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MGEB06 Sample Final Questions
These are some of the past Final exam questions. These questions are collections from different exams (the total marks do not add up to 100) and are for your reference only. You should also practice the review and assignment questions again assigned throughout the term.
Instructions:
• Answer all questions.
• Point form is acceptable.
• You must submit the questions along with your answer booklet; otherwise, you will receive a grade of ZERO for the whole exam.
• No credit will be given if you do not show your work.
• Label your graph; otherwise, marks will be subtracted.
• If the question has more than one part, label each part of your answer. Latter part(s) of the question will not be graded if you failed to label your answer.
• Do not write exchange rate increases/decreases, you should state whether the currency appreciates or depreciates.
• Your answer should be structured in a way that even those with limited knowledge in economics will understand your argument/answer
Question 1 (15 points)
The economy is currently in its long-run equilibrium. However, there are evidences indicating that there is an increase in (autonomous) consumption.
a) According to the long-run classical model of a closed economy, what would happen to the economy’s output, real interest rate and investment? Support your answer by an appropriate diagram. (6 points)
b) Suppose the government finds the change in real interest rate in part (a) undesirable and wants to maintain the real interest rate at the initial level, what policy would you recommend the government to pursue? Explain how the recommended policy could achieve the goal of the government. Also, how does this recommended policy affect the country’s output, real interest rate, and investment? Use the diagram you drew in part (a) to support your answer and discuss the magnitudes of changes of the above macroeconomic variables after your recommended policy is implemented (compare your answer in part (b) to your answer in part (a)) (9 points)
Question 2 (10 points)
Consider an economy described by the production function: Y = F(K, EL) = 3K1/3(EL)2/3.
a) Find the steady-state capital per effective worker and output per effective worker if the depreciation rate is 7%, the population growth rate is 5%, the growth rate of efficiency of worker is 3%, and the saving rate is 20%. (4 points)
b) Redo part (a) if the production function becomes Y = F(K, EL) = 12K1/3(EL)2/3. (2 points)
c) Explain your results in parts (a) and (b) in words and an appropriate diagram (4 points).
Question 3 (15 points)
“When the economy is initially above its golden rule, changing the saving rate to reach the golden rule involves no trade-off between current (or initial) consumption and future consumption.”
True/False/Uncertain, explain in the context of the Solow Growth Model (support your answer by a Solow Model diagram and the time path of consumption per worker).
Question 4 (10 points)
“The Solow model predicts a fall in depreciation rate will increase the capital-labour ratio in transition and in the new steady-state; but this will lead to a lower steady-state growth rate of total output.” True/False/Uncertain, explain and support your answer in an appropriate diagram (you can assume there is a population growth of n% a year and there is no technological progress).
Question 5 (15 points)
“The quantity theory of money states that given a constant velocity, there is a one-to-one relationship between monetary growth rate and inflation rate, even if the growth rate of labour remains constant.” True/False/Uncertain, explain.
Question 6 (15 points)
Consider an economy with 5000 people in the labour force. At the beginning of every month, 50 people lose their jobs and remained unemployed for exactly one month; one month later, they find new jobs and become employed. On January 1 of each year, 200 people lose their jobs and remained unemployed for 6 months before finding new jobs. Finally, on July 1 of each year, 200 people lose their jobs and remain unemployed for six months before finding new jobs. a) What is the unemployment rate in this economy in a typical month? (3 points)
Now, a study shows that in the long run the job finding rate and the job separation are 18% and 2% respectively.
b) What is the natural rate of unemployment? If the unemployment rate in part (a) were the current unemployment rate, what would you expect to happen in the unemployment rate over the long run? Briefly explain. (5 points)
c) Suppose, in order to help those who suffer from the unemployment spell, the government of this economy decides to provide unemployment insurance to the unemployed. How does the provision of unemployment insurance affect the natural rate of unemployment in this economy? Explain and you should relate your answer to the job finding and job separation rates. (7 points) MGEB06 Sample Final Questions Iris Au & Jack Parkinson 3
Question 7 (10 points)
a) Between December 2002 and December 2003, total employment increased by 427,400 workers, but the number of unemployed declined by only 182,600. How are these numbers consistent with each other? Why might one expect a reduction in the number of people counted as unemployed to be smaller than the increase in the number of people employed? Explain. (5 points)
b) Statistics Canada announced that in December 2000, of all adult Canadians, 14,974,500 were employed, 1,015,300 were unemployed, and 8,459,400 were not in the labour force. What was the labour-force participation rate? What was the unemployment rate? (Keep your answer in percentage terms and keep 1 decimal point) (5 points)
Question 8 (25 points)
Suppose there are only two countries in the world, Foreign and Home. Foreign is a large country while Home is small country. Currently, Home runs a huge trade deficit. Concerning about the country’s trade balance, the government of Home begins to look for policy that can correct its trade deficit. The Home government asks you for recommendation. In addition, the Home government wants you to use the long-run classical model of a small open economy to evaluate the long-run effects of your recommended policy on the Home’s key macroeconomics variables (output, national saving, investment, real interest rate, net foreign investment, net exports, real exchange rate, nominal exchange rate, price level, and unemployment rate).
