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    ECON208 Main 20-21

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    This document contains summaries of 4 documents: 1. The first document summarizes an economics exam with two sections containing macroeconomic questions. Students must answer two questions from each section. 2. The second document contains a question on institutions and capital flows, examining the effects of institutional quality on capital stock, output, and net capital flows. 3. The third document examines expectations of devaluation in a fixed exchange rate system and the potential for a balance of payments crisis. 4. The fourth document analyzes the determinants of foreign borrowing and net international investment positions for a small open economy, and the conditions under which the country is a net debtor.

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    ECON208 Main 20-21

    Uploaded by

    darius
    30 views5 pages
    This document contains summaries of 4 documents: 1. The first document summarizes an economics exam with two sections containing macroeconomic questions. Students must answer two questions from each section. 2. The second document contains a question on institutions and capital flows, examining the effects of institutional quality on capital stock, output, and net capital flows. 3. The third document examines expectations of devaluation in a fixed exchange rate system and the potential for a balance of payments crisis. 4. The fourth document analyzes the determinants of foreign borrowing and net international investment positions for a small open economy, and the conditions under which the country is a net debtor.

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    ECON208_Main_20-21

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    This document contains summaries of 4 documents: 1. The first document summarizes an economics exam with two sections containing macroeconomic questions. Students must answer two questions from each section. 2. The second document contains a question on institutions and capital flows, examining the effects of institutional quality on capital stock, output, and net capital flows. 3. The third document examines expectations of devaluation in a fixed exchange rate system and the potential for a balance of payments crisis. 4. The fourth document analyzes the determinants of foreign borrowing and net international investment positions for a small open economy, and the conditions under which the country is a net debtor.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    30 views5 pages

    ECON208 Main 20-21

    Uploaded by

    darius
    This document contains summaries of 4 documents: 1. The first document summarizes an economics exam with two sections containing macroeconomic questions. Students must answer two questions from each section. 2. The second document contains a question on institutions and capital flows, examining the effects of institutional quality on capital stock, output, and net capital flows. 3. The third document examines expectations of devaluation in a fixed exchange rate system and the potential for a balance of payments crisis. 4. The fourth document analyzes the determinants of foreign borrowing and net international investment positions for a small open economy, and the conditions under which the country is a net debtor.

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    PART II

    ECON208 - Macroeconomic Analysis (2h30 hours + 30 minutes)

    
    Candidates should answer TWO questions from Section A and TWO
    
    questions from Section B. All questions carry equal marks. Please answer
    each section on a different booklet. Use of non-programmable calculators is
    allowed.

    (PLEASE TURN OVER)


    1
    Section A

    1. Explain the features of the Solow Model focusing on the meaning of the steady
    state, the importance of the population growth and technological progress and the
    idea of the catching up effect.

    2. Consider an economy characterized by the following equations:

    C = 300 + 0.75(Y − T )

    I = 500 − 40r
    G = 200
    T = 0.25Y
    L(r, Y ) = Y − 100r
    M
    = 500
    P
    where C,Y ,I,G,T ,r,L and MP
    , denote consumption, output, investment, government
    spending, taxes, the interest rate, liquidity preferences and the real money supply,
    respectively.

    (a) Derive expressions for the IS and the LM and plot the two curves and find the
    equilibrium interest rate and the equilibrium level of income.
    (b) The Government decide to double the public spending. Calculate the new
    equilibrium and explain the transmission mechanism behind the result.
    (c) Compute the crowding-out effect and calculate the amount of money supply
    needed to eliminate it.

    3. Consider the AD-AS model and assume a starting equilibrium where output coin-
    cides with its natural level.

    (a) Describe and explain the short and medium run effects of a monetary policy
    tightening.
    (b) Describe and explain the short and medium run effects of a technology shock
    able to lower the price markup.

    4. Starting from a general expression of aggregate supply, derive the Phillips Curve
    and discuss the role of rational expectations.

    (PLEASE TURN OVER)


    2
    Section B

    1. Quality of Institutions and Capital Flows.


    We consider an economy which produces a final good according to a technology of
    production described by
    y = k 1−α , 0 < α < 1, (1)
    where y is output per capita and k the stock of capital per capita. The economy is
    open to world capital markets where it can borrow or lend each unit of capital at
    the interest rate r? . The cost of capital in open economy is thus R? = r? + δ where
    δ is the rate of depreciation of capital. Country’s institutions are of low quality
    and their detrimental effects are modelled as a tax τ which reduces the return on
    capital at (1 − τ ) (MPK − δ) where MPK is the marginal product of capital.

    (a) Determine the capital stock per capita in open economy, k ? , by using the
    equality between the return on capital defined above and r? . Next derive y ? .
    (b) Plot the capital demand (KD henceforth) and capital supply curves (KS
    henceforth) in the (k, r)-space where r is the interest rate (or the return on
    capital). Show graphically the effects of a rise in τ and explain its impact on
    ?
    GDP per capita. The net capital flows in percentage of GDP, d, are d = s−δ ky?
    where s is the saving rate s. Determine the analytical expression of d by using
    your answer to a) and indicate the effect of a rise in τ on d.

