Economicsi Honorsi Exami 2009i Solutions:i Macroeconomics,i Questionsi 6-7
Questioni6i(Macroeconomics,i 30ipoints).i i Pleaseianswerieachiquestioni below.i
Youiwillibeigradedionitheiqualityiofiyouriexplanation.
a. (6i points)i True/False/Uncertain.i Longi runi equilibriumi ofii thei goodi mar-
iketideterminesitheirealiinterestirate,ithatiofiitheimoneyimarketideterminesitheipriceilevel
.i Explain.
Answer:
TRUEi-
iIniaiclosedieconomyiinitheilongiruni(whereifactorsiofiiproductionsiareifullyiemployed
iandiinflationiexpectationsiareiconstant),iweicanirepresentitheigoodsiandimoneyimarketsiin
itheifollowingiway:
Yi =iFi(K,iL)i=iC(Yi,iTi)i+iI(v)i+iG
S
M
L(Yi,ivi+iπe)i=i
P
Therefore,i theigoodsimarketipinsidowniv,i anditheisecondimarketipinsidowniPi.i Thisialso
iimpliesithatipricesiwillimoveioneitoioneiwithimoneyisupply,iwhichiisitheistandardi resulti ofii
long-runi neutralityi ofii money.
Points:
1 pointi fori notingi thei statementi isi “true”.
2 pointsi fori showingi thati goodsi marketi pinsi downi v.
2 pointsiforishowingithatimoneyimarketideterminesiPi.i1i
pointiforiaiwell-illustratedianswer.
Partiali crediti ati thei grader’si owni judgement.
b. (6i points)i Whati clearsi thei goodi marketi ini ani openi economy?
Answer:
Wei cani writei thei goodi market’si equilibriumi ini ai smalli openi economyi as:
Yi =iCi+iGi+iI(v∗)i+iNX(ϵ)
Hereitheiinterestirateiisipinnedidownibyitheiinternationalione,isoinowitheigoodsimark
etiwillineediNXi(netiexports)itoiadjustiiniorderiforitheimarketitoiclear.i Ini turn,ithisirequi
resitheirealiexchangeirateiϵitoiadjust.
1
, Points:
3 pointsiforinotingithatiNX i andiϵiadjustitoiclearigoodsimarketiiniSOE.i3ip
ointsiforiaiwell-illustratedianswer.
Partiali crediti ati thei grader’si owni judgement.
c. (6i points)i True/False/
Uncertain.i Thei AKi growthi modeli predictsi clubiconvergenceiinipericapitaiGDPia
crossicountries.i Explain.
Answer:
FALSE.i Thei AKi modeli cani bei representedi byi thei followingi equationi fori capital
accumulation:
k˙i
=isAi−iδi−ini
k
wherei si isi thei savingsi rate,i δi isi depreciationi ratei andi ni isi populationi growth.i ki is
˙i
capitalipericapita.i Noteithati y˙i=yi k .i This
k
iequationisaysithatiasilongiasiforiaicountry
sAi>iδi+in,icapitaliandioutputipericapitaiareigoingitoikeepigrowingiforeveriatitheiratei
sAi−iδi−in.iTheimodelipredictsidivergence:i twoiidenticalicountriesithatistartioutiatidiff
erentilevelsioficapitaliwillinevericonvergeitoitheisameilevel,isoithereican’ti beiclubiconverg
enceiinithisimodel.
Points:
1i pointi fori notingi thei statementi isi “false”.
1i pointi fori notingi thati thei modeli actuallyi predictsi divergence.
4 pointsi fori ai well-
illustratedi answer,i whilei usagei ofii equationsi isi ai bigi plus.iPartiali crediti ati thei gr
ader’si owni judgement.
d. (6ipoints)iTrue/False/
Uncertain.i Tradeiliberalizationiandideunionizationiexplainitheirecentiupsurgeiiniw
ageiinequality.i Explain.
Answer:
UNCERTAIN.iUnionization:i thisiisiaipossibleiexplanationiforitheiincreaseiini wagei
inequality:i asistrongeriunionsiraiseitheiwageiofiilow-
skillediworkers,itheyileaditoiwageicompression.iTherefore,ide-
unionizationishouldicontributeitoiaireductioniinitheicompression,iandiasiaiconsequenceit
oianiincreaseiiniwageiinequality.i However,itheitheoryidoesinotifititheidataiwell:i initheiU
Kiwageiinequalityistarteditoiriseiinitheimidi1970s,iwhileiunionidensityiwasiincreasingiu
2
Questioni6i(Macroeconomics,i 30ipoints).i i Pleaseianswerieachiquestioni below.i
Youiwillibeigradedionitheiqualityiofiyouriexplanation.
a. (6i points)i True/False/Uncertain.i Longi runi equilibriumi ofii thei goodi mar-
iketideterminesitheirealiinterestirate,ithatiofiitheimoneyimarketideterminesitheipriceilevel
.i Explain.
