SESS2006 European Macroeconomics Mock Exam 2017Prolog

Java Python Mock Exam 2017

Module: SESS2006 European Macroeconomics

Section A: Multiple choice

Choose the most appropriate (i.e. ONLY ONE) answer to each question. No explanation is required.

(4  points for each question, 32 points in total)

1.   The major difference between the Solow growth model and the Malthusian growth model is that:

A.  Both assume that land is unlimited, but Malthusian model assumes that some land was not able to be used and therefore a larger population would starve.

B.  Solow growth theory assumes that land was unlimited and Malthus assumed that land was limited. Therefore, the production-possibility frontier in Solow model shifts outward

proportionally along both axes where the production possibility frontier of Malthusian model shifts out more on the axis representing the non-food good.

C.  Solow model assumes that the population could not grow whereas Malthusian model assumes that the population would grow and would eventually starve itself to death.

D.  None of the above.

2.   In the very long run,

A.  the AS-curve is vertical

B.  the AS-curve is horizontal

C.  the AS-curve is upward sloping

D.  the level of output is solely determined by the position of the AD-curve

3.   The public debt of a country is not necessarily a burden on the economy to the extent that:

A.  people are happy to hold government bonds.

B.  it grows less rapidly than GDP.

C.  people receive good public services.

D.  it can be financed without addingto inflation.

4.   Suppose the government levies a one-time tax this year that costs you £9000. Suppose you live forever and face the interest rate of 10%. Based on the permanent-income theory of

consumption, how would your consumption change?

A.  Consumption does not change.

B.  Consumption decreases by £9000 immediately.

C.  Consumption decreases by £900 each year starting today.

D.  Consumption decreases by £800 each year starting today.

5.   Which of the following effects takes place as a result of automatic stabilization?

A.  Extra tax revenues are generated in a boom

B.  Tax revenues remain constant during a recession

C.  Leakages increase during a recession, helping to stimulate the economy

D.  Both A and C are correct.

6.   The demand for investment

A.  depends negatively on output.

B.  depends positively on the nominal interest rate.

C.  depends primarily on the nominal interest rate.

D.  depends primarily on the real interest rate.

7.   In a closed economy, if a country's private saving is 100 and government saving is -100, domestic private investment

A.  must be 200.

B.  must be zero.

C.  is equal to the net amount the economy borrows from other countries.

D.  is equal to the net amount the economy lends to other countries.

8.   Suppose that an economy has the following Phillips curve between inflation π at time t,past inflation π−1 at time t-1 and unemployment rate u at time t: π = π−1 − 0.5(u − 0.06). The inflati SESS2006 European Macroeconomics Mock Exam 2017Prolog on rate is 10% and the central bank wants to reduce it to 7.5%. The necessary cyclical unemployment rate is

A.  4%

B.  5%

C.  11%

D.  20%

Section B

Answer ALL the questions. Marks are only awarded for brief justification (argument, algebra, graphs etc.) that you provide.

(Points for each question are indicated below, 68 points in total)

1.   Solow model with technological progress and population growth  (25 points)

a.   Write down a generic production function with inputs being labour and capital, and with technology level A. What is the condition for constant returns to scale? Assume now that the production function is F(N,K) = Kα (AN)β where N is

population (equal to the number of workers) and K capital. What is the condition for constant returns to scale?

b.   With the notation from question a), and assuming constant returns to scale, write down the equation for the accumulation of capital, and explain the intuition behind this equation.

c.   Assume constant returns to scale and assume that technology, represented by A, is growing at the growth rate gA , and population,N, is growing at the growth rate gN. What is the condition for stability of the model?

d.   What is the steady-state level of output per effective worker (K/(AN)) if the

savings rate is s0? What is the long-run growth rate of output and of output per worker?

e.   Assume the economy is starting from the steady-state level of output per

effective worker with savings rate s0. The savings rate now goes up from s0 to s1. What are the short-term, long-term and transitional effects on capital, output, and consumption per worker? What are the new long-run growth rates of output and of output per worker? Interpret the results.

2.   Barro Gordon model  (24 points)

a.   Draw a short-run Phillips curve (assuming expected inflation is 0) and the long-run Phillips curve in a figure with unemployment in the horizontal axis and inflation in the vertical axis. Explain the slopes of the short-run and the long-run Phillips curves. Where is the structural rate of unemployment in your chart?

b.   The central bank dislikes both inflation and unemployment. Draw the preferences of the central bank in a figure with unemployment in the horizontal  axis and inflation in the vertical axis, and assuming the central bank would like, in an ideal world, to achieve both zero inflation and an unemployment rate of 2%. Explaini how a “hard-nosed” and a “wet” central bank preference curves  will look like.

c.   Combining the figures you drew in question a) and in question b), explain in details what the short-term and long-term equilibria of the model are.

3.   Show how a Phillips curve can be derived from the wage setting / price setting model. Explain why expectations influence the Phillips curve, and describe two ways that expectations can be formed