EKO2111: Macroeconomics II

Final Exam
Instructor: Sekar Utami Setiastuti
Due: June 24, 2021; no later than 05:00PM (GMT+7).

Please read the following instructions carefully:

1. This is an individual open book exam.
2. Answer ALL questions. Each question worth 20 points.
3. Clearly-written work must be submitted no later than the date and time listed above.
4. You should submit a pdf version of your work. Use the following format to name your file
UAS NIU.pdf and upload it to a Dropbox folder, through the following link:

https://www.dropbox.com/request/HA6I3oUKlyCMbjCFR7El

When asked by Dropbox, write your NIU in the First name box and your UGM email
in the Email address box.
TIPS: Make sure that you stop working and start the uploading process at least 30 min-
utes before the exam due. Dropbox link will not be available after the mentioned
deadline. I will not accept any subsmission through Email.
5. Before you start, write out this pledge on top of the first page of your answer sheet
and sign it by writing your NIU.

I affirm that I will not give or receive any unauthorized help and information on this exam.
All work will be my own.

Signature: [NIU]

6. I advise you to read through the exam in its entirety before beginning the exam. This will
help you properly allot your time.
7. Stay calm.

Good luck.

1
1. TRUE/FALSE. Briefly explain your answer.

a. In the monetary intertemporal model, if the banks are perceived to be more risky, the price
level rises.

b. The real business cycle model is very helpful because we can always identify the sources of
total factor productivity shocks.

c. An increase in financial market frictions can cause the natural rate of interest to fall.

d. In the Keynesian sticky price open economy model with a flexible exchange rate, an increase
in current total factor productivity increases output.

2. In the Basic New Keynesian model,

a. Suppose that the anticipated future rate of inflation goes down. Determine the effects and
explain.

b. What should the central bank do if the anticipated future rate of inflation goes up? Explain.

3. In the New Keynesian sticky price open economy model with a flexible exchange rate:

a. Explain why fiscal policy is an ineffective stabilization tool.

b. Suppose that there is an increase in current total factor productivity. What should the central
bank do in response?

4. Business cycles might be caused by sectoral reallocations in which technological advancement

causes new industries to flourish. Workers can move from old to the new industries, although it
does not happen instantenously. These workers spend time away from market work, either for job
search or for training/education (to acquire the skills needed to work in the new industry).

Suppose that there are two firms, the agricultural low-tech and the manufacturing high-tech firm.
The old firm is active in both periods and it pays wage wA in each period. The manufacturing firm
pays wage wM and is only active in the second period and wA < wM . To work in the manufacturing
firm, the consumer should spend some of her time in the first period to be out of the labor market.
The consumer chooses (c, c0 , l, l0 ) to maximize

u(c, c0 )

subject to the budget constraints:

c + b ≤ wA (h − l)
c0 ≤ wA (h − l) + wM l + b(1 + r)

and a time constraint

0 < l ≤ h.

2
Assume also that the consumer’s utility function follows the standard conditions and that substi-
tution effects dominate income effects in the consumer’s decision. Note that in this model, the
consumer values consumption but does not value leisure. The amount of hours spent to work in
the manufacturing sector cannot be greater than l, the hours spent out of labor market in the first
period.
a. Derive the consumer’s lifetime budget constraint.
b. Obtain the consumer’s choice of time spent out of the labor force in the first period l using
the lifetime budget constraint you derive in question (a).

5. Consumer preferences fluctuate across time. For example, during the COVID-19 pandemic,
consumers value current leisure more than all other goods since market work exposes them to virus
infection. Thus, the disruption is identified as a huge adverse labor supply shock in the economy.
Suppose that a representative consumer chooses (c, c0 , l, l0 ) to maximize her utility u(c, c0 , l, l0 ) sub-
ject to a real lifetime budget constraint
1 0 w0 0 w0 h + π 0
c + wl + c + l ≤ wh + π + .
1+r 1+r 1+r
The consumer also make a decision on money holding
mD = pL(y, r)
where P denotes the nominal price level, y is the real GDP, and r denotes the real interest rate.
Assume that the money supply mS is fixed and exogenous.
The firm in this economy chooses the amount physical capital investment i and the amount of labor
0
they hire in the first and second period, nD and nD , to maximize the profit
π0
Π=π+
1+r
where
π = zF (k, nD ) − wnD − i
0 0
π 0 = zF (k 0 , nD ) + (1 − δ)k 0 − w0 nD
k 0 = (1 − δ)k + i.
Consider the adverse labor supply shock is powerful enough so that in equilibrium, leisure increases
and current consumption falls. Identify and explain how the following change (i.e., rise, fall, no
change, or ambiguous)
a. Current output
b. Current investment
c. Current employment
d. Current real wage
e. The real interest rate