# UT ECO 320L - final_spr_2017 (12 pages)

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- Pages:
- 12
- School:
- University of Texas at Austin
- Course:
- Eco 320l - Macroeconomic Theory

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University of Wisconsin Madison Department of Economics Eco 302 Intermediate Macroeconomics Final Exam You have 2 00 to complete this exam The highest score is 115 points but the grade will be out of 100 Good Luck 1 2 1 Short Answer 10 Points Each 1 1 Consider the Solow Growth model with the assumption that people require some minimum consumption so that the per worker investment is given by it sAf kt m Plot required investment per worker for the economy to be in a steady state as well as actual investment per worker and show that there can be two steady states 1 2 Suppose that Starbucks sells 1 Billion dollars worth of coffee and pays 500 million for the beans they are imported At the same time households buy 500 million worth of beans to brew at home half of which is imported and half of which is grown domestically Calculate the change in consumption net exports investment and GDP from this coffee drinking activity 3 1 3 Your friend estimates that consumption demand is given by statistician 1 Y f where r is in decimals Y is current income and Y f is future C d 45 Y 1 r f A income She also estimates that investment demand is given by I d 1 r f where A is future capital productivity Solve for the IS Curve i e solve for the market clearing interest rate as a function of Y keeping Y f and Af fixed Draw how the IS curve shifts if there is a simultaneous rise in Af and Y f 1 4 You find data on the country of Stankonia In this country nominal GDP grows at 10 per year total labor grows at 0 per year the nominal value of capital grows at 5 per year and the annual inflation rate is 5 If the production function is given by Yt At Nt0 7 Kt0 3 where Yt and Kt represent real GDP and value of capital what is the growth rate of At Show your calculations 4 1 5 Suppose that the federal reserve attempts to keep the price level constant over time Show in the money market diagram how they would need to change the nominal money supply in the long run if labor productivity was to increase 1 6 Consider the endogenous growth model and suppose that human capital is proportional to GDP per capita That is ht is human capital per worker and ht s yt with yt kt ht1 Recall that the law of motion for capital is kt 1 1 kt syt and show that GDP per capita grows at the rate s 5 2 Business Cycle Facts 15 Pts For each of the following variables indicate whether it is pro counter or a cyclical and whether it is leading lagging or coincident with GDP 1 Inventories 2 Average labor productivity 3 Stock Prices 4 Consumption 5 Inflation 6 3 Long Problems 20 each 3 1 Housing Wealth In 2008 the housing market crashed which lead to a large fall in household wealth as home prices fell but mortgage debt remained constant In our models this would be like reducing the wealth parameter of households a is the variable we have used This question has you think through the effects of such a decline in wealth 1 Consider the labor market effects of this change in wealth in the labor market in the short run when prices are fixed i e the Keynesian short run model Assume that due to efficiency wages the labor market does not clear fully What happens to GDP in the short run What about unemployment i e the amount of labor supply in excess of demand 2 We also learned how a change in wealth affects the household s consumption and savings decision For the next part show how this decrease in wealth affects the equilibrium of the investment and savings market and the IS curve First assume that the price can adjust immediately as in the classical model show how to shift the LM curve using the money market diagram What happens to GDP Prices 3 Reconsider part 2 above but in the Keynesian short run when prices cannot adjust Again fully explain how you move along the LM curve using the money market diagram What happens to GDP 4 Now combine the two effects in the short run What happens to GDP and the real interest rate 7 Scrap 8 Scrap 9 Scrap 10 3 2 Ricardian Equivalence We studied Ricardian Equivalence in class which taught us that a tax cut in the present would lead households to increase their savings in order to offset future taxes and therefore had no effect on GDP or the real interest rate One of the assumptions needed was that the government paid the same real interest rate as households Suppose instead that the government can borrow at a lower real rate For simplicity assume the government borrowers at a real interest rate of 0 while households borrow and save at rate r 0 We will explore the effects of deficit financed tax cuts in this situation 1 Draw the household s budget line when net taxes equal to nt1 and future net taxes are ntf1 then show what happens if the government reduces nt1 by 1 borrows to keep government spending constant and increases taxes in the future to keep their present value budget balanced 2 Suppose that households increase savings just enough to pay the extra taxes in the future Do they save more or less or exactly 1 What happens to national savings in response to this deficit financed tax cut 3 Show the effect of this deficit financed tax cut in the short run in the IS LM FE model when prices are fixed What happens to GDP Fully explain how you move along curves 11 Scrap 12 Scrap

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