## Intermediate Macroeconomics – 2020F (ECON-301-002)

# Intermediate Macroeconomics – 2020F (ECON-301-002)

It is best to write the answer process, to be clear. Only need to answer the question step can, do not need very detailed explanation.The full title is on the attached PDF, please check it out.

Problem 1. (Final Exam, Fall 2019) Use the IS-MP-PC framework to answer the following questions. Assume that the economy starts in period 0 in the no-shock long-run equilibrium, in which ¯a = 0, R0 = ¯r = 2%, ¯o = 0, Y˜ 0 = 0, and ∆π = 0, with π0 = 2%. Assume also that the sensitivity coefficient in the Phillips curve is ¯v = 0.5, and the sensitivity coefficient in the IS curve is ¯b = 2. Be sure to draw the relevant IS-MP-PC diagrams for each of your answers below. Label all curves in periods 0, 1, 2 and mark equilibrium points. 1. Suppose that the economy experiences a reduction in exports that lasts for 1 period. Specifically, ¯a = −2 in period 1 and goes back to zero in period 2. Sketch the paths of inflation and short-run output over time if the central bank’s policy is to maintain the real interest rate constant at the initial level of 2%. What is the rate of inflation in period 2? 2. Now assume that the central bank wants to keep the inflation rate constant at 2% using monetary policy. What is the value of the real interest rate in period 1? 3. Assume that the government wants to keep inflation constant, as before, but using fiscal policy (via changes in government purchases) rather than monetary policy. What should this policy and its magnitude be? 4. Suppose that investment demand is less responsive to the interest rate. Specifically, ¯b = 1. Will the magnitude of monetary policy response change relative to part 2 and, if yes, how? What will be the value of the real interest rate in period 1? Be sure to illustrate both cases (¯b = 1 and ¯b = 2) on the same set of IS-MP-PC diagrams. Problem 2. (Final Exam, Fall 2017) Use the IS-MP-PC framework to answer the following questions. Assume that the economy starts in period 0 in the no-shock long-run equilibrium, in which ¯a = 0, R = ¯r = 2%, ¯o = 0, Y˜ = 0, and ∆π = 0, with π0 = 4%. Assume also that the sensitivity coefficient in the Phillips curve is ¯v = 0.5, and the sensitivity coefficient in the IS curve is ¯b = 2. Be sure to draw the relevant IS-MP-PC diagrams for each of your answers below. 1. Suppose that the Fed is unhappy about 4% inflation rate and decides to lower it to 2% in period 1. How would it achieve this goal? Find the values of the real interest rate and short-run output in period 1. 1 2. Now consider the version of this model with the multiplier effect. Graphically compare this case to the baseline from part 1. Specifically, draw the IS, MP, and PC curves in periods 0 and 1 for both cases on the same IS-MP-PC diagrams. Clearly mark the values of R and Y˜ in period 1 for both cases. 3. Go back to the case without the multiplier and assume that the Fed is implementing its policy from part 1. However, an unforeseen negative aggregate demand shock ¯a = −2 hits the economy in period 1, as a result of which the Fed is unable to reach its target of 2% inflation. In period 2, the are no shocks and the Fed makes another attempt (successful) to bring the inflation rate to 2%. Illustrate this situation showing clearly the positions of all curves and the economy in periods 0, 1, 2. Find the values of π1 and R2. 4. In part 3 scenario, assume that the Fed keeps the real interest rate at 2% in period 2 and instead, the government increases its purchases by 2 percentage points in that period. Illustrate this case using the IS-MP-PC diagrams and calculate π2.

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