Examen de Introducció a la Macroeconomia UPF 2019 · Final Exam - March 2019

Question 1 [0.25 points]. Measurement of inflation

Which of the following statements regarding inflation is accurate?

Question 2 [0.25 points]. Properties of nominal GDP

Regarding nominal Gross Domestic Product (GDP):

Question 3 [0.25 points]. Drivers of output changes

Variations in GDP are predominantly driven by:

Question 4 (0.25 points). Goods market fiscal multiplier

In the goods market framework, assume a marginal propensity to save equal to 0.3. If government purchases ($G$), net taxes ($T$), and investment ($I$) are exogenous, which of the subsequent shocks delivers the largest expansion in output?

Question 5 (0.25 points). Components of the money supply

Which of the following assets is not considered a constituent element of money?

Question 6 (0.25 points). Characteristics of money demand

Which of the following propositions correctly describes the demand for money?

Question 7 (0.25 points). Contractionary monetary policy instruments

Which of the following measures could the European Central Bank implement to execute a contractionary monetary policy?

Question 8 (0.25 points). IS-LM policy mix effects

Consider an economy described by the IS-LM model with fixed prices and a horizontal LM schedule (the central bank targets the interest rate). If an expansionary monetary policy occurs alongside a tax reduction, what outcome is certain?

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Question 9 (0.25 points). IS slope and monetary policy

In an IS-LM framework with a horizontal LM schedule, an expansionary monetary policy:

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Question 10 (0.25 points). Effective lower bound on real rate

If the monetary authority aims to lower the real policy interest rate and the nominal zero lower bound is strictly binding, what is the minimum value the real interest rate can take?

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Question 11 (0.25 points). Expected currency appreciation rate

If the spot exchange rate stands at 1.00 USD per GBP and is anticipated to reach 1.50 USD per GBP in twelve months, what is the expected rate of appreciation?

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Question 12 [0.25 points]. Uncovered interest rate parity

Under the uncovered interest parity condition in the absence of risk premiums:

Question 13 (0.25 points). Balance of payments equilibrium

Regarding the balance of payments accounts:

Question 14 (0.25 points). Reducing natural unemployment

To achieve a structural reduction in the natural rate of unemployment ($u_n$), the policy authority can:

Question 15 (0.25 points). Tariffs in WS-PS framework

Assume the labor market is represented by wage-setting (WS) and price-setting (PS) relations. Suppose an escalated trade conflict leads to higher tariffs on imports into the United States, thereby shielding domestic firms from competition and enabling them to apply higher price markups. In the medium run, this tariff increase will cause:

Question 16 (0.25 points). Labor market rate calculations

A country reports the following demographic and labor figures: 90 million people are employed, 10 million are actively seeking employment, 40 million individuals are under age 16, 8 million persons aged 16 or above do not work and have abandoned job search, and 17 million persons aged 16 or above are enrolled as full-time students. Based on these data:

Question 17 (0.25 points). Okun's Law dynamics

Suppose an economy's Okun's Law relation is characterized by

$$u_t - u_{t-1} = -0.4(g_{yt} - 3\%)$$

Which statement is correct?

Question 18 (0.25 points). Long-run Solow saving rate comparison

Consider two economies, A and B, that are identical in all structural parameters except that Country A has a higher saving rate than Country B ($s_A > s_B$). According to the standard Solow-Swan growth model, in the long run:

Question 19 (0.25 points). Balanced growth path properties

Which condition necessarily holds when an economy is operating along its balanced growth path?

Question 20 (0.25 points). Steady state without technological progress

In the Solow growth model without technological progress, when an economy reaches its steady state:

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Question 1 (2 points). Extended IS-LM and euro-zone fiscal policy

Read the following excerpt adapted from The Economist (March 14, 2019):

“For the first time in a decade, fiscal policy in the euro area is expected to loosen (be more expansionary) this year. The zone has no common budget — although its members’ finance ministers discussed the topic on March 11th — so overall policy is simply the sum of individual countries’ fiscal plans.

Much of the expected stimulus takes the form of tax cuts and benefit increases. Because people could choose to save rather than spend the extra cash, that lifts the economy less than public investment, which also brings the benefit of increased economic potential.

