MACROECONOMICS SECTION

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4 MACROECONOMICS SECTION Directions: Answer both parts, A and B; there is some choice in each part. Points will be proportional to the time limits indicated. Part A Short Answer Choose two (2) of the following. Time limit: 15 minutes each (30 minutes total). 1. Explain how seignorage revenue can be used by governments. What are the benefits? Is there a limit to its usefulness? Explain. 2. Consider only the goods market in an open economy. Assume the economy now has current output below its target level as well as a trade surplus. How can policymakers use fiscal policy and a change in the exchange rate to achieve the output target as well as balanced trade? Explain. 3. Compare the original (traditional) Phillips curve to the expectations-augmented Phillips curve. Be specific. Which version would be most appropriate in today s U.S. economy? Why? 4. What do economists mean by endogenous growth? Contrast the predictions of endogenous growth models with those of traditional models. 5. What is Okun s Law? How well does it predict empirically? How well did it predict during the Great Recession? Part B Long Answer Questions (Problems/Models) Choose two (2) of the following. Time limits: 45 minutes each (90 minutes total) 1. Many countries enacted expansionary monetary policy in the wake of the onset of the Great Recession. Analyze the situation of expansionary monetary policy for all three (3) of the following cases, assuming a short-run analysis. Your analysis can be mainly graphical and must include detailed explanations. You may include equations if you wish. Also, you must show and explain the changes on the central bank balance sheet where relevant. a. IS-MP model, closed economy, where MP is the monetary policy curve assuming the central bank targets the interest rate. b. Open economy IS-LM model, with free capital mobility (so that the interest parity relation holds) and a flexible exchange rate. Explain in detail the role of the interest parity condition. c. Open economy IS-LM model, with free capital mobility (so that the interest parity relation holds) and a fixed exchange rate. You must explain in detail the role of the interest parity condition. Could the policy trilemma be relevant in this case? Explain.

5 d. Finally, compare the impact on real GDP across the scenarios and explain carefully. 2. Analyze the short-run and medium-run effects of each of the following on output and the price level, using the closed economy IS-LM model and the aggregate-supply/aggregatedemand model (AS-AD). Be sure to explain how the economy adjusts from the new short-run equilibrium to the new medium-run equilibrium, discuss in detail the role of price expectations, and assess whether the theoretical adjustment process is realistic or not in each case. You may assume that the economy starts in an initial medium-run equilibrium at the natural output level Y n in each situation. a. A reduction in the monopoly power of firms. b. More states raise the minimum wage. c. A decline in business confidence. 3. (a) Derive the Solow Growth model (neoclassical growth model) algebraically. (b) Explain intuitively the steady-state equilibrium condition in the Solow Growth model. (c) Use the graph of the Solow model to analyze the effects of each of the following changes (considered separately) on long-run equilibrium: (i) A rise in the growth rate of the population (ii) A fall in the saving rate (iii) An increase in the rate of technical progress For each case, what is the change in the growth rate of output, output per worker, and output per effective worker? Summarize and explain the reasoning. (d) Finally, consider whether or not a policy to raise the saving rate would be a good idea. 4. Japan has a gross debt-gdp ratio of more than 200%. (a) What are the risks (in general) to the Japanese economy? (b) Japan also appears to be in a recession (its third in the past five years). Would this be a good time to enact expansionary fiscal policy? Contrast the short run and long run time horizons. (c) Would monetary policy be a better choice given that inflation continues below its 2% target and that short term interest rates are near the zero lower bound? Explain. (d) Summarize the nature of the complex tradeoffs facing any economy in a situation similar to that of Japan. Make your points in a clear manner. 5. Show algebraically and graphically how to determine whether a budget policy is sustainable. Graphically illustrate the difference between stable and unstable budget dynamics.

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