Spring 2009 Final Exam

# Spring 2009 Final Exam - Department of Economics University...

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Department of Economics University of Maryland Economics 325 Intermediate Macroeconomic Analysis Final Exam Professor Sanjay Chugh Spring 2009 May 16, 2009 NAME: TA’S NAME: The Exam has a total of four (4) problems and pages numbered one (1) through twelve (12). Each problem’s total number of points is shown below. Your solutions should consist of some appropriate combination of mathematical analysis, graphical analysis, logical analysis, and economic intuition, but in no case do solutions need to be exceptionally long. Your solutions should get straight to the point – solutions with irrelevant discussions and derivations will be penalized. You are to answer all questions in the spaces provided. You may use two pages (double-sided) of notes. You may not use a calculator. Problem 1 / 25 Problem 2 / 25 Problem 3 / 30 Problem 4 / 20 TOTAL / 100

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1 Problem 1. Monetary Neutrality or Nonneutrality? (25 points) . Suppose firms need to use only labor in order to produce output, and output in period t is given by t t t y An ! , where t A is a technology shock and t n is the number of hours of labor. Firms choose their labor in a profit maximizing way every period. Suppose the representative consumer’s period-t utility function is given by ln( ) ln ln t t t t t M B c l P "" , where, as always, 1 tt ln ! # denotes leisure , t B denotes a preference shock, and / M P is real money. Note that rather than supposing there are “168 units of time” available, here we are supposing that there is only “one unit of time” available (hence, both n and l will be fractions between zero and one). Finally, assume the labor supply curve is always upward-sloping (i.e., it never bends backwards), and that the labor tax rate is always zero. a. (7 points) In the diagram below, show the effect on the consumer’s optimal choice of consumption and leisure in period t due to a simultaneous rise in t A and rise in t B . Clearly label your diagram, and explain precisely any and all effects pertinent here. consumption leisure initial optimal choice
2 Problem 1 continued b. (7 points) Suppose instead of the preference and TFP shocks in part a, there were a positive money shock (and no other shocks) at the end of period t (as we described in class – i.e., the actual t M turns out to be different than the “planned” t M ). Suppose both nominal prices and nominal wages are completely flexible. In the diagram below, sketch the effect on the consumer’s optimal choice of consumption and leisure in period t due to the surprise extra quantity of money in the economy. Clearly label your diagram, and explain precisely any and all effects pertinent here. (Hint: The consumption-money optimality condition is relevant for the analysis here.) consumption leisure initial optimal choice

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3 Problem 1 continued c. (7 points) Consider again the same money shock from part b. Suppose the nominal wage is completely rigid (i.e., it can never change), but nominal goods prices are completely flexible. In the diagram below, sketch the effects on the consumer’s optimal choice of
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## This note was uploaded on 09/07/2011 for the course ECON 325 taught by Professor Chugh during the Spring '08 term at Maryland.

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Spring 2009 Final Exam - Department of Economics University...

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