Problem Set 2
1. In the economy of Solomania, economists know the following macroeconomic relationships. The economy of Solomania is a small open economy. Y = K1/2 L1/2 = 50,000 C = 1000 + 0.8 (Y T) I = 5000 1000 r r = r* = 0.1 T = 1
Aggregate Demand and Aggregate Supply
Classical assumption of money neutrality, costless adjustment
Only true in long run. In short run, prices are sticky especially down
In the long run we are all dead. Keynes.
Use monetary or fiscal policy to stabilize
Additional Practice MCQs For Final Exam With Answer Key
1. An increase in the elderly population of a country affects fiscal policy most directly because: A) the elderly generally are not required to pay taxes. B) governments provide p
EC202-D1 Practice Exam 1 Sp.2010 With Answer Key At The End 1. Macroeconomics does not try to answer the question of: A) why do some countries experience rapid growth. B) what is the rate of return on education. C) why do some countries have high rates of
Homework 3 (Due back on Tuesday, April 6)
Name: _ Date: _ 1. Most economists believe that prices are: A) flexible in the short run but many are sticky in the long run. B) flexible in the long run but many are sticky in the short run.
EC 202 Problem Set 1
June 1, 2012
1. What is the difference between GDP and GNP?
GDP includes income produced by residents of a country, including foreign multinationals
operating in the country. GDP includes income of a countrys
What is Macroeconomics?
1. Micro vs Macro
deals with individual markets.
deals with aggregate economy.
2. Considers the behavior of the interdependence of the
3. Key macroeconomic variables:
price level, output,
Beliefs of Classical Economists
Self-adjusting market mechanism
Money is neutral :
focus is on real factors
(e.g., productivity and real output).
In the aggregate, supply of output creates its own demand.
Outline of the Classi
Background of Keynesian Economics
The Great Depression during 1930s :
- Huge unemployment
- Low level of private investment spending
Classical Solution to the Depression :
Keynes View on the Depression
During 1929-1933, private investment fell by
Measuring the Economy
HOW fast is the economy growing?
Is it speeding up or slowing down?
Which sector contributes to economic growth?
How does the trade deficit affect economic growth?
Whats happening to the pattern of spending on goods and services
CH. 6 The Keynesian System II : The IS-LM Model
influence of interest rates on aggregate demand
simultaneous determination of equil. interest rates and equil. income
1. Role of Money
classical view : (perfectly flexible P and W)
P and W in propo
CH 4. Money, Prices and Interest in Classical Economics
4. Quantity Theory of Money
(1) Equation of Exchange
M : money stock
V : income velocity of money
(the number of times the average dollar is used in transacting
P : price level
CH. 7 Policy Implications of the IS-LM Model
1. Changes in Equilibrium Y and r
Any factor that shifts the IS or LM curve changes equil. Y and r.
(1) Monetary Policy
M Y and r ; Why?
M for a given r0, ES of money;
for money mkt to be
ANSWERS TO QUESTIONS IN CHAPTER 3
2. An aggregate production function gives the level of output that will be produced for given levels of the
factor inputs, capital, and labor. In the short run, the stock of capital (K) is fixed. An increase in the
Government Debt and Deficits
Real not nominal. Adjust for inflation, dont include D = D
Capital budgeting. Dont include Govt assets. Roads, buildings
Include liabilities. Unfunded Social Security and Medicare benefits
Full employment bu
Trade-Off between Inflation and Unemployment: Phillips Curve
Phillips Curve = e - (U U*) + v
increases when U < U*, falls U > U* Thus U* = NAIRU
e = -1 but can be more complicated
v = supply shock like oil price increases (v>0) or decreases (v<0)
Introduction to Macroeconomics
Microeconomics and Macroeconomics
Behavior of individual households and firms
Analysis of specific markets for goods or factors of production
Market failures. Externalities, public goods
Effects of government policies
Measuring Inflation and Aggregate Income
Consumer Price Index (CPI)
Household survey to find % of spending on different goods and services wi
Price of basket in year t = wi pit
Price index in base year = P0 = 100 * ( wi pit/ wi pit) =
Aggregate Supply and Demand
Aggregate Supply = Aggregate Production Function.
Y = F(K, L) = AK L 1- = Cobb Douglas production function
Constant returns to scale
Marginal products of K and L > 0 but declining
Factors receive their marginal products
Money and Inflation
Uses of money
Medium of exchange transaction demand for money
Unit of account
Store of value asset demand for money
Measures of the money supply
M0 = currency in circulation
M1 = currency + checking accounts + travelers checks
M2 = M1
Fixed and Floating
Fixed. Government sets E. China today, Europe until 1971-73.
Floating. Market determines E. US, Eurozone, UK, Japan, other developed countries
Nominal exchange rate E = units of foreign currency/1 unit domesti
Employed = with a job
Unemployed = no job but looking and available for work
Labor Force = Employed + Unemployed
Unemployment rate = U/L
Labor force participation rate = L/Pop
Economic Growth: Solow Model
Growth depends on saving and investment, population growth, technology (A)
Y = F(K, L) = A K L 1-
Constant returns to scale in K and L when both increase
Y = A F(K, L)
Diminishing marginal product of K a
Economic Growth and Population Growth
History of world population
Until 1700. Very low growth rates. 0.04 % per year
1700-1950. Low growth rate. 0.3 1 % per year
1950-1970. Growth > 2 % per year. Pop doubles every 35 years
1970-2000. Declining growth rate
Poverty and Inequality
Rank population by deciles or quintiles, calculate income shares
Calculate ratio of different deciles shares: 90/10, 80/40
Lorenz curves and Gini coefficients
Cumulative percent of population against cumulative
Aggregate Demand and Exchange Rates in an Open Economy
Arbitrage and interest rates - Covered interest parity
E$ = spot rate of dollars per euro today
F$ = forward rate in one year. Set by banks. Used in swaps.
Investors indifferent between the same dolla
A Numerical Example of National Income Accounts
Gross private domestic investment
Undistributed corporate profits
Corporate income taxes
Interest paid by business
Personal income taxes