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Econ 216 Managerial Macroeconomics







Final Exam


Spring, 2009

. Time Allowed: 2 Hours

. Answer All Questions (each carries equal marks)



1. True/False (Please give brief explanations)

a. Under the Solow model, the saving rate that maximizes long run GDP level also maximizes long run consumption level.

b. If the depreciation rate of capital increases, other things the same, the desired level of capital increases when the marginal returns to capital is diminishing.

c. Because China has a fixed exchange rate, it is unable to conduct discretionary monetary policy.

d. The J-curve effect states that any effort to depreciate the domestic currency will instantaneously correct a trade deficit.

e. Define nominal exchange rate as F/H. As an economy moves down and to the right of the IS curve (defined over the space of interest rate and output), other things being the same, the domestic currency depreciates.



2. Consider the impact of unemployment on the Solow model. Suppose output is produced according to the production function Y=K 1.u L 1., where K, L and u are capital, labor and the unemployment rate, respectively. The economys saving rate is s, the labor force grows at rate n, and capital depreciates at rate .

a. What is the per worker production function? How does it depend on the unemployment rate?

b. Calculate the steady-state level of capital per worker. How does an increase in the unemployment rate affect the marginal product of capital and the steady-state level of capital per worker?

c. Plot the effect of increased unemployment rate on the steady-state level of capital per worker.



3. Consider the Mundell-Fleming model with fixed price level:

. Y = C(Y C T) + I(r) + G + NX(e)

. M/P = L(r, Y)

. r = r* + p


where r and r* are domestic and foreign interest rates, respectively; e is the real exchange rate that is negatively related to NX; and p is a risk premium that
compensates for the country risk of the domestic economy.
a. Evaluate the effect of a higher risk premium p on output (Y), investment (I), net exports (NX) and real exchange rate (e) under a floating exchange rate regime. Plot the IS and LM functions (assume linearity) before and after the change in the space defined by e on the vertical axis and Y on the horizontal axis.

b. Evaluate the effect of a higher risk premium p on output (Y), investment (I), net exports (NX) and real exchange rate (e) under a fixed exchange rate regime. Plot the IS and LM functions (assume linearity) before and after the change in the space defined by e on the vertical axis and Y on the horizontal axis.



4. Consider an open economy with the following setup:

. C = 200 + 0.8(Y C T)

. I = 200 C 20r

. G = T = 1000

. M/P = 0.5Y C 50r

. NX = 500 C 100e (e is the exchange rate defined as F/H)

. M = 2000

. P = 1

. r = r* = 5

a. Find the IS and LM fun