SOLUTION TO ADVANCED MACROECONOMICS FINAL EXAMS

PRACTICE QUESTIONS
[1]
Solved already.

[2]
I. Frictional unemployment can be defined as the situation that occurs when
people leave one job to search for another in a healthy economy. It is
usually referenced as both voluntary and involuntary unemployment. Unlike
other types of unemployment, it is a component of the natural labour
turnover rate and not a sign of an unhealthy economy.
An example of frictional unemployment is employees leaving their current
positions to find new ones.
II. Structural unemployment is a form of unemployment where permanent
changes to an industry cause a job title or job field to become unnecessary.
In this situation, companies offer employees transfer opportunities to
locations that still require their job title.
An example of structural unemployment is the situation where production
assembly workers are being replaced by new technology thereby resulting in
the declining need for printing press workers due to increased consumer
preference for digital publications.
III. Cyclical unemployment is a type of unemployment where labour forces are
reduced as a result of business cycles or fluctuations in the economy, such
as recessions (periods of economic decline).
An example of cyclical unemployment is when construction workers are
laid off during a financial recession period following a financial crisis. It can
be observed that with the housing market struggling, construction of new
homes fell dramatically, leading to a rise in cyclical unemployment for
construction workers.
[3]
The loanable fund's theory is a neoclassical model that defines how the interest
rate is determined in the market by the forces of supply and demand for
loanable funds. The demand curve is downward sloping, indicating that demand
is high only for low values for interest rate. The supply curve is upward rising,
implying more funds are supplied as the interest rate rises.
Loanable funds are the savings available in an economy that can be used to
provide loans to individuals and businesses.

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The following diagram depicts a fully labelled loanable funds market.

The diagram above shows that as supply decreases more than demand, the
equilibrium interest rate rises while the quantity of loanable funds decreases.

[4]
(A)
I.
For something to be money, it must meet the following characteristics: i.
durability, ii. portability, iii. divisibility, iv. uniformity, v. limited supply, and
vi. acceptability.
II.
Money consistently has three functions: i. store of value, ii. unit of account, and
iii. medium of exchange.
III.
Packs of chewing gum do not function as money because they are not good as a
store of value, gum packs deteriorate, and they do not meet the characteristics of
durability, portability, divisibility, uniformity, limited supply, and acceptability.
[B]
Commodities are not used as money because of several problems. Many
commodities are bulky. And many commodities change in value over time.
Using as money a commodity that changes in value would be awkward. Prices
would change simply because the commodity’s value changed. Additionally,
using a commodity as money has a higher opportunity cost than do currency

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and bank deposits because the commodity has alternative uses that must be
foregone.
[C]
The main components of money in the United States today are the physical cash
in the form of currency, and also the deposits that are made in the form of
savings in various banks and other depository institutions. This is to take into
account that, the asset that can be converted into cash is not considered under
these components of money in the US.
[D]
In the real world, money supply has different definitions: M1 and M2. Money is
categorized according to its liquidity. The most liquid items are in M1.
M1: includes currency (coins minted by the U.S. Treasury and paper currency
issued by the Federal Reserve), checkable deposits and traveller’s checks
(issued by the commercial banks and thrift institutions).
Currency and checkable deposits belonging to the federal government, Federal
Reserve, or other financial institutions are not included in M1.
M1 = Currency + Checkable deposits + Traveller’s checks
M2: includes all of the components of M1 plus near-moneys i.e., M2 = M1 + all
near moneys (Such as small-time deposits, Savings deposits, Money market
accounts, overnight repurchase agreements, overnight Eurodollar deposits).
[II]
Measures of money vary by country but generally always include at least a
measure for narrow money and one for broad money. Thus, a measure of money
may be acceptable in one country and not acceptable in another which implies
that not all measures of money is real money.
[E]
Money is the commodity given as payment for goods and services (salt and
pepper preceded coins and, later, paper money). Essentially, checks and
debit/credit cards are devices which cause the movement of money from the
owner to a debtor or vendor. These devices have no intrinsic value themselves
and can’t be given as direct payment. They essentially constitute an order for
the holder of your money to transfer some of it to someone else. A check, for
example, is not legal tender and is only backed by the funds in the issuer’s
account. If that account should be empty, the check is worthless and cannot be
exchanged for money. Thus, checks and credit cards cannot be considered as
money because they do not possess any of the characteristics of money.

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 [5]
[A]
Same as number 2.
[B]
The natural unemployment rate is the unemployment rate that would exist in a
growing and healthy economy. In other words, the natural rate of
unemployment includes only frictional and structural unemployment, and not
cyclical unemployment.
[C]
Shifts in the productivity of workers determine the demand for labour, which, in
turn, impacts the natural rate of unemployment. Unexpected increases in
productivity can lead to a higher demand for labour at a given wage rate, and if
the change persists in the long term, it can decrease the natural rate of
unemployment.
[D]
Full employment is not the same as zero unemployment because there are
different types of unemployment, and some are unavoidable or even necessary
for a functioning labour market. As a result, the supply of labour can exceed the
demand for it, and structural unemployment arises.
[E]
Output gap is the difference between the actual output of an economy and the
maximum potential output of an economy expressed as a percentage of gross
domestic product (GDP).
II.
During a recession, the economy drops below its potential level and the output
gap is negative. A positive output gap implies an overheating economy and
upward pressure on inflation. A negative output gap implies a slack economy
and downward pressure on inflation.
[F]
Unemployment increases during business cycle recessions and decreases during
business cycle expansions (recoveries). If the equilibrium level of output is less
than the full employment level, this indicates that some available resources are
unemployed and less is being produced.

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 [6]
[A]
Growth rate of RGDP = (1,202 / 1,180) - 1 = 1.0186 - 1 = 0.0186 = 1.86%

[B]
Real GDP per person = RGDP / Population
Real GDP per person, 2013 = 1,180 / 198 = 5.96
Real GDP per person, 2014 = 1,202 / 200 = 6.01
Growth rate in Real GDP per person = (6.01 / 5.96) – 1 = 1.0084 – 1 = 0.0084 =
0.84%
[C]
Let number of years be N. Then;
6.01 x (1.0084)N = 2 x 6.01
(1.0084)N = 2
Taking natural log,
N x ln 1.0084 = ln 2
N x 0.0084 = 0.6931
N = 82.52 years