Answer:
TRUEi-
iIniaiclosedieconomyiinitheilongiruni(whereifactorsiofiiproductionsiareifullyiemployed
iandiinflationiexpectationsiareiconstant),iweicanirepresentitheigoodsiandimoneyimarketsiin
itheifollowingiway:
Yi =iFi(K,iL)i=iC(Yi,iTi)i+iI(v)i+iG
S
M
L(Yi,ivi+iπe)i=i
P
Therefore,i theigoodsimarketipinsidowniv,i anditheisecondimarketipinsidowniPi.i Thisialso
iimpliesithatipricesiwillimoveioneitoioneiwithimoneyisupply,iwhichiisitheistandardi resulti ofii
long-runi neutralityi ofii money.
Points:
1 pointi fori notingi thei statementi isi “true”.
2 pointsi fori showingi thati goodsi marketi pinsi downi v.
2 pointsiforishowingithatimoneyimarketideterminesiPi.i1i
pointiforiaiwell-illustratedianswer.
Partiali crediti ati thei grader’si owni judgement.
b. (6i points)i Whati clearsi thei goodi marketi ini ani openi economy?
Answer:
Wei cani writei thei goodi market’si equilibriumi ini ai smalli openi economyi as:
Yi =iCi+iGi+iI(v∗)i+iNX(ϵ)
Hereitheiinterestirateiisipinnedidownibyitheiinternationalione,isoinowitheigoodsimark
etiwillineediNXi(netiexports)itoiadjustiiniorderiforitheimarketitoiclear.i Ini turn,ithisirequi
resitheirealiexchangeirateiϵitoiadjust.
1
, Points:
3 pointsiforinotingithatiNX i andiϵiadjustitoiclearigoodsimarketiiniSOE.i3ip
ointsiforiaiwell-illustratedianswer.
Partiali crediti ati thei grader’si owni judgement.
c. (6i points)i True/False/
Uncertain.i Thei AKi growthi modeli predictsi clubiconvergenceiinipericapitaiGDPia
crossicountries.i Explain.
Answer:
FALSE.i Thei AKi modeli cani bei representedi byi thei followingi equationi fori capital
accumulation:
k˙i
=isAi−iδi−ini
k
wherei si isi thei savingsi rate,i δi isi depreciationi ratei andi ni isi populationi growth.i ki is
˙i
capitalipericapita.i Noteithati y˙i=yi k .i This
k
iequationisaysithatiasilongiasiforiaicountry
sAi>iδi+in,icapitaliandioutputipericapitaiareigoingitoikeepigrowingiforeveriatitheiratei
sAi−iδi−in.iTheimodelipredictsidivergence:i twoiidenticalicountriesithatistartioutiatidiff
erentilevelsioficapitaliwillinevericonvergeitoitheisameilevel,isoithereican’ti beiclubiconverg
enceiinithisimodel.
Points:
1i pointi fori notingi thei statementi isi “false”.
1i pointi fori notingi thati thei modeli actuallyi predictsi divergence.
4 pointsi fori ai well-
illustratedi answer,i whilei usagei ofii equationsi isi ai bigi plus.iPartiali crediti ati thei gr
ader’si owni judgement.
d. (6ipoints)iTrue/False/
Uncertain.i Tradeiliberalizationiandideunionizationiexplainitheirecentiupsurgeiiniw
ageiinequality.i Explain.
Answer:
UNCERTAIN.iUnionization:i thisiisiaipossibleiexplanationiforitheiincreaseiini wagei
inequality:i asistrongeriunionsiraiseitheiwageiofiilow-
skillediworkers,itheyileaditoiwageicompression.iTherefore,ide-
unionizationishouldicontributeitoiaireductioniinitheicompression,iandiasiaiconsequenceit
oianiincreaseiiniwageiinequality.i However,itheitheoryidoesinotifititheidataiwell:i initheiU
Kiwageiinequalityistarteditoiriseiinitheimidi1970s,iwhileiunionidensityiwasiincreasingiu
2
