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Part I (Do Problem 1 - 30 points) 1. Use the following version of Model 1 to address parts a -e. Show your work. W/P = d0 -d1*L + d2*K + d3*RM (1) Endogenous Exogenous Ls = so + $1*(W/P) - $2*T (2) W, P, L, LS, Y K, RM, T L = Ls (3) AD, C, I M, K, G Y = 100*L 7K.3 (4) AD = k*M/P (5) AD = C+1+ G (6) C = .8* (Y-T) (7) Y = AD (8) a. (6) Determine the reduced form equation for employment. b. (4) Determine the reduced form equation for output (income). c. (4) Identify the Aggregate Supply curve. d. (8) In this model, how would an earthquake that destroyed a major nuclear power plant affect employment, output, real wages, and the price level? e. (8) In this model, determine how a fall in taxes (T) would affect employment, output, real wages, and the price level. 2. Use the data in the table below to answer parts a - c. (15 points) a. Use a CPI type index (Laspeyres) to determine how much prices have changed from year 1 to year 2. b. Use a GDP current weight deflator index (Paasche) to determine how much prices have changed from year 1 to year 2. c. Use a chain weighted index to determine how much prices have changed from year 1 to year 2. Year Cell Phones Computers Cars Price Quantity Price Quantity Price Quantity 1 100 100 1000 50 5000 10 2 80 150 600 100 8000 123. Exchange rates are expressed in per Euro terms. (15 points) a. (8) Based on the data in the table below, calculate the trade weighted exchange rate for the Eurozone countries for 2011 based on a 2000 year base of 100. How much has it changed since 2000? b. (7) Assuming that the price index for Europe in 2000 was 90.2 and that it presently stands at 111.5, how much has the real exchange rate between the USA and Europe changed between 2000 and 2011. Country Share of Exchange Rate Exchange Rate |Price Index Price Index Trade 2000 2011 2000 2011 China 25% 7.94 9.44 NA NA Japan 25% 102.56 121.95 NA NA USA 50% 0.96 1.44 171.3 221.3 Part II (Answer two of the following three questions - 20 points each.) Be sure to provide supporting graphics or evidence. 4. Model 1 (The Neoclassical Model) seems to provide a view of money that contradicts that posed at the top of this exam. Furthermore, many economists and policy makers argue that money has powerful effects on output and employment. Explain why these views contradict the predictions of Model 1. Briefly discuss why it is difficult to predict the effects of expansionary monetary policy on the real economy. 5. On Friday, April 1", 2011, the Bureau of Labor Statistics reported that the unemployment rate had dropped to 8.8%, that the change in non-farm payroll employment was 216,000, that the labor force participation rate was 64.2%, and that the employment ratio was 58.5%. If you were a journalist asked to explain what this information says about the labor market, how would you do so? Be sure to put these indicators in historical context. 6. What role do interest rates play in Model 1? Be sure to distinguish between real and nominal interest rates as well as how they are determined. Explain the connection between interest rates and crowding out.Part I (30 points) 1. Use the following version of Model 1 to address pans a e. WJ'P = d0 dl"'L + d2*K + d3*RM (1) Endogenous Exogenous L5 = so + s1*(W1'P) + 5:11:13ch (2;. w, P, L, L',Y K,RM,E1TC L=L' (3;. AD,C.I,T M,l-L,G Y = 100*L-7KJ (4) AD = k*MfP (5) EITC=earned income tax credit AD = C + I + G (6) C = 3* (Y-T) (7;. T = .25*Y (a) Y = AD (9) a. Determine the reduced form equation for employment. b. Determine the reduced form equation for output (income). c. Identify the Aggregate Supply curve. 