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Wilcox  \nSpring 2018 Macro Final Exam---with guides to answers included  \nThis exam has five multi-part questions, followed by four shorter-answer questions on 11 pages. Points are shown before each question.  \nRemember that we can’t grade what we can’t read; write legibly, please.  \nFeel free to use graphs and equations in your answers if you like, but be sure to explain how they help answer the questions. Label graphs sufficiently.  \nSome parts and some questions are much easier than others. Allocate your efforts accordingly.  \nTime limit: 120 minutes  \nWord limit: 40 words per part of each question 1-5; 30 words per shorter-answer question  \nIn general (unless told otherwise), for each question, assume that consumption depends on aftertax income and that imports depend on income. Also, assume that both consumption and investment are affected both by interest rates and by sentiment (consumer and business, respectively) . The constant income tax rate is t. Government purchases are entirely autonomous, unless specifically stated otherwise.  \nDo well.  \n(22 points)  \n1. Suppose that the economy starts in long-run equilibrium (Y=YN and U=UN) . Suppose also that the inflation is at the central bank’s desired, or target, inflation rate of 2% per year. Suppose now that the government increases its spending for defense and for infrastructure improvements. (For this question, assume that there are no accelerator effects on investment spending.)  \nExplain why the increase in government spending would be likely to:  \na. Raise real GDP in the short run by a multiple of the increase in government spending, but also lower investment  \nAs G spending increases, employment and incomes rise. Part (due to the MPC) of the extra income is spent, further raising Y, and this process continues, in the usual way of multipliers. The increase in G shifts the IS curve to the right, thereby raising r. Higher r reduces I.  \nb. Raise the inflation rate in the short run  \nIn the short run, higher Y leads to a movement to the right along the SP curve, Y>YN and inflation increases.  \nc. Raise the expected inflation rate less than the actual inflation in the short run  \nInflation expectations adjust gradually, usually in response to actual inflation. One form of expectations formation that we learned is adaptive expectations, where people revise  \ntheir expectations about what will happen in the future based on what has happened in the past, in particular based on how much actual differed from their expectations.  \nd. Have very little or no effect on real GDP in the long run (when expected inflation and actual inflation are re-equated)  \nSP curve will shift up as expected inflation and actual inflation get re-equated. Real GDP will come back to long-run equilibrium. Y0 = Y1 = YN.  \ne. Suppose that the economy starts at its long-run equilibrium. With the government’s expansionary fiscal policy, briefly explain what happens, and why, to the following items by comparing their values in the eventual, new, long-run equilibrium with their initial, long-run equilibrium values:  \nGDP: no change, since Y starts at YN and comes back to YN in the long run.  \nConsumption: decreases, since expansionary fiscal policy pushes up interest rate, while disposable income (Y-T) is unchanged.  \nInvestment: decreases, since expansionary fiscal policy pushes up interest rate.  \nExports: no change, since exports are determined by GDP of foreign economies.(Alterative answer, expansionary fiscal policy exerts pressure for exchange rate to appreciate, which lower exports.)  \nImports: no change since there is no long run change in GDP. (Alterative answer, expansionary fiscal policy exerts pressure for exchange rate to appreciate, which increases imports.)  \n(16 points)  \n2. During his first year in office, suppose that President Trump gets a new law passed that cuts taxes. Being able to get this law enacted was a compl","cbCaihXhOcP1fbTF","https://ap.wps.com/l/cbCaihXhOcP1fbTF","pdf",250344,11,"English","# Exam Instructions\n# Question 1: Government Spending, Inflation, and Expectations\n## Short-Run Effects on GDP and Investment\n## Inflation Rate and Expected Inflation\n## Long-Run Re-equilibration Effects\n# Question 2: Tax Cuts, Infrastructure Spending, and Household Responses\n## Household Groups and Assumptions\n## Effects on Consumption and Saving Over Time","[{\"question\":\"What are the main exam rules on answering style and tools?\",\"answer\":\"Write legibly and allocate time based on which parts and questions are easier. You may use graphs and equations, but you must explain how they help answer and label graphs sufficiently.\"},{\"question\":\"How does Question 1 explain the short-run impact of higher government spending?\",\"answer\":\"Higher government spending raises employment and income, increasing spending through multipliers and shifting IS right, which raises interest rates and lowers investment. It also increases inflation in the short run when output moves above the natural level.\"},{\"question\":\"How does Question 2 model different household types when evaluating tax cuts and infrastructure spending?\",\"answer\":\"Group 1 consists of forward-looking consumers with assets and access to credit, following life-cycle consumption. Group 2 households live paycheck to paycheck with few assets, are younger on average, and experience more and longer unemployment episodes.\"}]","EWMBA201B - Macroeconomics in the Global Economy - Spring 2018 Macro Final Exam - Answer Guide Included | PDF",1790742657,28]