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Inter Macroeconomics theory I




Q.1: Explain why government budget deficits crowd out private investment spending in a closed;economy, but crowd out net exports in a small open economy. Assume prices are flexible and;that factors of production are fully employed in both economies. Use the basic version of the;open-economy model where net exports is function of real exchange rate. Use diagrams to;explain your answer. [10];Q.2: The real interest rates and real exchanges rates are constant and equal in North Country and;South Country. The Fisher equation and purchasing power parity hold in both countries. If the;nominal interest rate is 8 percent in North Country and 10 percent in South Country, do you;expect North Country's nominal exchange rate to appreciate, depreciate, or remain the same?;Explain. [10];Q.3: In classical macroeconomic theory, the concept of monetary neutrality means that changes;in the money supply do not influence real variables. Explain why changes in money growth;affect the nominal interest rate, but not the real interest rate. Use quantity theory of money and;fisher equation to answer this question. [10];Q.4: Consider a money demand function that takes the form (M/P)d = Y/3i, where M is the;quantity of money, P is the price level, Y is real output, and i is the nominal interest rate;(measured in percentage points). [10];a) What is the velocity of money if the nominal interest rate is constant?;b) How will the level of the velocity of money change if there is a permanent (one time);increase in the nominal interest rate, holding other factors constant?;Q.5: Assume that an employer believes that the efficiency (e) it can get from a particular;worker, as a function of the hourly wage (w), is given by function e = 0.125w + 0.15w2;0.005w3, at least up to a wage of 30. [15];a) Create a table of w, e, e/w, and w/e for wages equal to 5, 10, 14, 15, 16, 20, and 25.;b) Which wage gives the highest ratio of efficiency per unit of labour cost?;c) Once the firm has hit on an optimal w, whatever it is, would cutting wages whenever;demand falls off increase or decrease wages per unit of efficiency?;Q.6: Assume that we have an economy where a certain share (f) of the unemployed (U) manage;to find work during a given period of time! Assume also that a certain share (s) of the employed;are separated from their jobs every period! Denote employment by E and the total labor force by;L! [10];a) Derive an expression for the unemployment rate (U/L) in a steady state! What is;unemployment if s = 0.02 and f = 0.5?;b) Repeat the exercise for f = 0.25!;Q.7: Consider the following Neoclassical model of the economy, where the domestic interest;rate and the world interest rate are in percentage terms. Show all your work. [15];= 1000,,) (7.0 + 05 = NX= 100 100, 001 =,002 =,%5 =,01 002 =;(a) Find the equilibrium real interest rate, national saving, and investment in a closed economy.;Show the equilibrium real interest rate on a saving-investment diagram with measured on the;vertical axis.;(b) Now assume the small economy opens up to trade. Calculate the real exchange rate (), trade;balance and net capital outflow. Show the trade balance on a saving-investment diagram with;measured on the vertical axis;(c) Assume that contractionary fiscal policymakers enacted by reducing government spending to;100. Find the new real exchange rate, trade balance and net capital outflows. Redraw the diagram;from part (b) to show the changes.;Q.8: A hypothetical economy can be described by the Solow growth model. Answer the below;questions for this economy by using the following information: [20];=;saving rate (s) = 0.20;depreciation rate () = 0.12;initial capital per worker (k) = 4;population growth rate (n) = 0.02;a.;b.;c.;d.;What is the steady-state level of capital per worker?;What is the steady-state level of output per worker?;What is the level of steady-state consumption per worker?;What is the steady-state level of investment per worker?


Paper#15575 | Written in 18-Jul-2015

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