UNIVERSITY OF GRONINGEN
FACULTY OF ECONOMICS AND BUSINESS
:
INCLUDING ANSWERS
RESIT
MACROECONOMICS 1
2008-2009
Tuesday, February 2, 2010
8.30-11.30 am
Always motivate your answers. Without a motivation you will not get any
credits. Please use the predefined boxes for your answers.
The answers will be published on Nestor as soon as possible.
,Question 1 (18 points)
This question consists of 6 statements. You are requested to evaluate whether these
statements are right or wrong. You have to give an explanation. For every correct answer
you get 3 credit points. No credit points are given for answers without explanation.
a) The difference between the long run and the short run models presented by Mankiw is
that in the long run all factors of production are flexible.
False. The difference is the degree of price flexibility.
b) Statement: The time-inconsistency problem of discretionary policy refers to the fact
that, because of implementation lags, it takes time for economic policy to produce the
desired effects.
False. The time-inconsistency of discretionary policy refers to the fact that policy
announcements may be not be credible if agents understand the incentives of the policy
maker to renege on them.
c) In a given country, the majority of banks are planning to implement a system of
internet banking, which is guaranteed to simplify all the banking operations and thus
decrease the costs of withdrawing money from the bank.
Statement: According to the Baumol-Tobin model, the Internet banking system will
have a negative impact on the demand for money.
True. The transaction costs of withdrawing money will be lower, so people will hold less
money on average in order to decrease the opportunity costs of forgone interest.
d) The life cycle model of Modigliani predicts that a person winning € 500,000 in a lottery
will save this full amount of money to consume after his retirement.
False. His wealth is increased by this prize and he will smooth out consumption out of this
extra wealth during his expected life time.
e) Suppose the Keynesian cross model is extended by assuming that the investment
function reads: I = aY + I . (a>0)
Statement: This extension increases the value of the multiplier.
1
True. The multiplier becomes (with c as the marginal propensity to consume).
1− c − a
,f) Hysteresis tends to enlarge the cyclical component of unemployment in the course of
time.
False. It affects the structural component.
Question 2 (18 points)
Part a) is about the National Accounts.
a) Explain in the box below whether and how the following events as such affect Dutch
GDP and its components Consumption, Government expenditures, Investment and Net
exports in the current year.
1) The Dutch government increases welfare benefits.
Nothing is affected, because transfers do not put a claim on capacity.
2) The Dutch government buys an airplane from a company in the USA.
G: +, NX: −, GDP: 0
3) Dutch households buy new cars that have been imported the year before.
C: +, I: −, GDP: 0
4) The National Museum buys an etching of Rembrandt from a private Dutch collector.
Nothing is affected. (“second hand”)
5) The Dutch automobile company Spyker buys Saab from General Motors.
Nothing is affected. (Portfolio investment)
5 points
, b) Explain why a government (including the central bank) may benefit from
inflation. Does it make a difference whether the inflation is expected or
unexpected?
Inflation (expected and unexpected) decreases the real value of the existing debt and
generates seigniorage for the central bank. Unexpected inflation makes borrowing
relatively cheap, because the nominal interest rate only increases if inflation is
expected (Fisher equation)
4 points
c) Whether the government debt ratio (nominal debt divided through nominal
income) is stable depends on the primary deficit, the real interest rate and the
growth of real GDP. Please explain why the real interest rate is relevant. (a verbal
explanation is sufficient, but if you prove it mathematically…you earn a bonus
point.)
Total nominal debt changes by the primary deficit P(G−T) and the interest payments
on the existing debt.
3 points
d) Is the budget deficit a stock or a flow? Please explain.
A flow. It is an amount per unit of time.
1 point
e) Explain why, if money demand depends on the nominal interest rate, an increase
in the expected inflation may result in a rise of actual inflation.
Expected inflation raises the nominal interest rate, which lowers money demand.
With a given money supply this raises the price level.