Both Germany and Italy have been hit hard, partly by slowing demand for their exports. But whereas Germany has plenty of fiscal room, Italy, with public debt of more than 130% of GDP, would risk scaring financial markets (again) if it splurged (overspend). A German boost would help Italy too.”

a)

[0.4 points] Write down the equations for the extended IS-LM model that incorporates the real interest rate and a risk premium. Identify each term, state which market each equation describes, specify the sign of the relationships, and sketch the equilibrium graph.

b)

[0.2 points] The article states: “For the first time in a decade fiscal policy in the euro area is expected to loosen (be more expansionary) this year.” Explain what is meant by this statement and provide three concrete fiscal measures that correspond to this description.

c)

[0.2 points] How do tax cuts and benefit increases affect the equations of the extended IS-LM framework? Show the graphical shift.

d)

[0.4 points] If households decide to save the entirety of their additional disposable income arising from lower taxes or higher benefits, how would this affect the IS curve mathematically? What economic motive could drive this behavior?

e)

[0.4 points] Using the IS-LM framework, assess the excerpt's claim: “Because people could choose to save rather than spend the extra cash, that lifts the economy less than public investment.” Assuming consumer behavior remains stable, is public investment inherently more expansionary than an equivalent tax cut? Justify briefly.

f)

[0.2 points] What is meant by the assertion that public investment “would also bring the benefit of increased economic potential” ?

g)

[0.2 points] Suppose borrowing costs faced by Italian firms increase whenever the government's borrowing costs rise. How would the concern that Italy “would risk scaring financial markets (again) if it splurged” be reflected in the IS-LM model, and what would be the effect on Italian output?

Question 2 (1.5 points). IS-LM-PC framework and labor market shocks

Starting from an initial medium-run equilibrium where $Y = Y_n$, suppose that in 2018 consumer confidence experiences an unexpected surge, which causes inflation to accelerate.

a)

[0.3 points] In 2018, how does equilibrium GDP compare to natural/potential GDP ($Y_n$)? How does the unemployment rate compare to the natural unemployment rate ($u_n$)?

b)

[0.3 points] Graphically illustrate this shock in the IS-LM-PC framework (assuming a horizontal LM). Identify the short-run equilibrium and medium-run adjustment.

c)

[0.3 points] What is the central bank's primary mandate, and how should it react to the higher inflation of 2018? Show this reaction using the IS-LM-PC model. What happens to consumption, investment, and GDP once this monetary response is enacted?

Question 2 (1.5 points). IS-LM-PC framework and labor market shocks

Starting from an initial medium-run equilibrium where $Y = Y_n$, suppose that in 2018 consumer confidence experiences an unexpected surge, which causes inflation to accelerate.

d)

[0.3 points] Can monetary policy alter the structural/natural rate of unemployment? Propose two concrete economic measures capable of reducing $u_n$.

e)

[0.3 points] In 2019, Spain raised its legal minimum wage. Illustrate the consequences of this policy using the Wage-Setting / Price-Setting (WS-PS) diagram. Label axes and curves, identify equilibria before and after the reform, and explain the effects on real wages and natural unemployment.

Question 3 (1.5 points). Solow-Swan growth model with technological progress

Consider the Solow-Swan model with labor-augmenting technical progress and population growth. The aggregate production function is given by:

$$Y = K^\alpha (AL)^{1-\alpha}$$

where $K$ is physical capital, $L$ is labor, $A$ represents labor-augmenting technology, and $\alpha \in (0,1)$ is an exogenous parameter. The growth rate of technology is $g_A$, the population/labor growth rate is $g_N$, capital depreciates at constant rate $\delta$, and the national saving rate is $s$.

Part A (0.75 points, 0.15 points each): Express the steady-state values of the following variables in terms of exogenous parameters $(s, g_A, g_N, \delta)$

a.

Capital per effective worker $k^* = \frac{K}{AL}$ and output per effective worker $y^* = \frac{Y}{AL}$.

b.

The long-run growth rate of aggregate GDP ($Y$).

c.

The long-run growth rate of output per worker ($Y/L$).

d.

The steady-state capital-output ratio ($K/Y$).

e.

Are standards of living improving while the economy is in steady state? Justify briefly.

Part B (0.75 points): Now suppose that the government introduces a tax exemption on pension contributions, inducing households to save a higher fraction of income. Use the provided Solow diagram to answer the following questions:

a.

How does the growth rate of per-capita income behave during the transition in the first few years?

b.

Is the growth rate of per-capita income affected in the long run?

c.

Will this policy lead to permanently higher steady-state consumption per worker? Explain.