answer the question from question 13 to question 18

this is 6 question abut Advanced Macro Theory . you just need to do question 13 to question 18 which one is chapter 9 to chapter 11. the Formulas is in the back of the pdf, if you need.
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Student Name:
Student Number:
ECON 2HH3 – Sections C01 and C02
Marc-Andre´ Letendre
and Bidyut Kumar Talukdar
DAY CLASS
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DURATION OF EXAMINATION: 3 Hours
MCMASTER UNIVERSITY FINAL EXAMINATION
APRIL, 2010
THIS EXAMINATION PAPER INCLUDES 9 PAGES AND 18 QUESTIONS. YOU ARE
RESPONSIBLE FOR ENSURING THAT YOUR COPY OF THE PAPER IS COMPLETE.
PLEASE BRING ANY DISCREPANCY TO THE ATTENTION OF YOUR INVIGILATOR.
Special Instructions:
Write your name and student number at the top of this page.
Write all your answers in the exam booklets provided.
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Total number of points: 74
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Pay attention to the points allocated to each question and budget your time accord-
ingly.
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Answer all questions.
Use of Casio FX-991 calculator only is allowed.
You will ?nd a list of formulas at the end of this exam paper.

Continued on Page 2
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Economics 2HH3 – Examination
Page 2
Questions from Chapters 1, 2 and 3
1. (1 point) Indicate whether the following statement is true or false. You do not need to
justify your answer. Write your answer in your EXAM BOOKLET.
In?ation is ultimately determined by the rate of growth in money supply.
2. (1 point) Indicate whether the following statement is true or false. You do not need to
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justify your answer. Write your answer in your EXAM BOOKLET.
An intermediate good is used as an input to produce a ?nal good.
3. (1 point) Indicate whether the following statement is true or false. You do not need to
justify your answer. Write your answer in your EXAM BOOKLET.
Business cycle activity is represented graphically as deviations of real GDP from its
trend.
4. (1 point) Fill-in the blank. Write your answer in your EXAM BOOKLET.
The
approach to measuring GDP sums the value added to all the goods and
services produced in an economy over a particular time.
5. (1 point) Are deviations from trend in Canadian employment a lagging, leading or
coincident variable? You do not need to justify your answer. Write your answer in
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your EXAM BOOKLET.
6. (3 points) Consider the following information about an economy:
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• Working-age population: 30 millions people
• Unemployment: 5 millions people
• Labour force: 20 millions people
(a) Calculate the number of people employed.
(b) Calculate the unemployment rate.
(c) Calculate the labour force participation rate.
Continued on Page 3
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Economics 2HH3 – Examination
Page 3
Questions from Chapters 4 and 5: One-Period Model of the Macroeconomy
7. (3 points) Brie?y explain why hours worked by the representative consumer might
increase, decrease or stay the same when the real wage increases in our one-period
model. Organize your answer around the income and substitution e?ects of a change
in the real wage rate. No graphs necessary to earn full marks.
8. (2 points) Can the government run a de?cit in the one-period model? Brie?y explain
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why or why not.
9. (1.5 points) Consider our one-period model where the representative ?rm chooses
labour input N to maximize pro?ts p = zK 0.5 N 0.5 – wN . Use calculus to derive
the optimality condition implied by the ?rm’s pro?t maximization exercise.
10. (1.5 points) Consider our one-period model where the representative ?rm’s labour
demand function is given by w =
1
2
(
K
N
)1
2
. Calculate the amount of labour demanded
by the ?rm when w = 5 and K = 200.
11. (4 points) Consider our one-period model of the macroeconomy. Recall that in this
framework we ?nd the competitive equilibrium outcome by maximizing the consumer’s
utility subject to the constraint imposed by the economy’s production possibilities
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frontier (in other words we solve a benevolent social planner’s problem). Suppose that
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the government reduces its spending (that is, G decreases).
(a) (3 points) Use a graph (consumption on the vertical axis and leisure on the horizontal axis) to ?nd out how equilibrium consumption and leisure are a?ected by
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the decrease in G.
(b) (1 point) Does output increase, decrease, or stay unchanged? Provide a brief
explanation.
Continued on Page 4
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Economics 2HH3 – Examination
Page 4
Question from Chapter 8: A Two-Period Model: The Consumption-Savings
Decision and Credit Markets
12. (10 points) Consider a consumer who receives endowment income y and y ‘ in the current and future periods, respectively. However, there is a credit market imperfection
because of limited commitment. As in the setup with collateralizable wealth we examined in this chapter, suppose each consumer has a component of wealth (e.g. housing)
which has value pH in the future period, cannot be sold in the current period, and
can be pledged as collateral against loans. Suppose also that the government requires
period.
