Business School
Subject of Economics
Degrees of MA, MA (SocSci) BAcc, BSc, LLB with Honours Economics Degrees of MA (SocSci) BSc, LLB with Honours Business Economics Degree Exam
Macroeconomic Analysis, ECON4019
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Friday, 4 May 2018, 14:00-16:00
Please ensure that you write the course code (as above), your student ID, date of birth and the number of the question that you have attempted on each answer sheet.
How to complete this exam:
Students should answer ONE question from Section A and ONE question from Section B.
Materials allowed:
Calculators:
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Instructions to students:
Both entry and exit to the examination hall will be at the absolute discretion of the invigilator.
No candidate will be permitted to leave within the first hour or the last half hour of this exam.
Using exam answer sheets
Always use a black pen.
Complete personal information on all white sheets supplied before the exam begins.
Use the standard character set, printed above, when hand writing in data boxes. E.g.
Student ID, Date of Birth, Question Number. Keep your characters inside the boxes. Write your answer to each question on a SEPARATE white answer sheet, using BOTH sides if required. For this exam, the required number of white answer sheets is TWO.
Request yellow continuation sheets to continue your answer if there is not enough space on a white sheet.
You must return all white answer sheets to the invigilator even if you have not attempted all questions.
This page has been left blank for student notes – anything written here will not be marked.
You must answer ONE question from this section.
Please use ONE WHITE answer sheet per question. If there is not enough space on a white sheet, please raise your hand to request a YELLOW answer sheet in order to continue your answer.
1. Consider the AK model in which output, Y (t), is produced by the pro- duction function
Y (t)=AK(t); (1) and the level of capital, K(t), evolves over time according to the accumu-
lation equation
K(t)=sY (t) K(t): (2)
Assume that there is population growth with the number of workers in the economy, L (t), growing over time according to
L(t) = nL(t): (3) 1.1. (10%) Explain the economic meaning of the parameters A, s, , and
1.2. (10%) Using equations (1)ó (3), express the production function in per-worker terms and derive the accumulation equation for capital- per-worker. Show your working.
1.3. (10%) Under what conditions do capital-per-worker and output-per- worker exhibit zero growth? Discuss the determinants of growth in output-per-worker in this economy. Would government policy be able to ináuence long-run growth?
1.4. (10%) Using a ìSolow-Swan diagramî illustrate the three possible cases of negative-growth, positive-growth, and no-growth in output- per-worker.
1.5. (10%) Discuss the predictions of the AK model in terms of con- vergence. Does the model suggest that output-per-worker in poor countries is expected to grow more rapidly and catch up to that of rich countries?
2. Consider an economy where output-per-worker, y (t), is produced accord- ing to the production function
y(t)=A(1 )k(t) ; (4)
where 0 < < 1. Capital-per-worker, k(t), evolves over time according to the accumulation equation
k (t) = sy (t) (n + ) k (t) ; (5) where0 0.
2.1. (25%) Derive the growth rate of output per worker in a balanced growth path. Discuss the determinants of growth in this economy and the role of capital accumulation. Would government policy be able to ináuence long-run growth? Show all your working.
2.2. (25%) Discuss the concepts of ëconvergenceíand ëconditional conver- genceíand how the modelís predictions match the empirical evidence.
ñContinued overleaf ñ
You must now answer one question from this section. As before, please use a new WHITE answer sheet. If there is not enough space on a white sheet, please raise your hand to request a YELLOW answer sheet in order to continue your answer.
3. Let the householdís budget constraint in period t be given by Ct +bt =wtLt +(1+rt 1)bt 1;
where Ct denotes consumption, bt denotes real bonds purchased in period t, wt denotes the real wage, Lt denotes labour supply, and rt 1 denotes the net real interest rate in period t 1. (Here we have assumed that there is no dividend income).
3.1. (10%) Assuming the households live for only two periods (periods t and t + 1) and leave no wealth unconsumed when they die, derive the two-period budget constraint.
3.2. (15%) Assuming that household preferences are such that consump- tion and leisure are normal goods, discuss the e§ect that an increase in wt has on labour supply in periods t and t + 1.
3.3. (15%) Maintaining the assumption that consumption and leisure are normal goods, discuss the e§ect that an increase in rt has on con- sumption demand in periods t and t + 1.
3.4. (10%) Continuing to assume that consumption and leisure are nor- mal goods, explain the consequences of an increase in future labour income for current and future consumption.
4. Consider an economy with an inertial Phillips curve
t=t 1+ (yt ye);
and where the Central Bank optimally sets the interest rate, aiming to achieve an ináation target, T , and keep output at its equilibrium level, ye. In setting policy, the Central Bank is assumed to care equally about ináation and output stabilisation. Carefully explain and illustrate using diagrams how monetary policy will respond to a temporary increase in aggregate demand and the consequences for ináation and unemployment, when:
4.1. (25%) Interest rate changes a§ect aggregate demand with a lag.
4.2. (25%) Interest rate changes a§ect aggregate demand within the period (without a lag).
ñContinued overleaf ñ
Before your exam answers are collected:
Please ensure that you have written the course code (on the front of this exam paper), your student ID, date of birth and the number of the question that you have attempted on each answer sheet.
Put your exam answers in the order of the question number, ensuring that yellow answer sheets follow the appropriate white answer sheet.
Do not place any other exam materials, including the exam paper, beside the answer sheets.
5 ñEnd of exam ñ
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