# Economics 576 Macroeconomic Theory and Policy Fall 2017 Final Exam

Question # 00625513 Posted By: neil2103 Updated on: 12/07/2017 11:37 PM Due on: 12/09/2017
Subject Economics Tutorials:
Question

Economics 576

Macroeconomic Theory and Policy

Fall 2017

Final Exam – Take Home

Assume the model: And pay attention to the model in answering the questions

Y = C + I + G + X - M

C = a + b Yd where a > 0 and 0 < b < 1

I = f(i) but I ? f(Y) ie, MPI = 0

G = Go

Ms = Mso Ms = money supply/stock

Tx = Txo ……..meaning that Tx ? f ( Y )

Md = Mt(Y)+ Ml(i) [Mt = transactions demand; Ml = liquidity preference demand]

X = Xo X = exports

M = Mo + mY where Mois autonomous imports, and m is the marginal propensity to import

In each of the following cases, indicate the effect of the given autonomous change (or policy measure) on each of the listed variables. In each case indicate whether the listed variable increases in value, decreases, or does not change.

Note: Answer beside the listed variable. For example, if in I an increase in the money supply does not bring about a change interest rates, write “does not change” beside “interest rates” at I, 1. And if an increase in the money supply causes a decrease in the level of income, write “decreases” beside “level of income” at I, 2

I. An increase in the money supply:

1. Interest rates

2. Level of income

3. Imports

4. Investment

5. Government spending

II. A decrease in the public’s liquidity preference:

6. Level of income

7. Investment

8. Saving

9. Consumption

10. Exports

III. An increase in the marginal propensity to import:

11. Income

12. Amount of money demanded for transactions purposes

13. Bond prices

14. Saving

15. Investment

16. Consumption

17. Money supply

18. Exports

IV. An increase in exports:

19. Income

20. Interest rates

21. Imports

22. Money supply

V. A simultaneous and equal increase in taxes and government spending: (Think and apply what you know)

23. Level of income

24. Interest rates

25. Investment

26. Expansionary fiscal policy – taken by itself – tends to raise interest rates and the level

of income.

27. Expansionary monetary policy tends to lower interest rates.

28. The greater the elasticity of the LM curve, the greater will be the effectiveness of

fiscal policy (in terms of increasing income).

29. The more interest elastic the investment demand function, the more effective

monetary policy will be.

30. The more interest elastic the investment demand function, the stronger will be the

“crowding out” effect associated with a pure fiscal policy measure.

31. For equilibrium in the goods/commodity market (or, real sector), the higher the rate

of interest, the lower the level of income must be.

32. Given a two sector model, at any point to the right of the IS curve, saving must

exceed investment.

33. Using the IS – LM framework, in which model would monetary policy be more

effective (in terms of increasing the level of income)? THINK IT THROUGH

A. I = f (i) S = f (Y) G = Go

B. I = f (i) S = f (Y) G = Gog(i)

34. Using the IS – LM framework, in which model would monetary policy produce larger

income changes (per unit of monetary stimulus)? THINK IT THROUGH

1. Tx = Txo
2. Tx = To + tY t > 0

35. Based on the equation of exchange, an increase in government spending can increase

income if and only if it is financed by an increase in the money supply.

36. At any point to the right of the IS curve, total leakages must exceed total injections.

37. If velocity is rising, then the demand for money must be falling.

38. The transactions motive for holding/demanding money is related primarily to the fact

that money serves as a store of value.

39. The asset (liquidity preference, or speculative) motive/demand for money relates

primarily to money’s medium of exchange function.

40. A Keynesian would view expansionary monetary policy as having its impact

primarily through its effect on interest rates and thus consumption.

VI. In response to onset of the 2007-2009 “Great Recession” both Presidents Bush and Obama proposed and got approval for economic “stimulus” packages—totaling almost \$1 trillion is government outlays and tax cuts. (The Bush Economic Stimulus Act 2008 was estimated at \$152 billion and the Obama American Recovery and Reinvestment Act 2009 was estimated at \$787 billion.) Based on a simple Keynesian multiplier (such as Model II in Models and Multipliers), if the U.S. MPC was in the range of 0.8 to 0.9, this would suggest that income should have increased somewhere in the range of \$4.75 trillion to almost \$10 trillion. The actual impact was NOWHERE near that. Using the various tools and analysis from this course (including the IS-LM framework, and considering that the actual economy is more akin to Model VII than to Model II), and other principles discussed, explain why there would be such a discrepancy between the multiplier formula results and actual outcome.

The exam is 100 points.

I – V (1 – 25) each correct answer is worth 2 points

Questions 26-40 each are worth 2 points

VI is worth 20 points.

Submit to: Take Home Final Dropbox at Week