Intermediate Macroeconomic TheoryName:
Spring 2006
Please answer the questions in order.
Be sure to answer all parts.
1.a. Graph the goods market EQ assuming that I is autonomous, the economy is closed, and P is fixed.
b. Fully specify the consumption function, and provide the value of the intercept of Z.
c. Look at the goods market in isolation, assume c1=0.9, and let autonomous spending increase by $50 billion. What will happen to equilibrium Y?
d. Use this numeric problem and the simple circular flow model to explain how the multiplier works.
2.a. Graph the goods market EQ, assuming I=I(i). Graphically derive two points on the IS curve, and connect the dots.
b. What do points along the IS represent?
c. Redraw the goods market and corresponding IS, and illustrate on your two graphs an increase in T = $X and its effect.
d. Describe the steps of the changes.
3.In this question, consider only the financial market.
a. Continuing to hold P constant, graph the financial market EQ.
b. Re-draw the financial market and a corresponding LM curve and illustrate a decrease in Ms on your two graphs.
c. Describe the steps of the changes.
4.a. Graph IS and LM together and illustrate an increase in T = $X.
b. Compare the resultant change in equilibrium Y with the change predicted in question 2. Why the difference? (List the steps.)
5.a. Graph the IS/LM model and corresponding AS/AD model to illustrate simultaneous medium run equilibriums in all markets.
b. Re-draw your graph from (a). What are the effects in the short run of a monetary expansion? Explain and show on your graph.
c. What are the effects in the medium run of a monetary expansion? Explain and show on your graph from (b).
6. Begin with the price setting and wage setting relationships and provide the algebraic derivation of the post 1970 Phillips curve relationship. That is, how do we get from those initial relationships to the modern Phillips curve?
Small bonus:
Restrict your considerations to the short run goods and financial markets, and assume the I=I(i).
Will there be crowding out? (T/F/or uncertain?) Explain.
Honor code:
Thanks for all your hard work!
Have a good safe summer!!!
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Study guide for 2006 Intermediate Macro final exam
At least 80 percent of your exam will come off of this sheet. We may edit questions as we go over them together in class. Please get clear on the answers that I will expect. Also, practice drawing big graphs.
1.Graph the goods market EQ assuming that I is autonomous, the economy is closed, and P is fixed.
Fully specify the consumption function, and provide the value of the intercept of Z.
Look at the goods market in isolation, assume c1=0.8, and let autonomous spending increase by $100 billion. (This number may change for the exam.) What will happen to equilibrium Y? Use this numeric problem and the simple circular flow model to explain how the multiplier works. Repeat for c1=0.9, and again for c1=0.5.
Redraw your graph to illustrate each of these problems.
2.Re-graph the goods market EQ, assuming I=I(i). Graphically derive two points on the IS curve. What do points along the IS represent?
Redraw the good market and corresponding IS, and illustrate each of the following scenarios on your two graphs: increase G = $X; increase T = $X; increase the interest rate.
In the case of each describe the steps of the changes.
3.Continuing to hold P constant, graph the financial market EQ.
Redraw the financial market and derive two points on the LM curve. What do points along an LM curve represent?
Redraw the financial market and corresponding LM curve and illustrate each of the following scenarios on your two graphs: decrease in Ms; decrease in income.
In each case describe the steps of the changes.
4.Graph IS and LM together and indicate your equilibrium.
Redraw the previous graph and illustrate of each of the following: increase G = $X; increase T = $X.
Compare the resultant change in equilibrium Y with the change predicted in question 2. Why the difference?
Redraw the IS/LM model and illustrate an increase the money supply. Describe the steps of the changes.
5.We relax an assumption in order to include the labor market. What assumption is that? What is the related model specification that puts us in the medium run?
6.Graph the wage setting and price setting relationships. In what sense is this a labor market equilibrium? What do we call the medium run equilibrium unemployment rate?
7.Do the algebra to derive the AS relationship.
Graph the AS. What do points along the AS represent? Explain the upward slope in terms of the interactions of wage setters and price setters.
When price expectations are being met, what is the level of Y? Indicate this on the AS graph. If P rises and Pe adjusts (so that they are again equal) how will the AS graph change?
8.Graphically derive AD. Explain the downward slope of AD in terms of the interaction of the goods and financial markets.
Illustrate the consequences of each of the following: increase in T = $X; increase in G = $X.
9.Graph AS and AD together, illustrating that the short run Y need not necessarily equal Yn.
Graph AS and AD, with the short run EQ Y greater than Yn. Explain the adjustment to the medium run equilibrium, i.e., explain why the AS is shifting and why the economy is moving along the AD curve.
10.Graph the IS/LM model and corresponding AS/AD model. Explain the short run and medium run effects of a monetary expansion, and an increase in G = $X. Compare the resultant change in equilibrium Y with the change predicted in question 4. Why the differences?