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each consumer to pay a lump-sum tax t in the current period and a tax t’ in the future
The collateral constraint is given by
c=y-t+
pH
1+r
(a) (2 points) On a graph, represent the constraint faced by the consumer when maximizing utility. Future consumption on the vertical axis and current consumption
on the horizontal axis.
(b) (5 points) Now suppose that the government reduces t and increases t’ so that
the government present-value budget constraint continues to hold. Use a graph to
explain the e?ects on an individual consumer’s consumption in the present and the
future? Assume that the collateral constraint holds with equality (binding) before
and after the change in taxes.
(c) (3 points) Does Ricardian equivalence hold in this economy? Explain why or
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why not.
Questions from Chapter 9: A Real Intertemporal Model with Investment
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13. (3 points) As we saw in class, in a model with asymmetric information and where there
are good and bad borrowers we end up with a borrowing rate that is greater than the
lending rate. Let rB denote the rate at which a ?rm borrows and let x denote the
spread between borrowing and lending rates. Therefore, rB = r + x where r is the rate
a bank gets when it is lending.
Explain why a ?rm that is a “good” borrower will end up investing less when a ?nancial
crisis increases the fraction of “bad” borrowers.
Continued on Page 5
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Economics 2HH3 – Examination
Page 5
14. (10 points) Consider two economists who disagree about the main factor driving the
current economic recovery in Canada.
Economist A’s theory is the following. Since empirical evidence seems to show that a
rising stock market precedes increases in total factor productivity (TFP) and that the
Canadian stock market is doing well, he thinks that it is an expected increase in TFP
(which corresponds to an expected increase in Z ‘ in our model) that is the main factor
currently increasing real GDP.
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Economist B’s theory is that the temporary government stimulus (re?ected by an
increase in G in our model) is the main factor currently increasing real GDP.
(a) (3 points) Focus your discussion on the goods market in the current period (include a graph) to explain why economist A’s theory is consistent with our real
intertemporal model. Provide an explanation for each curve shift.
(b) (5 points) Focus your discussion on the goods market in the current period (include a graph) to explain why economist B’s theory is consistent with our real
intertemporal model. Provide an explanation for each curve shift. If you ?nd that
both the output supply and output demand curves shift, assume that the shift in
the output demand curve is greater.
(c) (2 points) Explain how you could attempt to ?nd out which of the two economists
seems to be correct using data on aggregate investment. That is, how could you
tell which of the two economists seems to be correct if you knew whether there is
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an increase or a decrease in investment in Canada right now.
Continued on Page 6
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Economics 2HH3 – Examination
Page 6
Questions from Chapter 10: A Monetary Intertemporal Model
15. (2 points) Brie?y explain whether doubling the money supply has any e?ect on real
output in the monetary intertemporal model studied in class.
16. (8 points) The Bank of Canada is evaluating the possibility of switching from in?ation
targeting to some form of price-level targeting. For the purpose of our analysis, let’s
suppose that the Bank of Canada’s ultimate goal is to keep the price level constant
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and that it uses interest rate targeting to try achieving that ultimate goal. That is,
it behaves in such a way to keep the nominal interest rate (denoted R in our model)
constant. Recall that the nominal interest rate, the real interest rate (r) and the
in?ation rate (i) are related through the approximate Fisher equation R = r + i.
The Bank of Canada needs to know the e?ectiveness of an interest rate targeting policy
in delivering a constant price level. To do so, it needs you to answer the following
questions in the context of the monetary intertemporal model we studied in class.
(a) (3 points) Consider the case of a temporary increase in money demand resulting from a reduction in the supply of credit card balances. Suppose that the
shock shifting the money demand leaves the real interest rate r constant. Explain
whether an interest rate targeting policy would deliver a constant price level when
such a shock hits the economy. A graph of the money market in the current period
is not necessary to get full marks.
(b) (3 points) Now consider the case of a temporary decrease in total factor pro-
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ductivity (perhaps because of a temporary run up in energy prices). As seen in
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class (you are not asked to show this) the equilibrium e?ects of such a temporary
decrease in total factor productivity is to increase the real interest rate r and to
decrease real output Y . Explain whether an interest rate targeting policy would
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deliver a constant price level when such a shock hits the economy. A graph of the
money market in the current period is not necessary to get full marks.
(c) (2 points) What would you report to the Bank of Canada regarding the e?ectiveness of an interest rate targeting policy in delivering a constant price level?
Continued on Page 7
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Economics 2HH3 – Examination
Page 7
17. (5 points) Examples of recent large scale natural disasters are numerous, unfortunately.
