Review intermediate macroeconomics
1

explain how a policy mix (like the one used in
the 1990s) could help reduce C
eliminate
the budget deficit without having an adverse effect on the output
illustrate your answer using an IS

LM graph.
2

A 1

year Canadian
bond with a face value of $5000 can be purchased at $4800.
a)
Calculate the nominal interest rate in Canada.
b)
If the Canadian dollar is expected to depreciate against the US dollar by 1
percent over next year, calculate the current nominal
interest rate in the US.
c)
How much could an American bond with the same Face Value as the
Canadian bond sell in the market?
3

suppose the economy is currently in recession, and the exchange rate is fixed.
Using the IS_LM,
a)
explain and illustrate the ec
onomy’s adjustment ( in the medium run) with
devaluation.
b)
Explain and illustrate the economy’s adjustment ( in the medium run)
Without devaluation.
4

Suppose the firms’ mark

up over the cost is 10% and the wage

setting equation is
W= p(1
–
u), where u is
the unemployment rate.
a)
find out the real wage rate implies by the price setting equation.
b)
Determine the natural rate of unemployment.
c)
Plot the wage

setting and price

setting equations on a properly labeled graph
and identify
the natural rate of unemployment.
5

carefully explain the neutrality of money in the medium run. Use aggregate
Demand
–
aggregate supply diagram to illustrate your answer.
6

given the Phillip Curve
π
t
=
π
t
e
+0.24
–
4 u
t
,
a)
plot the relationship when
π
t
e
= 0
b)
find the natural rate of unemployment ( NAIRO)
c)
what is likely to happen to the
curve if wage indexation becomes more
widespread? Illustrate your answer on the graph.
7

consider the aggregate production function Y=(K/N)
1/2
a)
plot the function for val
ues of K/N equal to 4, 9, 16, and 25.
b)
Carefully explain what happens to output per worker as more capital per
worker is used.
c)
If the saving rate is 50% and the depreciation rate is 20%. Locate the
equilibrium (steady

state) in a proper graph.
d)
What happens
if the saving rate declines to 40%?
Illustrate this on your
graph and explain.
8

suppose the rate of interest on one

year government bonds in Canada is 3
percent. The same interest rate is 2 percent in Germany.
a)
If the interest parity relation holds,
what is the expected depreciation of
Canadian dollar against the Euro?
b)
If the expected exchange rate ( a y
ear from now) is $Can 1.36/1 Euro, what
should the current exchange rate be? ( round up your answer two decimal
point)
9

Use the income

expenditure model ( Y and ZZ lines) along with the net
export(NX) graph to illustrate and explain the effect of an increase in exports(X)
on the equilibrium domestic output (Y) and the trade balance. Assume that at the
original output equi
librium trade is in balance.
Important formula ,

Return on bond: i =( face value
–
actual value) / actual value.

Interest parity condition: i
t
= i
t
*
+ (E
e
t+1
–
E
t
)/ E
t
where
i
t
*
is the foreign interest
rate, and
E
t
is the exchange rate.

Price Setting Relationship: (W/P) = 1/(1+ mark

up)
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