11. Use the results from a, b, and c to determine how an increase in the earned income tax credit (BITE-subsidies to low income workers) would affect employment, output, real wages, and the price level. Use the results from a, b, and c to determine how a rise in governmental purchases (G) would affect employment, output, real wages. and the price level. Pan 1]. Answer two of the following three questions (20 points each). Be sure to show your work. 2. Use the data in the table below to represent a household's consumption and income for each given year. - Use a xed weight index (Laspeyres) to determine how much income has changed for this household from year 1 to year 2. . Use a current weight index (Paasche) to determine how much income has changed from year 1 to year 2. . Use a chain weighted index to determine how much income has changed between the two years. Steak (pounds) Price Quantit $11] 100 3. $20 80 The data in the table below describe key features of the trade relations between China and three of its major trading partners. Use these data to answer parts a. and b. Exchange rates are expressed in Chinese Yuan or Renminbi terms. Country Share of Exchange Rate Exchange Rate Price Index Price Index USA 30% 8.28 RMBJ$ 6.30 RMBI$ Trade 2012 2005 (CPI) 2012 (CPI) 10.5 RMBJ'Euro 3.215 RMBJ'Euro NA NA 12.9 Yen! RMB 12.8 YenJ'RMB 230 a. Calculate the trade weighted exchange rate for China for 2012, assuming that the 2005 rate equals 100. How much has it changed since 2005'? [Be cat-4h! to use appropriate units in your calcufnriamJ b. Assume that China's price index in 2005 was 100 and that for 2012. it stands at 130. How has the real exchange rate between the U.S 3:. China changed between 2005 and 2012'? c. Explain why the real exchange rate represents terms of trade. Part I. (40 points) 1. Use the following algebraic model of an economy to answer parts ad. You may use graphical versions of this model to answer pans e and f. {1] Labor Demand: La = no- n1*(WfP) + n2*K + n3*RM {2] Labor Supply: L: = so + s1\"foP) {3] Labor Market Position: U = (L: - URL: + U\"' {4] Production: v = Tech'La' *K'RRM' {5] Consumption: C = o. + c'd +c:*NW c3\"P [NW = net worth] {6] Investment: I = d - e\"r {7] Governmental Expenditures G = Go + t"\"(Y'1 Y] (El) Net Exports: X = g: - gI*Yd - g2*r (9] Disposable Income Yd = Y - T (10) Taxes: T = t.I + t-I'IIIIr (11) Aggregate Expenditure: AB = C + I + G + X {12) Goods Market Equilibrium: 'I" = AD {13) Money Demand: Md - P = hlw - h2*i {14) Money Supply: M = mo + mi*i {15) Money Market Equilibrium: Md = M (16) Nominal Interest Rate: i = r + ItE Endogenous Variables Exogenous Variables Ld.P.u.Ls.v,c,a.ch,T.i w.I<.rm. m tech. uw vp in and i various autonomous terms tag. niir a. derive the is curve. b. lm c. aggregate demand curve indicate its slope. d. supply determine sign of slope e. effect an imam potential gdp on output. prices. real interest rates employment. show graphics based above model f. showr how protease raw materials affects rates. model. j points consider following version except where indicated. variables are expressed current year thus subscript has been suppressed. be sure to your work for all parts. curve: y="YPo(rp}+NX+s" net exports n xii xve fisher equation: r="i" rte phillips it="n'+" rp v ination expectations: monetary rule: p b d s endogenous variables: nx. rt exogenous pr xa dynamic paul krugman. olivier blanchard others have suggested that inflation target he raised what would happen paths output if policy reflected this new results change expectations were rational part ii each answer three questions. any noteworthy assumptions. evaluate quotation at beginning exam. you believe true. provide evidence support assertion. false. statement make true claim. use increase gdp. p. l. u. imp r. assume e . there a positive shock period t v. question studies co-existence money credit. time discrete with infinite horizon. consists two subperiods. day trade bilateral partially anonymous as kiyotaki wright kw market night takes place walrasian or centralized cm types agents buyers sellers measure both normalized per utility u h q quantity good produced by seller consumed buyer x consumption numeraire hours worked cm. can turn one unit labor into good. functions satisfy usual assumptions will only spell out most crucial ones: exists co such we define first-best traded : here sellers. type-1 o never accept unsecured hence meeting type must pay spot pro quo money. contrast type-2 but they also credit form promise repay forthcoming however limit: credibly amount up c rest standard. goods non storable. exits storable recog- nizable object fiat serve medium exchange. controlled authority simple policies mul="(1"> B - 1. New money is introduced, or withdrawn if a