Expenditure Plans In the very short run, firms do not change their prices and they sell the amount that is demanded. As a result: The price

More information

13 EXPENDITURE MULTIPLIERS: THE KEYNESIAN MODEL* Chapter. Key Concepts

13 EXPENDITURE MULTIPLIERS: THE KEYNESIAN MODEL* Chapter. Key Concepts Chapter 3 EXPENDITURE MULTIPLIERS: THE KEYNESIAN MODEL* Key Concepts Fixed Prices and Expenditure Plans In the very short run, firms do not change their prices and they sell the amount that is demanded.

More information

The Foreign Exchange Market

The Foreign Exchange Market Jan-95 Mar-95 May-95 Jul-95 Sep-95 Nov-95 Jan-96 Mar-96 May-96 Jul-96 Sep-96 Nov-96 Jan-97 Mar-97 May-97 Jul-97 Sep-97 Nov-97 Jan-98 Mar-98 May-98 Jul-98 Sep-98 Nov-98 Jan-99 Mar-99 May-99 Jul-99 Sep-99

More information

The level of price and inflation Real GDP: the values of goods and services measured using a constant set of prices

The level of price and inflation Real GDP: the values of goods and services measured using a constant set of prices Chapter 2: Key Macroeconomics Variables ECON2 (Spring 20) 2 & 4.3.20 (Tutorial ) National income accounting Gross domestic product (GDP): The market value of all final goods and services produced within

More information

Aggregate Demand and Aggregate Supply Analysis

Aggregate Demand and Aggregate Supply Analysis Chapter 12 (24) Aggregate Demand and Aggregate Supply Analysis Chapter Summary During most years, prices rise (we have inflation) and real GDP increases (we have economic growth). The equilibrium level

More information

Chapter 11. International Economics II: International Finance

Chapter 11. International Economics II: International Finance Chapter 11 International Economics II: International Finance The other major branch of international economics is international monetary economics, also known as international finance. Issues in international

More information

The Circular Flow of Income and Expenditure

The Circular Flow of Income and Expenditure The Circular Flow of Income and Expenditure Imports HOUSEHOLDS Savings Taxation Govt Exp OTHER ECONOMIES GOVERNMENT FINANCIAL INSTITUTIONS Factor Incomes Taxation Govt Exp Consumer Exp Exports FIRMS Capital

More information

Chapter 3 AGGREGATE DEMAND AND

Chapter 3 AGGREGATE DEMAND AND Chapter 3 AGGREGATE DEMAND AND AGGREGATE G SULY Dr. Mohammed Alwosabi The aggregate demand and aggregate supply (-AS) model determines RGD and GD Deflator and helps us understand the performance of three

More information

Aggregate Supply and Aggregate Demand

Aggregate Supply and Aggregate Demand 26 Aggregate Supply and Aggregate Demand Learning Objectives Explain what determines aggregate supply Explain what determines aggregate demand Explain what determines real GDP and the price level and how

More information

AP Econ Day 62.notebook. December 02, 2013

AP Econ Day 62.notebook. December 02, 2013 The AD curve slopes downward because: per-unit production costs fall as real GDP increases. the income and substitution effects are at work. changes in the determinants of AD alter the amounts of real

More information

1. Neutrality of money in classical model: brief characteristic, implication for economic policy

1. Neutrality of money in classical model: brief characteristic, implication for economic policy Economic policy, examination questions, school year 2010-2011 A. Questions, where brief, compact answer is required 1. Neutrality of money in classical model: brief characteristic, implication for economic

More information

Chapter 12: Aggregate Demand and Aggregate Supply Analysis

Chapter 12: Aggregate Demand and Aggregate Supply Analysis Chapter 12: Aggregate Demand and Aggregate Supply Analysis Yulei Luo SEF of HKU March 13, 2012 Learning Objectives 1. Identify the determinants of aggregate demand and distinguish between a movement along

More information

Chapter 13: Aggregate Demand and Aggregate Supply Model

Chapter 13: Aggregate Demand and Aggregate Supply Model Chapter 13: Aggregate Demand and Aggregate Supply Model Chapter 13: Aggregate Demand and Aggregate Supply model A model that explains short-run fluctuations in real GDP and the price level. Aggregate demand

More information

CHAPTER 17 Investment

CHAPTER 17 Investment CHAPTER 17 Investment Questions for Review 1. In the neoclassical model of business fixed investment, firms will find it profitable to add to their capital stock if the real rental price of capital is

More information

Macroeconomics. A Modern Approach. Robert J. Barro. Apostolos Serletis. Harvard University. University of Calgary. First Canadian Edition.

