THE AUSTRALIAN NATIONAL UNIVERSITY
Second Semester Final Examination (2020)
Macroeconomics 1
(ECON1102)
Reading period: 15 minutes
Writing period: 150 minutes
Permitted materials: Calculator and one sided formula sheet (you need to use the template
provided and attach your formula sheet to your answers when submitting)
You can type and/or handwrite the answers. You can also use writing apps if you like. Please
submit only one PDF file to Wattle.
Please note that YOU MUST READ the all files uploaded under Final Exam Heading on Wattle.
Please follow the rules stated there strictly.
You must attempt to answer all questions.
Always show your work and fully explain your answers (100 marks in total).
GOOD LUCK!
Page 1 of 4 – Macroeconmics 1 (ECON1102)
QUESTIONS
1. We have the following information on Apple-land and Banana-land economies.
Apple-land
Banana-land
Production function
Y=F(K,L)=K1/2L1/2
Y=F(K,L)=K1/3L2/3
Population growth rate (n)
0%
0%
Growth rate of the
technological progress (g)
0%
0%
Rate of the capital stock
10%
10%
depreciation (d)
Saving rate (s)
20%
20%
In this question, in your formulas, write down the value of variables as decimals. For
instance d=10% should appear as 0.10 in your formulas.
a. Find the steady state levels of income (output) per worker and consumption per worker for
both countries. Make a brief comment on your findings by comparing your results. [10 marks]
b. How much Banana-land should save (calculate the new saving rate s for Banana-land) to have
the same level of income per worker as in Apple-land. [10 marks]
2. The Rosy-land’s economy is described as follows:
Consumption function
C=250+0.8(Y-T)
Investment function
I=750-30r
Real money balances
M/P=Y-100r
Government expenditures
G=750
Taxes
T=1500
Money supply
M=6000
Price level
P=3
Y is income (output) and r is the real interest rate. In IS equation r appears as a whole number
not as a decimal. For instance if r=1%, in formula you need to enter this as 1 not as 0.01.
a. Calculate the equilibrium interest rate and income. [4 marks]
b. Suppose now T=750. Money supply is still M=6000. Calculate the new equilibrium interest
rate and income. [4 marks]
Page 2 of 4 – Macroeconmics 1 (ECON1102)
c. The Central Bank Rosy-land adjusts money supply to hold the interest rates constant at the
level you found in part (a). Calculate new money supply (M) and income. [4 marks]
d. Show the equilibriums you found in parts (a), (b), and (c) on the graph labelling them by A,
B, and C, respectively. [4 marks]
e. Provide a brief comment on your findings focusing on the role of tax cut and money supply
adjustment. [4 marks]
3. In the country of Dream-land, the natural rate of unemployment is equal to 7%. The
parameter that captures how responsive inflation is to the cyclical unemployment is set to 0.6.
The parameter that captures the adverse supply shock is set to zero. Dream-land citizens hold
adaptive expectations and hence, expected inflation is equal to the last year’s inflation.
a. Write down the Philips curve equation for this economy (In the formula, enter
unemployment and inflation rates as whole numbers. For example, if the unemployment
rate is 10%, in the formula this should appear as 10 not as 0.10) [3 marks]
b. Graph the short-run and the long-run relationship between inflation and unemployment. [5
marks]
c. How much cyclical unemployment is necessary to reduce inflation by 2 percentage points.
[5 marks]
d. Calculate the sacrifice ratio. [4 marks]
4. The Central Bank of Lala-land decides to decrease the target inflation from 4 to 3 percent.
Using the dynamic AD-AS model, show the effect of the change in the target inflation rate by
drawing a graph. When you draw your graph, assume that the economy is at the long run
equilibrium at the beginning. Please provide a brief explanation of your graph. [20 marks]
5. The country of Tutorial-land has two citizens, Roshni and Simon. Roshni and Simon like to
smooth their consumption over time and both live four periods. In the last period (retirement),
they do not work. Assume the interest rate is zero for both saving and borrowing and life-span is
perfectly predictable. The table below shows their incomes earned during each period.
Period 1
1
2
3
Roshni
$20
$20
$20
Simon
$10
$25
$25
Page 3 of 4 – Macroeconmics 1 (ECON1102)
4
$0
$0
a. Compute consumption and saving in each period of life for Roshni and Simon. [4 marks]
b. Compute Roshni and Simon’s wealth (at the beginning of each period) including period
five. [2 marks]
c. Graph consumption, income, and wealth for Roshni and Simon (one graph for Roshni and
one graph for Simon). Compare two graphs by providing an explanation regarding
differences. [6 marks]
d. Suppose that borrowing in this economy is not possible and wealth can’t be negative any
given period. How does that change your answer (When you answer this question
recalculate consumption, saving, and wealth for Roshni and Simon when is necessary. You
do not need to draw graphs.) [6 marks]
6. How does the leverage ratio influence a financial instution’s stability in response to negative
macroeconomic shocks? [5 marks]
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