=========================preview======================
(ECON199)[2009](s)midterm~ma_ysxad^_10234.PDF
Back to ECON199 Login to download
======================================================
Econ 199 Intermediate Macroeconomics
Midterm (April 3rd, 2009)

The exam lasts 1 hour and 45 minutes
Part A: True or False Statements. Label each of the following statement true, false, or uncertain. Explain your answer. (6 marks each)
1.
The unemployment rate provides all the information economists need about the labor market.

2.
Increasesofpricelevelwillleadtoanupwardshift oftheLMcurveandtheAScurve.

3.
GDP is the value of final goods produced in the economy during a given period.


Part B: Short Answer Questions: (16 marks each)
1. Consider the wage setting equation and the prise setting equation we discussed in Chapter 6. a) Using the WS and PS relations to explain the effects of a reduction m
unemployment benefits on the equilibrium real wage, the natural rate of unemployment, the natural level of employment, and the naturallevel of output.
b) Will this affect the AS curve and AD curve? If so, how does the AS and AD curve change in the short run? Does the short-run equilibrium increase or decrease? Explain your result intuitively.
2. The introduction of the credit card reduces the transaction need for money demand. Hence, people will hold less money for transaction for the same level of output. In other words, given Y, money demand decreases. Based on your understanding of the financial market and the IS-LM model, answer the following questions. a) Graphically illustrate the effect of the introduction of credit card in the money
market. How does money demand curve shift? How does the equilibrium interest rate change? Explain your findings intuitively. b) Show the effect of the introduction of credit card in the central bank money market using a graph. c) Use the IS-LM model to analyze how this affect the LM curve, the IS curve, and the equilibrium output and interest rate.
Part B: Long Question.
1. (20 marks) Consider the following IS-LM model:
C = 200 + 0.25(Y -T), 1= 150 + 0.25Y -2500i, (~r = 2Y -5000i the
real money supply is given by (~J = 2000 .Government spending is G = 230 , and tax is
given by T =200 .
1
a) Derive the IS relation and the LM relation. Then solve for the equilibrium real output and interest rate. (5 marks)
b) The government decides to decrease the tax by 120. How does this affect the autonomous expenditure? If both the goods market and fmancial market equilibrium are considered, what is the new equilibrium output and interest rate? Are they higher or lower than your answer a)? Explain the intuition. (5 marks)
c) Now suppose the government's objective is to increase the output while keeping interest rate constant. In particular, the government want to increase the output to 1100 while keep i at the level you got in part a).
i) Solve for the level of real money supply needed to implement this policy objective. (Hint, use the LM relation you derived in part a)). Then solve for the level of government spending required to implement the policy objective. (Hint