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(ECON199)Econ 199 midterm 2007.pdf
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Econ 199 Intermediate Macroeconomics
Midterm (March 22nd, 2007)

The exam lasts 90 minutes.
Part A: True or False Statements. Label each of the following statement true, false, or uncertain. Explain your answer. (5 marks each)
1.
Inflation is not good for the economy, so deflation is good for the economy.

2.
A more stringent antitrust legislation will lead to an increase of the real wage and a decrease of the natural rate of unemployment.

3.
It is never the best interest of employers to pay wages higher than their workers reservation wage.

4.
The aggregate supply relation implies that an increase of price level will lead to an increase of national output.


Part B: Short Answer Questions: (15 marks each)
1. Based on your understanding of the IS-LM model, answer the following questions. a) Graphically illustrate and explain what effect an increase in consumer confidence will have on output, the interest rate, and investment.
b) Increases in the budget deficit are believed to cause reductions in investment. Based on your understanding of the IS-LM model, will a fiscal policy action that causes a reduction in the budget deficit cause an increase in investment? Explain the intuition.
c) Graphically illustrate and explain what effect a decrease in the nominal money supply will have on output, the interest rate, and investment.
2. In Hong Kong there is no legal minimum wage. (The only exception is a low minimum wage for foreign domestic helpers employed in Hong Kong.) Recently there has been a lot of discussion about introducing a legal minimum wage. Now let us use the knowledge we have learned to analyze the short run and medium run effect of such a policy. Assume that the economy is at the medium-run equilibrium before the implementation of such a policy. Also assume that the minimum wage is binding. a) How does this affect the WS and PS curve? So what will happen to the natural
unemployment rate, the medium-run equilibrium output, and real wage? b) Will this affect the AS curve and AD curve? If so, how does the AS and AD curve change? Explain your result intuitively. c) So according to your answer in b), does the short-run equilibrium increase or decrease? Explain your result intuitively.
1


Part B: Long Question.
1. (25 marks) Consider the following IS-LM model:
C = 200 + 0.25(Y . T ), I = 150 + 0.25Y .1000i,

.M .d . M .s
. .= 2Y . 8000i , the real money supply is given by . .= 1,600 . P .. P .
Government spending is G = 250 , and Tax is given by T = 200
a) Derive the IS relation and the LM relation. Then solve for the equilibrium real output and interest rate. (6 marks) b) The government decides to increase the government expenditure by 50. That is., the autonomous spending will be increased by 50. (10 marks) i) If we only consider the goods market equilibrium, how much will the national output increase? So this implies a multiplier which equal to?
ii) If we consider b