Final Exam 120 minutes Econ 1102 34 Principles of Macroeconomics Ceyhun Elgin Monday May 7 2007 Name On the following pages please show all of your work If you need more space use the back of the page Clearly state where your work answer are Clearly highlight circle solutions Calculators are NOT allowed You may leave answers as fractions Fully label all graphs Read each question carefully and be sure to answer all parts of every question There should be 17 pages including the cover sheet 1 Question 1 15 points Define the following 6 terms a Structural Unemployment b Discount Rate c M2Y 2 d Monetary Base e Phillips Curve both short and long run f Net Capital Outflow 3 Question 2 15 points Consider the following economy Consumption C 25 0 75 Y T Investment I 3 0 25i Government spending G 12 Taxes T 20 Money supply M S 80 Money demand M D Y i P where i is interest rate in percentages C is consumption Y is nominal GDP I is investment G is government expenditures T is taxes MS is money supply and MD is money demand a Assuming that the price level is P 2 find the equilibrium real output interest rate consumption and investment 4 b Now assume that the government increases spending so that G 17 Answer part a again c What would be the change in the equilibrium output in part b in the simple model without the money market Hint Think about the expenditure multiplier Compare this to the change in output in part b and explain why there is a difference 5 Question 3 8 points Suppose that the value of the capital stock of the Turkish economy at the end of 1976 was 120 billion and at the end of 1977 127 billion If the depreciation rate is given by 100 what was the total amount of investment done in 1977 Do not just give the answer show how you calculate it Question 4 14 points Remember the discussion about the shape of the AS Aggregate Supply curve Using this graphically prove that Contractionary fiscal policy is a bad tool to decrease inflation because it causes a recession Is this claim always true What should the shape of the AS curve look like for this claim to be true 6 Question 5 18 points Suppose that you are asked to calculate the CPI and inflation for the South African Economy and you have the following data Years Cost of the basket of goods a typical consumer consumes in the South African economy at the end of the corresponding year 1000 1500 1800 2100 1947 1948 1949 1950 Taking 1947 as the base year calculate the CPI for all the years 1947 1948 1949 and 1950 Then calculate the inflation rates in 1948 1949 and 1950 7 Question 6 21 points Consider the real liquidity preference model and real loanable funds model In these models graphically show show in both of the models what happens if the monetary authority increases the nominal money supply M Does the real interest rate change If so how 8 Question 7 17 points Consider an economy with two countries Bulgaria and Turkey The economy only produces two goods software and cars Bulgaria and Turkey can produce the goods as follows Olive Oil Bulgaria Turkey Cars 5 hours unit olive oil 10 hours unit olive oil 15 hours car 7 5 hours car a Which country has absolute advantage in olive oil and or in cars b Make a table 2x2 showing the Opportunity Costs of producing 1 unit of olive oil and cars in each of the 2 countries c Which country has comparative advantage in olive oil and or cars d Assuming each country has 300 hours of workforce draw PPFs for each country e Show as in lecture notes how trade can be beneficial for both countries 9 Question 8 16 points Consider the supply for British Pounds in USA Draw the supply curve Clearly label the axes and name three factors that can shift the supply curve Explain how these factors shift the supply curve 10 Question 9 10 points The following table displays the prices of some goods in 3 countries in the home country s currency Fill in the missing values in the following table by translating the price into the other currencies Good Condo DVD movie Slow cooker Russia 180 000 Rubles Turkey Chinese Yuan 10 TL 24 Yuan The exchange rates between the Turkish Lira and the Russian Ruble and between the Russian Ruble and the Chinese Yuan are given 1 Turkish Lira 18 Rubles 1 Yuan 3 Rubles You still need to find the exchange rate between the Turkish Lira and the Chinese Yuan assuming no arbitrage in order to be able to complete the table 11 Question 10 14 points Let the demand and supply for Egyptian Pounds in millions each month be D 100 2000e S 20 3000e where the exchange rate e is the price of Egyptian Pound in terms of Dollars a Draw the demand and supply curves Find the equilibrium exchange rate and quantity b Suppose that the Egyptian central bank wants to fix the exchange rate at 1 50 Egyptian Pounds and keep it there Should the Egyptian Central bank buy or sell its own currency Illustrate this graphically 12 Question 11 15 points Prove carefully that in an open economy where the government balances its budget national savings are equal to investments plus net capital outflow 13 Question 12 14 points a Define what we mean with real exchange rate Give the mathematical formula of it Don t forget to explain every term in the formula b Assume that the theory of Purchasing Power Parity is completely correct Then what should the real exchange rate between any 2 countries should be equal to c Is it true that the presence of international capital flows reduces the power of the fiscal policy If yes in what sense Show this graphically 14 Question 13 15 points Suppose in 2006 the CPI equals 100 That year John borrows a nominal value of 1 000 from the bank Suppose the expected rate of inflation is 3 Both parties agree the loan will be repaid in one year along with a real interest rate of 2 a What is the CPI in 2007 the year in which the loan is repaid b What is the real payment John must make to the bank in 2007 c What is the nominal payment John must make to the bank in 2007 15 d Suppose actual inflation is 7 What is the nominal payment that John should make to the bank in 2007 if the inflation were known to be 7 e Who if anyone benefits from the unexpected inflation Question 14 8 points What does triangular arbitrage mean Illustrate it with an example 16 Bonus Question 8 points The following question is from a guest lecture Name the 3 criteria that a country should satisfy to be able to enter the European Monetary Union 17