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Repeat Examinations 2009 / 20 10
Exam Code(s) 2BA Exam(s) 2 nd Arts (Economic and Social Studies) St. Angela’s College, Sligo Module Code(s) EC Module(s) Macroeconomics Paper No. Repeat Paper YES External Examiner(s) Professor Cillian Ryan Internal Examiner(s) Professor John McHale *Mr. Stephen McNena Instructions: There are three sections in this exam. Please answer 8 questions in total. Please use a separate answer book for each section. Please read the further instructions on page 2. Duration 2 hours No. of Pages 5 Department(s) Economics Course Co-ordinator(s) Breda Lally, St. Angela’s College, Sligo Requirements : MCQ No Handout No Statistical Tables No Graph Paper Yes, if students request it Log Graph Paper No Other Material No
INSTRUCTIONS
Please answer 3 questions from section A. Please answer 2 questions from section B. Please answer 3 questions from section C. Please use a separate answer book for each section. All questions are worth 30 marks. Please allocate 15 minutes per question.
SECTION A The Real Economy in the Long Run
Instructions: You must attempt 3 of the 6 questions in this section. Question 1: neoclassical model of income distribution (a) In the neoclassical model of income distribution, what determines how much the factors of production get paid? (8) (b) Given a fixed amount of real GDP, and constant government spending, use the equation below to explain what will happen if the government decreases taxes and runs a large budget deficit: Y = C(Y - T) + I(r) + G (10) (c) Suppose that due to an earthquake, there is a large decrease in the capital stock. Explain, and illustrate on suitable diagram(s) , how this will affect the cost of capital, MPL, labour demand, and the real wage rate. (12) Question 2: money and inflation (a) Write out the Quantity theory of Money equation. Explain the four terms in the equation. Explain the central implication of the Quantity equation. (15) (b) Imagine an economy where the growth rate of the nominal money supply exceeds the money demand. Use the following data in you answer: Nominal money supply growth = 5% Real interest rate = 2% Real money demand growth = 2% Explain what will happen to each of the following variables over the long run: (i) general price level, inflation rate (ii) nominal interest rates In your answer, calculate the inflation rate and the nominal interest rate. (15)
SECTION B Long-run Economic Growth
Instructions: You must attempt 2 of the 3 questions in this section. Q 1. (a) (i) Write down a typical production function, and list the three key sources of growth in output over the long run. (ii) Briefly explain how each of the three contributes to growth of output. (10) (b) Consider the first stage of the Solow model of economic growth, with no population growth and no technological progress. (i) What is meant by a steady-state equilibrium? (ii) Briefly explain how an economy moves towards a steady state. (iii) Illustrate an economy at a steady-state equilibrium. (20) Q2. (a) Discuss the central conclusion of the Solow model of economic growth. (8) (b) Suppose that country A and country B both have the same level of income-per- head and the same growth rates of income. Then country A begins to save a bigger share of income / output than country B. Explain and illustrate on one diagram the effect of this change over time. (10) (c) (i) In terms of the Solow growth model, carefully explain the convergence hypothesis. (ii) Describe the two suggested causes of convergence. (iii) Briefly discuss the real-world evidence of convergence. (12) Q3. (a) Write down, and explain, the five terms in the ESRI equation that breaks down output-per-person into both productivity and dependency components. ( 12 ) (b) Then use this equation to explain why labour productivity is so important for long-run economic growth. ( 10 ) (c) (i) List two ways by which a government might promote stronger economic growth. (ii) Briefly describe how these actions might affect output. ( 8 )
SECTION C Short-run fluctuations in the economy
Instructions: You must attempt 3 of the 4 questions in this section. Question 1 : the AD/AS model (a) Using an AD/AS diagram, draw an economy at a long-run equilibrium. The diagram should contain a long-run Aggregate Supply curve, a horizontal short- run Aggregate Supply curve and an Aggregate Demand curve. (10) (b) Redraw the same diagram from part (a), and use it to show both the short-run and long-run effects of a negative demand-side shock (e.g. a large decrease in consumer confidence and consumer expenditure). (10) (c) Redraw the same diagram from part (a), and use it to show both the short-run and long-run effects of an adverse supply-side shock. Assume that the policymakers do not respond to the shock. (10) Question 2: the IS/LM model (a) Sketch the equilibrium in the IS/LM model. (6) (b) Write down the two equations of the IS/LM model. (8) (c) Describe what causes each of the IS and the LM curves to shift. (8) (d) During 2009 and 2010 the Bank of England purchased about £200bn of assets which it paid for by creating new money. Use the IS/LM model to explain the effects of this policy on the economy. (8) Question 3 : the Phillips curve Consider an economy experiencing a severe recession, with output below its equilibrium level. In response, the central bank introduces expansionary policies. (a) Illustrate the initial situation on a large AD/AS diagram and on a large Phillips curve diagram. (10) (b) Using a new AD/AS diagram, explain and illustrate the effects of the policy. (10) (c) Using a new Phillips curve diagram, explain and illustrate the effects of the policy. (10) Question 4 : the Irish case Ireland’s economy has been in recession, and experienced a large drop in demand. (a) Using an AD/AS diagram, illustrate and explain the effects of the drop in demand. (10) (b) Now assume that policymakers do not respond. Using a new AD/AS diagram, illustrate and explain how the economy might return to its long-run equilibrium. (10) (c) Now assume that policymakers respond with expansionary policies. Using a new AD/AS diagram, illustrate and explain how the economy might return to its long-run equilibrium. (10)
