Macroeconomics
1. Suppose the government (in the small open economy) is increasing taxes. Use the Mundell-Fleming model (the IS-LM with the interest parity condition, i.e. r = rFor) to describe the economic effect of this policy (and show this on the IS-LM graph) under:
a. Fixed exchange rate (3 points) and under flexibleTrue or false? “Restrictive fiscal policy reduces consumption and investment”. Use the IS-LM graph to support you argument (3 points).
b. Flexible exchange rate
2. True or false? “In the neo-classical growth model, countries with the same savings rates but different population growth rates will achieve the same standard of living.” Use of a properly labeled graph to explain your answer (5 points).
3. The labour share of output = 75%. Assume constant return to scale, no government, no net exports and no technological progress. Using this information:
a. Write (calculate) the Cobb-Douglass production function (1 point);
b. Write (calculate) the output per worker function (2 points);
c. Calculate total factor productivity if output grows by 6%, labour by 4% and capital by 2% (2 points).
4. Assume closed economy and the following:
Population growth n= 1% per year, work force is growing at the same rate as population, consumption C=0.5 (1-t)Y (t is taxation rate and Y is output), production function per worker is y=8k0.5 , the depreciation of capital = 9% per year, government purchases G=0, and taxation rate=0. Using this information:
a. Write expressions for national saving/worker and the steady-state level of investment /worker as functions of the capital/labour ratio k (2 points)
b. Calculate steady-state values of capital/worker ratio k (2) points, output /worker (1 point), consumption/worker (1 point) and investment/worker (1 point)
5. The money demand function has the following form: Md/P = 400 + 0.25Y – 1000i
Assume that: P=130, Y=800 and i=0.08. Find real money demand (1 point), nominal money demand (1 point) and velocity (1 point).