Our real intertemporal model predicts that a natural disaster that destroys part of the
capital stock leads to an increase in the real interest rate (you are not asked to show
this). Focussing your discussion on the labour market in the current period (include a
graph), try to determine what is the e?ect of such a natural disaster on employment.
Question from Chapter 11: Market Clearing Models of the Business Cycle
18. (16 points) In the market-clearing business cycle model, suppose there is a persistent
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decrease in total factor productivity, so that there are decreases in Z and Z ‘ , current
and future total factor productivity, respectively. Answer the following two questions
with the aid of diagrams for the labour market, the goods market, and the money
market in the current period.
(a) (12 points) What are the e?ects on output (Y ), employment (N ), consumption
(C), real wage (w), real interest rate (r), and the price level (P ) of this negative
productivity shock? Explain your answer clearly and explain each curve shift. If
you ?nd that there is ambiguity about the net e?ect on the real interest rate,
assume that the net e?ect is an increase in r. Also, assume that the e?ect of a
change in the real interest rate on the labour supply curve is small.
(b) (4 points) Are the movements in N , C, w and P consistent with the key business
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cycle facts? Why or why not?
Continued on Page 8
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Economics 2HH3 – Examination
Page 8
Formulas
Chapter 2: Income-expenditure identity: Y = C + I + G + N X. Private disposable income
Y d = Y + N F P + T R – IN T – T . Private sector saving S p = Y d – C. Government saving
S g = T – T R – IN T – G. Government de?cit D = -S g . National saving S = S p + sg .
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Chapter 4: time constraint l + N s = h. Budget constraint: C = wN s + p – T . Consumer
optimality condition M RSl,C = w. Production function Y = zF (K, N ). Firm’s pro?t
function p = zF (K, N d ) – wN d and pro?t maximizing condition M PN = w.
Chapter 5: Government budget constraint: G + T . Production possibilities frontier: C =
zF (K, h – l) – G. Optimality condition: M RSl,C = M RTl,C = M PN
Chapter 8: Consumer’s budget constraints: c + s = y – t, c’ = y ‘ – t’ + (1 + r)s, and
c + c’ /(1 + r) = we where wealth is we = (y – t) + (y ‘ – t’ )/(1 + r). Consumer optimality
condition M RSC,C ‘ = 1+r. Government budget constraints: G = T +B, G’ +(1+r)B = T ‘ ,
and G + G’ /(1 + r) = T + T ‘ /(1 + r). Credit market equilibrium condition: S p = B.
Chapter 9: Consumer’s budget constraints: C + S p = w(h – l) + p – T , C ‘ = w’ (h – l’ ) +
p ‘ – T ‘ + (1 + r)S p , and
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C’
w’ (h – l’ ) + p ‘ – T ‘
= w(h – l) + p – T +
.
1+r
1+r
Consumer’s optimality conditions:
w(1 + r)
1 + r = M RSC,C ‘
w = M RSl,C
w’ = M RSl’ ,C ‘
= M RSl,l’
w’
Firm’s production function Y = zF (K, N ) and Y ‘ = z ‘ F (K ‘ , N ‘ ). Capital accumulation
C+
equation K ‘ = (1 – d)K + I. Firm’s pro?ts and objective functions:
p = Y – wn – I
p’
.
1+r
and 1 = (M PK’ + 1 – d)/(1 + r) which reduces to
p ‘ = Y ‘ – w’ N ‘ + (1 – d)K ‘
Firm’s optimality conditions: w = M PN
V =p+
M Pk’ – d = r. Government budget constraint: G + G’ /(1 + r) = T + T ‘ /(1 + r)
Continued on Page 9
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Economics 2HH3 – Examination
Page 9
Chapter 10: Approximated Fisher equation: r = R – i. In?ation rate: i = (P ‘ – P )/P .
Firms and consumers transaction constraint: P (C + I + T ) + B d = M – + B – (1 + R- ) + P X d
Firms and consumers budget constraint:
P (C + I + T ) + B d + M d + P qX d = M – + B – (1 + R- ) + P Y
Money demand equation: M d = P Y – P (1 + q)X d . Money demand function: M d =
P L(Y, R) or M d = P L(Y, r + i) where i = (P ‘ – P )/P . Government budget constraint
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P G + (1 + R- )B – = P T + B + M – M – .
Cobb-Douglas production function: Y = ZK a N 1-a where 0 < a < 1. Ka Na M PK' = aZ ' sh Th is M PN = (1 - a)Z THE END https://www.coursehero.com/file/9975735/final2hhw10/ Powered by TCPDF (www.tcpdf.org) N '1-a K '1-a ... Purchase answer to see full attachment

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