3 points
f) Explain why in the case of a fixed exchange rate inflation at home makes the
currency appreciate in real terms (other things equal)
P
ε =e
P*
2 points
FACULTY OF ECONOMICS AND BUSINESS
:
INCLUDING ANSWERS
RESIT
MACROECONOMICS 1
2008-2009
Tuesday, February 2, 2010
8.30-11.30 am
Always motivate your answers. Without a motivation you will not get any
credits. Please use the predefined boxes for your answers.
The answers will be published on Nestor as soon as possible.
,Question 1 (18 points)
This question consists of 6 statements. You are requested to evaluate whether these
statements are right or wrong. You have to give an explanation. For every correct answer
you get 3 credit points. No credit points are given for answers without explanation.
a) The difference between the long run and the short run models presented by Mankiw is
that in the long run all factors of production are flexible.
False. The difference is the degree of price flexibility.
b) Statement: The time-inconsistency problem of discretionary policy refers to the fact
that, because of implementation lags, it takes time for economic policy to produce the
desired effects.
False. The time-inconsistency of discretionary policy refers to the fact that policy
announcements may be not be credible if agents understand the incentives of the policy
maker to renege on them.
c) In a given country, the majority of banks are planning to implement a system of
internet banking, which is guaranteed to simplify all the banking operations and thus
decrease the costs of withdrawing money from the bank.
Statement: According to the Baumol-Tobin model, the Internet banking system will
have a negative impact on the demand for money.
True. The transaction costs of withdrawing money will be lower, so people will hold less
money on average in order to decrease the opportunity costs of forgone interest.
d) The life cycle model of Modigliani predicts that a person winning € 500,000 in a lottery
will save this full amount of money to consume after his retirement.
False. His wealth is increased by this prize and he will smooth out consumption out of this
extra wealth during his expected life time.
e) Suppose the Keynesian cross model is extended by assuming that the investment
function reads: I = aY + I . (a>0)
Statement: This extension increases the value of the multiplier.
1
True. The multiplier becomes (with c as the marginal propensity to consume).
1− c − a
,f) Hysteresis tends to enlarge the cyclical component of unemployment in the course of
time.
False. It affects the structural component.
Question 2 (18 points)
Part a) is about the National Accounts.
a) Explain in the box below whether and how the following events as such affect Dutch
GDP and its components Consumption, Government expenditures, Investment and Net
exports in the current year.
1) The Dutch government increases welfare benefits.
Nothing is affected, because transfers do not put a claim on capacity.
2) The Dutch government buys an airplane from a company in the USA.
G: +, NX: −, GDP: 0
3) Dutch households buy new cars that have been imported the year before.
C: +, I: −, GDP: 0
4) The National Museum buys an etching of Rembrandt from a private Dutch collector.
Nothing is affected. (“second hand”)
5) The Dutch automobile company Spyker buys Saab from General Motors.
Nothing is affected. (Portfolio investment)
5 points
, b) Explain why a government (including the central bank) may benefit from
inflation. Does it make a difference whether the inflation is expected or
unexpected?
Inflation (expected and unexpected) decreases the real value of the existing debt and
generates seigniorage for the central bank. Unexpected inflation makes borrowing
relatively cheap, because the nominal interest rate only increases if inflation is
expected (Fisher equation)
4 points
c) Whether the government debt ratio (nominal debt divided through nominal
income) is stable depends on the primary deficit, the real interest rate and the
growth of real GDP. Please explain why the real interest rate is relevant. (a verbal
explanation is sufficient, but if you prove it mathematically…you earn a bonus
point.)
Total nominal debt changes by the primary deficit P(G−T) and the interest payments
on the existing debt.
3 points
d) Is the budget deficit a stock or a flow? Please explain.
A flow. It is an amount per unit of time.
1 point
e) Explain why, if money demand depends on the nominal interest rate, an increase
in the expected inflation may result in a rise of actual inflation.
Expected inflation raises the nominal interest rate, which lowers money demand.
With a given money supply this raises the price level.
3 points
f) Explain why in the case of a fixed exchange rate inflation at home makes the
currency appreciate in real terms (other things equal)
P
ε =e
P*
2 points