Macroeconomics. A Modern Approach. Robert J. Barro. Apostolos Serletis. Harvard University. University of Calgary. First Canadian Edition. Macroeconomics A Modern Approach First Canadian Edition Robert J. Barro Harvard University and Apostolos Serletis University of Calgary NELSON E D U C A T I O N AUTHORS PREFACE iv xvi PART 1 INTRODUCTION

More information

Introduction to Macroeconomics

Introduction to Macroeconomics Topic 1 Introduction to Macroeconomics LEARNING OUTCOMES By the end of this topic, you should be able to: 1. Define macroeconomics; 2. Discuss five main issues in the study of macroeconomics; 3. Elaborate

More information

Four Key Markets, the Circular Flow of Income and Aggregate Demand Ing. Mansoor Maitah Ph.D.

Four Key Markets, the Circular Flow of Income and Aggregate Demand Ing. Mansoor Maitah Ph.D. Four Key Markets, the Circular Flow of Income and Aggregate Demand Ing. Mansoor Maitah Ph.D. Circular Flow Diagram land Resource Suppliers rent labor wages capital interest Producers of Goods Circular

More information

Introduction to Economics, ECON 100:11 & 13 Exchange Rate

Introduction to Economics, ECON 100:11 & 13 Exchange Rate The The exchange rate of a currency is the value of an economy s money in relation to that of another. Why do we need this measure of relative value? Principally, no economy is self sufficient or efficient

More information

Econ 202 Final Exam. Table 3-1 Labor Hours Needed to Make 1 Pound of: Meat Potatoes Farmer 8 2 Rancher 4 5

Econ 202 Final Exam. Table 3-1 Labor Hours Needed to Make 1 Pound of: Meat Potatoes Farmer 8 2 Rancher 4 5 Econ 202 Final Exam 1. If inflation expectations rise, the short-run Phillips curve shifts a. right, so that at any inflation rate unemployment is higher. b. left, so that at any inflation rate unemployment

More information

Chapter 17 The International Monetary System

Chapter 17 The International Monetary System Chapter 17 The International Monetary System After reading Chapter 17, THE INTERNATIONAL MONETARY SYSTEM, you should be able to: Describe Foreign Exchange markets and discuss the differences between Fixed

More information

THE AGGREGATE DEMAND AGGREGATE SUPPLY MODEL

THE AGGREGATE DEMAND AGGREGATE SUPPLY MODEL THE AGGREGATE DEMAND AGGREGATE SUPPLY MODEL Previously The original Solow model focused on capital investment as the main source of economic growth. Modern growth theory now recognizes that institutions

More information

The session previously discussed important variables such as inflation, unemployment and GDP. We also alluded to factors that cause economic growth

The session previously discussed important variables such as inflation, unemployment and GDP. We also alluded to factors that cause economic growth The session previously discussed important variables such as inflation, unemployment and GDP. We also alluded to factors that cause economic growth enabling us to produce more and more to achieve higher

More information

Introduction to Macroeconomics. Family Name (capital letters): First Name: Student Number:

Introduction to Macroeconomics. Family Name (capital letters): First Name: Student Number: Introduction to Macroeconomics Prof. Marcelo Olarreaga, 2009-2010 August 2010 Family Name (capital letters):... First Name:... Student Number:... Total number of pages: 10. Duration of the exam: 3 h. (30

More information

Econ 202 Section 4 Final Exam

Econ 202 Section 4 Final Exam Douglas, Fall 2009 December 15, 2009 A: Special Code 00004 PLEDGE: I have neither given nor received unauthorized help on this exam. SIGNED: PRINT NAME: Econ 202 Section 4 Final Exam 1. Oceania buys $40