    2. Devaluation Expectations and Balance of Payments Crisis


    Let us consider an open economy which has removed all barriers to capital mo-
    bility. The open economy comprises three agents: households, firms and the gov-
    ernment/monetary authorities. We denote GDP by Y , the domestic interest rate
    by r, the exchange rate (i.e., the pound sterling price of one euro) by e (a rise in
    e means a depreciation of the pound sterling), and the world interest rate by r? .
    The goods market is described by Y = C (Y ) + I(r) + Ḡ + N X (Y, e) where C is
    households’ final consumption expenditure, I investment, Ḡ government spending,
    N X net exports. The money market is described by L (r, Y ) = M S where money
    supply M S = M̄ + H includes an exogenous component, M̄ , and an endogenous
    component H = ∆RES which is the change in international reserves. The behav-
    ior of households and firms is characterized by the following reaction functions:
    0 < CY < 1, Ir < 0, N Xe > 0, N XY < 0, Lr < 0, LY > 0.

    (a) Domestic and foreign prices are fixed and normalized to unity, i.e., P = P ? = 1.
    We denote export volume by EX and import volume by IM ? . Net exports in
    the U.K. are described by N X = EX − e .IM ? . We denote the export price
    elasticity by γ and the import price elasticity by β. Give the condition under
    which a 1% increase in e increases net exports.
    (b) We denote the anticipated value for the future exchange rate by ea . We assume
    a
    that ee = 1 + x. Write the uncovered interest parity condition.

    (PLEASE TURN OVER)


    3
    (c) We consider a fixed exchange rate regime so that H 6= 0. Given its past
    of high inflation, the domestic country’s fixed exchange rate regime is not
    credible so that foreign investors anticipate a devaluation, i.e., a rise in x.
    Show graphically the adjustment of the economy in the (Y, r)-space. Explain
    the adjustment from the initial to the new macroeconomic equilibrium.
    (d) Determine the change in output and in foreign currency reserves caused by an
    increase in x, i.e., dY /dx and dH/dx, in a fixed exchange rate system (hint:
    Ix = ∂I/∂x < 0, ∂L/∂x = Lx < 0). Determine the change in government
    spending that would bring output back to its initial level, i.e., determine dḠ/dx
    such that dY = 0.

    3. Risk Premium and Foreign Borrowing.


    Consider a small open endowment economy without a government that is inhabited
    by a representative consumer who lives two periods indexed by ’1’ and ’2’, respec-
    tively. The representative consumer receives exogenously a revenue of Y in period
    1 and anticipates a revenue of Y (1 + g) in period 2 where g is the expected rate of
    future growth. The household consumes C1 in period 1 and C2 in period 2. Her/his
    lifetime utility is given by:
    Λ = ln C1 + β ln C2 , (2)
    where 0 < β < 1 is a parameter which discounts future utility, i.e., the agent values
    more present than future consumption. To transfer consumption across time, the
    household holds a stock of net foreign assets B1 in period 1 which represents the
    net international investment position (NIIP). When B1 < 0 (B1 > 0), it means that
    the country is a net debtor (creditor) as it borrows (lends) from (to) abroad. We
    impose B2 = 0. Period 1 and period 2 budget constraints are given by, respectively:

    Y = C1 + B1 , C2 = (1 + r? ) (1 + θ) B1 + Y (1 + g) , (3)

    where r? is the (exogenous) world interest rate and θ > 0 is a risk premium as
    foreign investors anticipate that the country might default on its debt.

    (a) Derive the intertemporal budget constraint and next the optimal trade-off
    between C1 and C2 . Determine the value of the rate of time preference, ρ.
    (b) Derive optimal NIIP in period 1, B1? , which must be expressed in terms of Y ,
    r? , g, θ, and β.
    1
    (c) Assume that β = 1+r?
    . Derive the condition under which the country is a net
    debtor.

    4. Labor Supply and Fiscal Multiplier


    Let us consider a closed economy with one final good whose price is normalized to
    one, i.e., P = 1. The representative household has an available time normalized to
    1 which can be allocated to work N S or alternatively to leisure l, i.e., 1 = N S + l.
    Each agent derives utility from consumption C and leisure time l:

    Λ ≡ C 1/2 l1/2 . (4)

    (PLEASE TURN OVER)


    4
    The household supplies labor in exchange for a hourly real wage rate denoted by ω.
    There is no savings. The budget constraint is C = ωN S −T . The government levies
    a lump-sum tax, T , to finance government purchases G. The government budget
    is assumed to be balanced, i.e., T = G. Denoting output by Y , the representative
    firm produces a final good by using labor: Y = N .

    (a) Derive optimal labor supply N S .


    (b) Derive the marginal product of labor and the equilibrium real wage, ω ? . Derive
    the number of hours worked, N ? , when the labor market is in equilibrium by
    using the goods market equilibrium Y = C + G and Y = N .
    (c) Determine the value of the fiscal multiplier dYdG
    . Plot the labor supply- (LS
    henceforth) and the labor demand- (LD henceforth) curve in the (N, ω)-space
    and show graphically the effects of a rise in G. Explain by using an economic
    reasoning.

    (END OF PAPER)
    5

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