Course name: Macroeconomics, the European Perspective RETAKE KEY
Date examination: 8 July 2019
Duration 3 hrs; from 10.00 to 13.00
Examination: end term
Total number of pages: 15
Total number of questions: 6
Question 1 – Economic fluctuations (20 points)
a) 6 points
Y = 0.75 ( Y – 0.2 Y – 4) +20+25+20
0.4 Y = 62 Y* = 155 (3 points)
T* = 0.2*155+4 = 35
Yd* = 155-35 = 120
C* = 110
Public saving = T-G = 35-20 = 15 (2 points)
Private saving = Y – T – C = 155-35-110 = 10 (1 point)
b)
i) 2 points
Consumption is smoothed because there are always needs that need to be
satisfied. No consumption is no option. Moreover, there are diminishing marginal
returns to consumption so smoothing consumption over time leads to utility
maximisation. Investment depends much more on volatile expectations and
opportunities that depend on the business cycle.
ii) 3 points
- through financial markets: saving and borrowing
- through insurance and co insurance
- through social security systems / social benefits
c) 4 points
Rational-expectations economists supposed that fiscal policy would be
undermined by forward-looking taxpayers. They should understand that
government borrowing would eventually need to be repaid, and that stimulus
today would necessitate higher taxes tomorrow. They should therefore save
income earned as a result of stimulus in order to have it on hand for when the
bill came due. The multiplier on government spending might in fact be close to
zero, as each extra dollar is almost entirely offset by increased private saving.
d) 5 points
In most of the rich world since the recession that followed the global financial
crisis, cutting interest rates to zero has proved inadequate to revive economies.
Many governments turned instead to fiscal stimulus to get their economies
going. As a new debate over multipliers flared, freshwater economists objected
to the Keynesian policies stating that they are fairy tales that have been proved
, false. Therefore estimation of the value of fiscal multipliers is essential to be able
to assess the effectiveness of fiscal stimulation. Plenty of economists now argue
that insufficient fiscal stimulus has been among the biggest failures of the post-
crisis era.
Question 2 – The labor market model (15 points)
a) 5 points
Drawing graph (horizontal PS curve, upward sloping WS curve, naming axes) =
2 points
Explaining horizontal PS curve = 3 points
The price-setting ‘curve’ is a single number that gives the value of the real wage
that is consistent with the markup over costs, when all firms set their price to
maximize their profits. The value of the real wage consistent with the markup
does not depend on the level of employment in the economy, so it is shown as
as a horizontal line at the height of the aforementioned real wage.
b) 6 points
High investment, rapid productivity growth, rising wages, and low
unemployment defined the golden age.
After-tax profits in the US economy remained high, profits led to investment.
High investment and continued technological progress created more jobs and
unemployment stayed low leading to increasing power of workers. This secured
sustained increases in wages. But accords between unions and employers meant
that unions tended to act in an inclusive manner and sustained the union voice
effect.
Graphically:
- technological progress shifts AP and PS up
- power of workers shifts WS up but less than PS
- W/P increases, N increases, U decreases.
c) 4 points. Several answers possible:
- lower inflation expectations are lower due to more credible monetary policy by
the central bank
- natural unemployment rate has decreased due to a lower markup and/or a
better functioning of the labour market
- the effect of a change in unemployment rate on inflation has fallen sharply.
This could be due to globalization. E.g. the price of a final product is to a smaller
extent determined by the domestic economic situation, like unemployment.
- the bargaining power of workers/ trade unions has diminished (globalization,
policy measures)
Date examination: 8 July 2019
Duration 3 hrs; from 10.00 to 13.00
Examination: end term
Total number of pages: 15
Total number of questions: 6
Question 1 – Economic fluctuations (20 points)
a) 6 points
Y = 0.75 ( Y – 0.2 Y – 4) +20+25+20
0.4 Y = 62 Y* = 155 (3 points)
T* = 0.2*155+4 = 35
Yd* = 155-35 = 120
C* = 110
Public saving = T-G = 35-20 = 15 (2 points)
Private saving = Y – T – C = 155-35-110 = 10 (1 point)
b)
i) 2 points
Consumption is smoothed because there are always needs that need to be
satisfied. No consumption is no option. Moreover, there are diminishing marginal
returns to consumption so smoothing consumption over time leads to utility
maximisation. Investment depends much more on volatile expectations and
opportunities that depend on the business cycle.
ii) 3 points
- through financial markets: saving and borrowing
- through insurance and co insurance
- through social security systems / social benefits
c) 4 points
Rational-expectations economists supposed that fiscal policy would be
undermined by forward-looking taxpayers. They should understand that
government borrowing would eventually need to be repaid, and that stimulus
today would necessitate higher taxes tomorrow. They should therefore save
income earned as a result of stimulus in order to have it on hand for when the
bill came due. The multiplier on government spending might in fact be close to
zero, as each extra dollar is almost entirely offset by increased private saving.
d) 5 points
In most of the rich world since the recession that followed the global financial
crisis, cutting interest rates to zero has proved inadequate to revive economies.
Many governments turned instead to fiscal stimulus to get their economies
going. As a new debate over multipliers flared, freshwater economists objected
to the Keynesian policies stating that they are fairy tales that have been proved
, false. Therefore estimation of the value of fiscal multipliers is essential to be able
to assess the effectiveness of fiscal stimulation. Plenty of economists now argue
that insufficient fiscal stimulus has been among the biggest failures of the post-
crisis era.
Question 2 – The labor market model (15 points)
a) 5 points
Drawing graph (horizontal PS curve, upward sloping WS curve, naming axes) =
2 points
Explaining horizontal PS curve = 3 points
The price-setting ‘curve’ is a single number that gives the value of the real wage
that is consistent with the markup over costs, when all firms set their price to
maximize their profits. The value of the real wage consistent with the markup
does not depend on the level of employment in the economy, so it is shown as
as a horizontal line at the height of the aforementioned real wage.
b) 6 points
High investment, rapid productivity growth, rising wages, and low
unemployment defined the golden age.
After-tax profits in the US economy remained high, profits led to investment.
High investment and continued technological progress created more jobs and
unemployment stayed low leading to increasing power of workers. This secured
sustained increases in wages. But accords between unions and employers meant
that unions tended to act in an inclusive manner and sustained the union voice
effect.
Graphically:
- technological progress shifts AP and PS up
- power of workers shifts WS up but less than PS
- W/P increases, N increases, U decreases.
c) 4 points. Several answers possible:
- lower inflation expectations are lower due to more credible monetary policy by
the central bank
- natural unemployment rate has decreased due to a lower markup and/or a
better functioning of the labour market
- the effect of a change in unemployment rate on inflation has fallen sharply.
This could be due to globalization. E.g. the price of a final product is to a smaller
extent determined by the domestic economic situation, like unemployment.
- the bargaining power of workers/ trade unions has diminished (globalization,
policy measures)
