Macroeconomics Answers

Given a hypothetical consumption function of the form:
Y = C + I0 + G0
C = α + β
Where: = Y – T
Y = Income
T = Taxes and that:
Compute the equilibrium level of income and consumption

Assume perfect capital mobility, fixed nominal exchange rate and adaptive expectations. How does a one-time increase in productivity affect the economy?

Select one or more:
a. It moves both the LAS ans AS curves to the right but the AS curve changes its position over time.
b. It lowers the domestic price level permanently.
c. It moves the LAS curve to the right but the AS curve does not change.
d. It lowers the domestic price level but only temporarily.

Assume perfect capital mobility, fixed nominal exchange rate regime and rational expectations. How does an unexpected, one-time devaluation of the nominal exchange rate affect the economy?

Select one or more:
a. It does not increase output in the long run and is does not change the price level.
b. Output increases in the short and in the long run.
c. It does not affect the AD curve.
d. It moves the AD curve to the right.

Use the Mundell-Fleming model to analyze the demand side in the AD-AS model. Assume perfect capital mobility and fixed nominal exchange rates. Compare the initial equilibrium value of the nominal money supply M_0 with the new equilibrium value M_1 after an unexpected one-time fall in the domestic price level. Mark the correct statement.

Select one or more:
a. M_0 < M_1
b. M_0 = M_1
c. We cannot make an unambiguous statement about the relationship between M_0 and M_1
d. M_0 > M_1

Assume perfect capital mobility and fixed nominal exchange rates. Which of the following statements about the derivation of the AD curve are true ?

Select one or more:
a. A decrease in P raises income. Thus the AD curve has a negative slope.
b. A decrease in P decreases the real exchange rate, which shifts the IS curve to the right. This raises equilibrium income.
c. A decrease in P increases the real exchange rate, which shifts the IS curve to the right. This raises equilibrium income.
d. The demand side equilibrium (for the derivation of the AD curve) is determined by the intersection of the IS and FE curve.

Assume perfect capital mobility and fixed exchange rates. Furthermore, assume that no changes in the nominal exchange rate are expected and that there are no risk premia. The economy in characterized as follows: LM curve: i = 0.5Y - 0.1 M/P, IS curve i = -Y + R + 100, nominal exchange rate E = 7.5, price level P = 2, world interest rate i^W = 5.5, world price level P^W= 2. Calculate the change in Y if the price level changes from P_0=2 to P_1=1.

Answer:

Mark correct statements about the short-run AS curve.

Select one or more:
a. The positively sloped (but not vertical) AS curve can be derived by assuming real rigidities on the labor market.
b. The positively sloped (but not vertical) AS curve can be derived by assuming nominal rigidities on the labor market.
c. Rational expectations imply a vertical AS curve.
d. Flexible prices on the labor and goods market imply an AS curve with a positive, but not vertical, slope.

Rational expectations ...

Select one or more:
a. are always better predictors of realizations of a random variable than adaptive expectations.
b. are always correct.
c. are correct on average.
d. always contradict the assumption of perfect foresight.

The positively sloped (but not vertical) AS curve ...

Select one or more:
a. is not consistent with agents who have perfect foresight.
b. is implied by some rigidities in the labor or goods market.
c. can be consistent with perfect competiton on the goods market.
d. is implied by full price flexibility in the neoclassical model.
e. is implied by the Keynesian assumption that prices do not change at all.

Assume that prices do not turn out as expected. Mark the correct statements.

Select one or more:
a. Actual aggregate output lies on the LAS curve, but not on the AS curve.
b. Actual aggregate output lies neither on the AS curve nor on the LAS curve.
c. Actual aggregate output lies on the AS curve and on the LAS curve.
d. Actual aggregate output lies on the short-run AS curve, but not on the long-run LAS curve.