ECON 3116: Macroeconomic Analysis Sample Questions

NAME:

Instructions:

Short questions

1. Explain the Phillips Curve and why it is downward sloping. (4 points)

2. In the consumption function, where (Y-T) denotes disposable income:
C=c 0 +c 1∗(Y −T )
what does c 0 capture? (4 points)

Longer questions

1. Consider the following numerical example of the ISLM model:

Z=C+I+G C = 500 + .5YD T = 600 I = 300 + 0.25Y – 1000i

YD = Y - T G = 2000 i = 0.03

a) Explain why the LM curve is a horizontal line. (2 points)

b) Derive the IS relation. (2 points)
c) Find the equilibrium level of output (2 points)
d) Check that investment equals savings in equilibrium (2 points)
e) Suppose the government implements a fiscal expansion (i.e. increase in G or decrease
in T). Without doing any calculations, what do you expect happens to output,
investment, and consumption? And to the interest rate? (2 points)
f) What must the Central Bank (the Fed) do in financial markets during the fiscal
expansion for the interest rate to remain unchanged? Explain your reasoning (2
points)