What policy would you recommend? What happens to the key macroeconomic variables in the long run? Explain and support your answer by a set of appropriate diagrams.
Note: You must provide explanation on how your recommended policy affects the key variables (explain why the variables change or remain unchanged).
Question 9 (10 points)
“To minimize fluctuations in output in a closed economy, the central bank should target the money supply not the (real) interest rate if shocks originated from the goods market”. True/False, explain and use ONE IS-LM diagram to support your argument (Only the first diagram will be graded)
Question 10 (10 points)
Suppose a closed economy is currently producing above its full capacity. Knowing that you are an expert in macroeconomic, policy makers want you to suggest a policy that would bring the economy back to its full-employment equilibrium and, at the same time, prevent the level of investment from falling. What kind of policy, fiscal or monetary, would you suggest? Explain with the help of ONE IS-LM diagram.
Question 11 (20 points)
Answer the following questions using the IS-LM model and support your explanation by ONE diagram for all parts. Also, compare your answer to initial equilibrium. Each part is worth 5 points.
Suppose a closed economy experiences a fall in money demand.
a) What happens to the economy’s output, price, real money balance and unemployment rate in the short run? Explain.
b) In the absence of intervention from policy makers, what happens to the economy’s output, price, the real money balance and unemployment rate in the long run? Explain.
c) Suppose the government finds the change in output in part (a) undesirable and wants to keep output from changing, what kind of policy should the government pursue? What happens to the real money balance?
d) Suppose the central bank finds the change in output in part (a) undesirable and wants to keep output constant, what kind of policy should the central bank pursue? What happens to the real money balance?
Question 12 (15 points)
Answer the following questions using the AS-AD model and support your explanation by ONE diagram for all parts. You should compare your answer to the initial equilibrium.
A closed economy experiences a favorable shock in the demand for goods and services.
a) What happens to the economy’s output, price, real money balance, and unemployment rate in the short run? In the long run? Explain. (10 points)
b) Suppose the government finds the short-run change in output undesirable and wants to keep it from changing, what kind of policy should the government adopt? What is the effect of this change in policy on the real money balance? Explain. (5 points)
Question 13 (20 points)
Consider the following closed economy:
Consumption: C = 325 + 0.5(Y – T) – 500rInvestment: I = 200 – 500rReal money demand: L(i, Y) = 0.5Y – 1000iExpected inflation: Πe = 0Money supply: MS = 6000Full-employment level of output = 1000
Note: In this economy, consumption is not only depending on disposable income (as we normally assumed) but also on the real interest rate. Interest rates, i and r, are expressed in decimal points, i.e., if r = 0.5, then r = 50%.
a) Derive the IS and LM equations as functions of exogenous variables. (4 points)
b) The government runs a balanced budget; government purchases (G) and taxes (T) are both equal to 150. Calculate the full-employment values of the real interest rate, price level, consumption, and investment. (6 points)
c) Now suppose that government purchases increase to 250 and there is no change in taxes.
Assuming that the economy was initially at full employment, what are the new values of output, the real interest rate, price level, consumption, and investment in the short run? In the long run? (10 points)
Question 14 (20 points)
Consider the following closed economy:
Consumption: C = 300 + 0.5(Y – T) – 50r
Investment: I = 250 – 200r
Government spending: G = 300
Taxes: T = 300
Real money demand: L(i, Y) = 0.5Y – 250i
Expected inflation:
Money supply: MS = 5000
Production function: Y = 6K0.5L0.5
Note: Interest rates, i and r, are expressed in decimal points, i.e., if r = 0.5, then r = 50%.
a) Derive the AD equation for this economy. (6 points)
b) The supply of capital and labour in this economy are 400 and 100 respectively. Calculate the full-employment values of the output, real interest rate, price level, and real money balance. (4 points)
c) Now suppose that there is an increase in autonomous investment such that the investment function become:
I = 350 – 200r
Assuming that the economy was initially at full employment, what are the new values of output, real interest rate, price level, and real money balance in the short run and the long run? (10 points)