Question 31(3 points)

Which of the following models is best for understanding how fiscal and monetary policy affect the macroeconomy in the short run?

a

loanable funds model

b

IS-LM model

c

Quantity theory of money

d

Solow model

Question 32(3 points)

Suppose the economy is currently in a short-run equilibrium with GDP greater than the normal long-run average level that's consistent with full employment, and the unemployment rate is below the natural rate of unemployment.

If there are no shocks or changes in policy, the price level will

a

gradually rise over time until the economy reaches its long-run equilibrium with unemployment equal to the natural rate.

b

rise over time at the rate of population growth.

c

gradually fall over time until the economy reaches its long-run equilibrium with unemployment equal to the natural rate.

d

remain at its current level permanently due to sticky prices.

Question 33(3 points)

In the Solow model, the capital stock

a

is exogenously fixed, like in the loanable funds model.

b

is determined by supply and demand.

c

increases when actual investment exceeds break-even investment.

d

is always in a steady state.

Question 34(3 points)

In 2015, Algeria and Bahrain are starting with the same GDP per capita, the same capital per worker, and the same aggregate production function.Over the next 30 years, Algeria's population growth rate is higher than Bahrain's, and Algeria saves a larger share of its GDP.According to the Solow model, which country will have the highest GDP per capita in 2045?

a

Algeria

b

Bahrain

c

They will have the same GDP per capita in 2045.

d

The answer cannot be determined without additional information.

Question 35(8 points)

[SHORT-ANSWER QUESTION]

In the Solow model's steady state, consumption per capita is determined by this equation:

c* = (1-s)y* = (1-s)f(k*)

where s, y*, and k* denote the saving rate, steady-state income per capita, and steady-state capital stock per worker, respectively.

If the country increases the saving rate (for example, if households decide to save more or the government reduces its budget deficit), then

(a) What will happen to the steady-state income per capita y*?No explanation necessary.

(b) What will happen to steady-state consumption per capita c*?Explanation is necessary and determines your score on part (b).

Your answer:

PART 2:GRAPHING QUESTIONS

Question 36(6 points)

On a blank sheet of paper, draw the Solow model diagram.Label both curves and label the horizontal axis.

Identify the steady state and label it point "A" in your graph.Draw a dotted line from point A to the horizontal axis to identify the steady-state capital stock per worker and label it

Suppose the population growth rate falls.Show the impact of this on your diagram.If there is a new steady state, label the point B and draw a dotted line from B to the horizontal axis to identify the new steady-state capital stock. Label it

Answer these questions.Do not attach a picture of your graph just yet.

1. In the new steady state, are capital and income higher, lower, or the same as in the initial steady state?
2. Describe the forces that move the economy over time from point A to point B.

Again, don't upload your graph here - this problem is for your written answers.The next problem is for your graph....

Your answer:

Question 37(8 points)

Attach the graph you drew for the previous question.

Your answer:

Record Answer

Question 38(6 points)

On a separate, blank sheet of paper, draw the diagram for the IS-LM model. Label both curves and label both axes.Label the initial equilibrium point A.

Suppose the economy has been at point A for a while.But now, the Federal Reserve increases the nominal money supply.Illustrate the short-run effects of this change in your diagram.If there is a new equilibrium, label it "B."

1. Is investment higher at point A or point B?Explain.
2. Is the unemployment rate higher at point A or point B?Explain.
3. Is the price level higher at point A or point B?Explain.

Do not upload your graph here; this question is only for your written answers.The following question will ask you to upload your graph.

Your answer:

Question 39(8 points)

Attach the graph you drew for the previous question.

Your answer:

Record Answer

Question 40(1 point)

This is an ungraded control question, inserted here for technical reasons.

Enter your name in the space below.

Your answer: