Final Exam Fall 2018-2019

Date: Monday, January 21 2019.

Course Title: Introduction to Macroeconomics (BCOR 240)
Duration: 2 hours
Number of pages: 4

INSTRUCTIONS
1. Books, notes, phones and electronic devices are not permitted.
2. Non-Scientific Calculators are permitted (no memory).
3. You are not allowed to leave the classroom during the exam to go to the bathroom or
to smoke unless you submit your answer sheet and you sign out.

EXERCICE 1 (20 marks)

Choose the right answer for each question; choosing 2 answers will be graded zero.
1. The price of one currency in terms of another currency, such as 100 yen for €1, is an example of:
A. a nominal exchange rate.
B. a real exchange rate.
C. purchasing-power parity.
D. a constant world interest rate.
2. If the nominal exchange rate is €1 equals 150 Japanese yen, and a Big Mac costs €2 in the Frankfurt
and 300 yen in Tokyo, then the real exchange rate of German Big Macs for Japanese Big Macs is:
A. 1.
B. 2.
C. 150.
D. 300.
3. If a country's real exchange rate falls (depreciates), then:
A. net exports rise.
B. net exports fall.
C. exports and imports rise by the same amount.
D. exports and imports fall by the same amount.
4. Choose the pair of words that best complete this sentence: If government purchases increase, national
saving will ________ and the equilibrium real exchange rate will _______.
A. fall; fall
B. fall; rise
C. rise; rise
D. rise; fall
5. If the government prevented the import of foreign cars, then, in the resulting equilibrium, net exports
would:
A. rise because fewer cars would be imported.
B. remain constant because saving and investment would not change.
C. fall because the real exchange rate would rise.
D. rise because the real exchange rate would fall.
6. Suppose that a bicycle costs $300 in the United States and 150 pounds in Great Britain. What would
the nominal exchange rate in pounds per dollar have to be for purchasing-power parity to hold?
A. 0.5
B. 1
C. 2
D. 2.5

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7. If the rate of job finding rises, the natural rate of unemployment will:
A. remain constant.
B. increase.
C. decrease.
D. rise or decline, depending on the rate of job separation.
8. Frictional unemployment occurs because:
A. the minimum wage is too high.
B. unions exert pressure in the labour market.
C. rigidities exist in the wage-setting process.
D. it takes time to match firms and workers.
9. The unemployment resulting from wage rigidity and job rationing is called:
A. the natural rate of unemployment.
B. the discouraged-worker effect.
C. structural unemployment.
D. insiders versus outsiders.
10. Minimum-wage laws are an example of:
A. collective bargaining.
B. wage rigidity.
C. the discouraged-worker effect.
D. insiders versus outsiders.

EXERCISE 2 (20 Marks)

1) Given the following consumption schedule, compute 1.a and 1.b so that the Marginal Propensity to
Consume (MPC) remains constant.
Consumption Income Taxes
425 TND 1320 TND 320 TND
1.a TND 1910 TND 1.b TND
1175 TND 2500 TND 500 TND

2) In an Investment Function, denoted by I(r):

a. Should r be the nominal interest rate or the real interest rate? Explain.
b. Does the relationship between I and r capture the relationship between the sales of new residential
housing in Tunisia and the mortgage rate in Tunisia? Explain.

3) Define budget deficit and write its expression. Enumerate two solutions aiming to cut budget deficit (one
sentence for each solution).

4) What are the two types of savings? Write the expression of the National Saving (denoted by S) and derive
the expression of S as a function of I in a closed economy, using the national income accounts identity.

EXERCISE 3 (30 Marks)

1) Using graphs, derive the IS curve from the Keynesian cross Model in a closed economy, then define in
words the IS curve.

2) In separate graphs, use the Keynesian cross Model to predict the impact of the following policies on the
income (Y), give the necessary details of your prediction (preferably provided below each graph):
a. An increase in government purchases.
b. An increase in taxes.
c. An equal increase government purchases and taxes.

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3) Define in words the LM curve and draw in a graph the short-run equilibrium using an IS-LM model.

4) What is the effect of the three policies in question 2 on the IS curve? on the LM curve? on the equilibrium
level of income (denoted Y*)?

5) Compare the ∆Y in the Keynesian cross Model and the ∆Y* of short run equilibrium in the IS-LM model
after an increase in G. Explain your answer.

PROBLEM (30 Marks)

Eight years after the 14 January 2011 revolution, the Tunisian economy is still going through
recession. You are asked, throughout this problem, to provide a reality check using relevant analytical
Macroeconomic tools.

1) The TND depreciation

2010 2018
Inflation rate 4.4% 8.1%
Exchange rate TND/USD 1.43 2.99
Public debt per each Tunisian new born in TND 2400TND 6500 TND
Public debt per each Tunisian new born in USD 1.1.a USD 1.1.b USD
Public debt per each American new born in USD 25 000 USD 42 000 USD
Public debt per each American new born in TND 1.4.a TND 1.4.b TND

In his recently released book “The mirror and the Horizon”, the former governor of the Central Bank of
Tunisia Mr. Taoufik Baccar computed the figure “Public debt per each Tunisian new born” (denoted by
PD). Conceptually assume that public debt is closely related to budget deficit, and that the debt takes the
form of loans from the international financial markets in USD.
1.1 Compute 1.1.a and 1.1.b.
1.2 Is the increase in PD from 2010 to 2018 justified by the TND depreciation or other factors? Argue your
answer.
1.3 As other nominal macro variables (GDP, Wage…), PD should be corrected for inflation. Show how to
derive a real version of PD. So, is the increase in PD from 2010 to 2018 justified by a more severe inflation
rate or other factors? Argue your answer.
1.4 Compute 1.4.a and 1.4.b. If the purchasing-power parity holds between Tunisia and USA, would a
Tunisian baby be better off starting his life with a -6500TND budget or a -1.4.b TND budget (both budgets
are negative)? Explain while defining the purchasing-power parity assumption.

2) The unemployment
Since the historical nationwide strike organized by the main Tunisian Union (UGTT) on January 14 2011,
the UGTT has a more powerful collective bargaining power than major political parties.
2.1 Does the monopoly power of UGTT causes frictional unemployment or structural unemployment?
Justify your answer using a graph of the labor market supply/demand. Use the concept of wage rigidity that
you have to define.
2.2 Show how to compute the official rate of unemployment, define the variables involved. Does illegal
work in the black market make the official unemployed rate overestimated? Given that the black market
workers are not unionized, explain the impact of the unionized labor market of 2.1 on the black labor
market. Draw a graph of the black labor market to show the resulting effect.

For the rest of the problem, assume that the Tunisian economy is closed. Definitely, the 2011
revolution shock caused an economic recession: lower GDP and more unemployment.

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3) Accommodative policies
Since the 2011 negative shock, inflation has been increasing so you cannot make a pure Short Run analysis
for the period 2011-2018 using the models AD-AS or the IS-LM: the constant price assumption does not
hold. You decide to extend the AD-AS supply model to a Medium Run version by setting a strictly
increasing AS curve instead of horizontal.
In this Medium Run AD-AS model:
3.1 What is the corresponding IS-LM model? Plot a graph with two panels: the AD-AS and the IS-LM.
3.2 What is the effect of an expansionary monetary policy? Choose the AD-AS graph or the IS-LM graph
to explain the effect.
3.3 What is the effect of an expansionary fiscal policy? Choose the AD-AS graph or the IS-LM graph to
explain the effect.
3.4 Using 3.2 and 3.3, try to find the best mixture of monetary and fiscal policies to boost output, decrease
unemployment while controlling inflation. Show the interaction of the monetary and fiscal policies that you
suggest using an AD-AS graph or an IS-LM graph.

GOOD LUCK