Question 1 (12 marks; 3 marks each)

Stateonesimilarityandonedifferencebetweenthefollowingpairsofterms:

a.privatesavingandpublicsaving

b.frictionalunemploymentandstructuralunemployment

c.GDPdeflatorandconsumerpriceindex(CPI)

d.nominalinterestrateandrealinterestrate

Question 2 (15 marks; 5 marks each)

StatewhetherthefollowingstatementsareTRUEorFALSE.Brieflyexplainyouranswer.

a.Thelong-runPhillipscurveis averticalstraightline.

b.When theFederalReserveconductsanopensaleofgovernmentbonds,thefederalfundsratewillfall.

c.Anexpansionarymonetarypolicydoesnotleadtoanincreaseinoutputintheshortrun.

Question 3 (12 marks)

a.ItisfoundthattherealGDPpercapitaofdevelopingcountriesgrowsfasterthandeveloped countriesatthesameperiod. Explainthisphenomenoninthelightofdiminishingreturnstocapital.(8marks)

b.Inaclosedeconomy,consumptionis$80,000,taxesare$17,600,governmentpurchases are$30,000andnationalsavingamountsto$20,000.ComputethelevelofGDPandprivate saving.(4marks)

Question 4 (15 marks)

Supposeaneconomyhasenoughlabor,capital,andlandtoproduce1,000applesperyear.Applesarethe onlyproductoftheeconomyandthepriceis$10perapple.In 2019,moneysupplyis$5,000andvelocityofmoneyisconstant.

a.Statethequantitytheoryofmoney.(3marks)

b.ComputenominalGDPandvelocityofmoneyin2019. (4marks)

In2020,thecentralbankoftheeconomyincreasesthemoneysupplyby10%.

c.ComputenominalGDPandpricelevelin2020.What is theinflationratebetween2019and 2020? (4marks)

d.Accordingto theFishereffect,

i.howarenominalandrealinterestratesrelatedtooneanother?(2marks)

ii.whatwillbetheimpactoftheincreaseinmoneysupply by10%onnominaland

realinterestratesrespectively?(2marks)

Question 5 (16 marks)

Suppose thatEconomyAisinthelong-runequilibriuminitially.

a.Copy thefollowingdiagramtoyouranswerbook.Labelthex-axisandy-axisappropriatelyforthefollowingdiagram.Addthelong-runaggregatesupplycurve(LRAS)onthediagramtoillustratethecurrentstateofEconomyA.Labelthefull-employment output(YN)onthediagram.(whereAD=aggregatedemandandSRAS=short-run aggregatesupply)(3marks)

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