EC202A – Intermediate Macroeconomics I

Professor Rowena Pecchenino

Sample Final Exam questions

Sample Problems

1. In the context of the IS-LM model, what is the effect of each of the following on equilibrium output and the real interest rate? Explain why these effects occur and show graphically.

a. New smart phone apps reduce the need to hold cash.

b. The European Commission, the ECB and the IMF finally agree a deal for Greece that markets like. Consumer and firm expectations of the future are again rosy.

2. In the context of the AS-AD model, what is the effect of each of the following on equilibrium output, the real interest rate, and the price level? Explain why these effects occur and show graphically.

a. The decade of austerity finally ends. To make up for the lost years, the government initiates a number of new spending programs.

b. A new battery allows cars to run on solar power. Oil prices plummet.

3. In the context of the Solow growth model, and extensions thereto, what is the effect of each of the following on long-run equilibrium output and consumption per effective worker? Explain why these effects occur and show graphically.

a. Governments invest heavily in R&D in an effort to increase research fertility. They are unsuccessful.

b. A wonder drug is developed which makes all workers twice as productive

Sample Essays

1. You have been hired by the Department of An Taoiseach to comment and critique a sustainable growth plan being considered by parliament. The plan suggests the following:

  1. The tax on pension saving should be abolished and the state pension available only to the destitute.
  2. University education should be outsourced. Students wanting to pursue third level education will have to go abroad.
  3. Subsidies for R&D will only apply to firms with fewer than 5 employees.

For each element of the plan, explain how growth could benefit, why elements of the plan may diminish its effectiveness, and how you would improve the plan.

2. You have been retained as an advisor to a recently elected TD. She tells you that until entering politics she was a primary school teacher, and she doesn’t understand economics. She asks you to provide brief explanations of the following phenomena that she’s read about in the newspaper.

a. Money is neutral so monetary policy is ineffective;

b. Generous social welfare benefits reduce the flexibility of the labour market and thereby lead to longer recessions and higher unemployment;

c. There is no way to reduce the government deficit, either in the short or the long run, other than by reducing expenditures or increasing taxes.

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