Course name: Macroeconomics, the European Perspective KEY
Date examination: 24 June 2019
Duration 3 hrs; from 9.00 to 12.00
Examination: end term
Total number of pages: 15
Total number of questions: 6
Question 1 – Economic fluctuations (20 points)
1a) 5 points
AD = C + I + G + X – M
Equilibrium condition: Y = AD
Y=C+I+G+X–M
Y = c0 + c (Y – T) + I + G + X – mY
Y = c0 + c Y –c T + I + G + X – mY
Y – cY + mY = c0 –c T + I + G + X
Y ( 1 – c + m) = = c0 –c T + I + G + X
Y = 1/(1-c+m) * (c0 – cT + I + G + X)
Y = 2850, multiplier = 1/(1-c+m) = 2.5
1b) 5 points
Change in investment = +200, Change in Y = multiplier * change in investment
= 200*2.5 = 500 (new equilibrium Y = 2850 + 500 = 3350 ). The value of the
multiplier is still 2.5 since neither c nor m has changed.
1c) 5 points
An automatic stabilizer dampens the fluctuations in economic activity without
direct interference by the government. In this model the only variable that
dampens fluctuations in Y are imports. If Y is larger (boom), M is larger and
since M is negatively related to Y, this leads to a mitigating effect on Y. If Y is
smaller (depression), M is smaller and Y will be affected less negatively.
Nb: all other answers lead to 0 points. Taxes and government expenditure are
exogenous in this model and thus do not act as an automatic stabilizer. To score
5 points, imports should be mentioned and there should be a sufficiently detailed
description of the mechanism by which imports dampen economic fluctuations.
Only referring to the multiplier is not enough to score full points.
, 1d) 5 points
Crucial in explaining the meaning of the paradox of thrift is mentioning the
difference between savings in an individual setting and savings in an aggregate
setting.
Saving is possible and beneficial for an individual, as long as not all individuals
save. If all individuals save, aggregate consumption will be lower, this leads to
lower aggregate demand. Lower aggregate demand leads to lower income and
lower income leads to lower aggregate saving. Therefore, if too many individuals
save, individual saving leads to lower or even negative saving on an aggregate
level.
To score full points, the difference between individual and aggregate saving
must be mentioned and explained, the mechanism by which saving by many
individuals leads to lower or negative savings must be explained and the end
result of aggregate saving (lower or negative) must be mentioned.
Date examination: 24 June 2019
Duration 3 hrs; from 9.00 to 12.00
Examination: end term
Total number of pages: 15
Total number of questions: 6
Question 1 – Economic fluctuations (20 points)
1a) 5 points
AD = C + I + G + X – M
Equilibrium condition: Y = AD
Y=C+I+G+X–M
Y = c0 + c (Y – T) + I + G + X – mY
Y = c0 + c Y –c T + I + G + X – mY
Y – cY + mY = c0 –c T + I + G + X
Y ( 1 – c + m) = = c0 –c T + I + G + X
Y = 1/(1-c+m) * (c0 – cT + I + G + X)
Y = 2850, multiplier = 1/(1-c+m) = 2.5
1b) 5 points
Change in investment = +200, Change in Y = multiplier * change in investment
= 200*2.5 = 500 (new equilibrium Y = 2850 + 500 = 3350 ). The value of the
multiplier is still 2.5 since neither c nor m has changed.
1c) 5 points
An automatic stabilizer dampens the fluctuations in economic activity without
direct interference by the government. In this model the only variable that
dampens fluctuations in Y are imports. If Y is larger (boom), M is larger and
since M is negatively related to Y, this leads to a mitigating effect on Y. If Y is
smaller (depression), M is smaller and Y will be affected less negatively.
Nb: all other answers lead to 0 points. Taxes and government expenditure are
exogenous in this model and thus do not act as an automatic stabilizer. To score
5 points, imports should be mentioned and there should be a sufficiently detailed
description of the mechanism by which imports dampen economic fluctuations.
Only referring to the multiplier is not enough to score full points.
, 1d) 5 points
Crucial in explaining the meaning of the paradox of thrift is mentioning the
difference between savings in an individual setting and savings in an aggregate
setting.
Saving is possible and beneficial for an individual, as long as not all individuals
save. If all individuals save, aggregate consumption will be lower, this leads to
lower aggregate demand. Lower aggregate demand leads to lower income and
lower income leads to lower aggregate saving. Therefore, if too many individuals
save, individual saving leads to lower or even negative saving on an aggregate
level.
To score full points, the difference between individual and aggregate saving
must be mentioned and explained, the mechanism by which saving by many
individuals leads to lower or negative savings must be explained and the end
result of aggregate saving (lower or negative) must be mentioned.
