Department of Economics

Iowa State University

Intermediate Macroeconomic Theory

Final Exam

Spring 1998 Alexander

1. (45 points)

In 7 to 10 sentences and using diagrams and math where appropriate, answer three of the following questions. If you answer all seven, the best three will be chosen.

 

a. Describe the calculations for chained real GDP for an economy with 3 goods.
    1. Using the Life-Cycle and Permanent Income Hypotheses, explain why current consumption is affected by current and future income, wealth, the interest rate, and expectations.

      2. c. Describe the problems of pursuing activist macroeconomic policies.

      d. Explain why there=s a much slower adjustment process back to long-run equilibrium with adaptive expectations.

    2. Explain why an equal increase in government spending and tax revenues will result in an economic expansion.
    3. Describe the problems with a balanced budget amendment.

g. Explain why investment is affected by current and future interest rates, and the future level of production.

 

 

2. AD/AS (55 points)

Using AD/AS, IS/LM, and the money market, explain and graphically depict the effect of an unanticipated decrease in money demand (L) on the level of output, the price level, and the interest rate for both the short and the long-run.

 

 

3. Open Economy Macroeconomics (45 points)

Using IS/LM/ee, explain and graphically depict the effect of the following scenarios on Y, i, e, C, L, I, and NX. Each situation requires 6 diagrams:

A. Increase in the marginal tax rate (t).

B. Decrease in transfer payments (TR).

C. Increase in the money supply (M).

 

4. IS/LM (55 points)

The model is: TE = C + I + G

C = a + b ( Y - t*Y + TR )

I = c - d * i + e * Y

L = f * Y - g * i

where a = 50 e = .15 G = 250

b = .8 f = .12 TR = 200

c = 500 g = 1000 M/P = 160

d = 2000 t = .25

a. What is the equation that describes the IS curve?

What is the definition of the IS curve?

b. What is the equation that describes the LM curve?

What is the definition of the LM curve?

c. What are the equilibrium values for Y and i?

d. Out of fear that a number of individuals are falling through the safety-net, the government decides to increase transfer payments by $50 (ΔTR = +50). What will be the changes in the equilibrium values for Y and i? Show all work!

e. Describe and graphically depict the effect of this change in TR on the goods and the money markets (I want a 3 quadrant diagram and an explanation).

 

 

 

 

Extra Credit: (5 points, to go directly towards your grade)

Derive the interest parity condition.