Final Exam
Macroeconomics II
Philip Leatherwood, Lecturer
8 May, 2001
Student Name: ___________________________________
Student #: ______________________________
Score: ___________________
Part One: Problems.
1. Assume a macro model of the following relationships:
Y = C + I + G + X – M
C = 440 + 0.85Y
I = 800 – 250R
G = 1200
T = 1000
X = 600
M = 100 + .1Y
Supply of Money (Sm) is assumed to equal Money Demand (Dm)
Sm = 1800
Dm = 0.4Y – 1000R
Find the following:
A. Equilibrium Income (Y)
B. Equilibrium interest rate (R)
Calculate a change in fiscal and money policy to bring the interest rate to 5 % with no effect on Income levels.
C. Find new G, and Sm (and T if that has changed). (Show your work)
Describe the effects of your fiscal and money policy on the following:
D. Net Exports
E. Government Budget
F. Private Investment
G. What effects might there be on the value of the currency?
2. Consider a world with good capital mobility. Initially the home country is in internal and external balance.
A. Draw the IS, LM, and Balance of Payments (BB) schedules.
Assume that the rate of interest abroad increases.
B. Show the effect of the foreign interest rate increase on the BB schedule.
C. Assuming no intervention, describe the adjustment process consistent with the monetary approach to the balance of payments?
D. What policy response might immediately restore internal and external balance?
Part Two. Discussion Questions.
1. What is a "dirty float?" Can the existence of a dirty float affect a government's ability to influence other economic variables? Explain. Be specific.
2. Explain the J Curve.
3. What is the relationship of the Long-Run Phillips Curve to Aggregate Supply?
4. What is the Quantity Theory of Money?
5. What are the Life-Cycle and Permanent-Income Theories? How might these theories impact the way we model a macroeconomy?
6. President Nazarbaev has asked you to advise him on the best way to bring long term economic growth to Kazakhstan. Will your advice be based more on Monetarist Theory, on Supply Side Theory, or will you focus on attracting foreign investment and trade? Explain your advice to the president.