More information

Introduction to Macroeconomics TOPIC 5: The IS-LM Model in an Open Economy

Introduction to Macroeconomics TOPIC 5: The IS-LM Model in an Open Economy TOPIC 5: The IS-LM Model in an Open Economy Annaïg Morin CBS - Department of Economics August 2013 The IS-LM Model in an Open Economy Road map: Two concepts to better understand openness The goods market

More information

7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Chapter. Key Concepts

7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Chapter. Key Concepts Chapter 7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Key Concepts Aggregate Supply The aggregate production function shows that the quantity of real GDP (Y ) supplied depends on the quantity of labor (L ),

More information

I. Introduction to Aggregate Demand/Aggregate Supply Model

I. Introduction to Aggregate Demand/Aggregate Supply Model University of California-Davis Economics 1B-Intro to Macro Handout 8 TA: Jason Lee Email: jawlee@ucdavis.edu I. Introduction to Aggregate Demand/Aggregate Supply Model In this chapter we develop a model

More information

11/26/2016 OPEN ECONOMY THE EXCHANGE RATE AND THE BALANCE OF PAYMENTS

11/26/2016 OPEN ECONOMY THE EXCHANGE RATE AND THE BALANCE OF PAYMENTS 9 OPEN ECONOMY THE EXCHANGE RATE AND THE BALANCE OF PAYMENTS In this chapter: Define the foreign exchange rate and explain how the exchange rate is determined Explain the alternative exchange rate policies

More information

Principles of Macroeconomics

Principles of Macroeconomics Principles of Macroeconomics Prof. Dr. Dennis A. V. Dittrich Touro College Berlin 2015 1. Use the instructions in the appendix to Chapter 26 to set up the Solow model in a spreadsheet program with the

More information

Aggregate Expenditure or Keynesian Model

Aggregate Expenditure or Keynesian Model Aggregate Expenditure or Keynesian Model ECO 120: Global Macroeconomics 1 1.1 Goals Goals of this chapter Specific Goals: 1. Understand how spending plans are determined when the price is fixed in the

More information

EC2105, Professor Laury EXAM 2, FORM A (3/13/02)

EC2105, Professor Laury EXAM 2, FORM A (3/13/02) EC2105, Professor Laury EXAM 2, FORM A (3/13/02) Print Your Name: ID Number: Multiple Choice (32 questions, 2.5 points each; 80 points total). Clearly indicate (by circling) the ONE BEST response to each

More information

Agenda. Exchange Rates, Business Cycles, and Macroeconomic Policy in the Open Economy, Part 1. Exchange Rates. Exchange Rates.

Agenda. Exchange Rates, Business Cycles, and Macroeconomic Policy in the Open Economy, Part 1. Exchange Rates. Exchange Rates. Agenda, Business Cycles, and Macroeconomic Policy in the Open Economy, Part 1 How Are Determined A Supply-and-Demand Analysis 19-1 19-2 Nominal exchange rates: The nominal exchange rate indicates how much

More information

The Aggregate Demand- Aggregate Supply (AD-AS) Model

The Aggregate Demand- Aggregate Supply (AD-AS) Model The AD-AS Model The Aggregate Demand- Aggregate Supply (AD-AS) Model Chapter 9 The AD-AS Model addresses two deficiencies of the AE Model: No explicit modeling of aggregate supply. Fixed price level. 2

More information

Money and the Economy CHAPTER

Money and the Economy CHAPTER Money and the Economy 14 CHAPTER Money and the Price Level Classical economists believed that changes in the money supply affect the price level in the economy. Their position was based on the equation

More information

1. a. Interest-bearing checking accounts make holding money more attractive. This increases the demand for money.

1. a. Interest-bearing checking accounts make holding money more attractive. This increases the demand for money. Macroeconomics ECON 2204 Prof. Murphy Problem Set 4 Answers Chapter 10 #1, 2, and 3 (on pages 308-309) 1. a. Interest-bearing checking accounts make holding money more attractive. This increases the demand

More information