UNDERGRADUATE PROGRAM
FACULTY OF ECONOMICS AND BUSINESS
UNIVERSITAS INDONESIA
FINAL EXAM
SEMESTER GENAP 2023/2024
MAKROEKONOMI 1
TEAM TEACHINGS
CLOSED BOOK
FRIDAY, JUNE 7, 2024
TIME: 08.30-11.30 WIB
Instructions:
1. The exam problem set consists of 3 parts which all are required to be completed. The total point is
105 if you do them all correctly. Read all the questions first. Work from what you think is easiest.
Complete each part and do not separate the answers fro m their respective parts.
2. The number in parentheses at the end of each question is the weight of the question.
3. It is assumed that you already know the meaning of the notation used in the equations.
A. Consumption Expectation, Investment Expectation, and Government Policy (Total 35 points)
A1. Table 1 below provides information on the annual growth rate of national income, consumption, and
saving to GDP ratio of country XYZ from 2012 to 2022. Country XYZ faced two economic phases,
2013-2018 economic recovery period and 2019-2021 economic recession period.
Table 1 Annual Growth Rate of National Income, Consumption, and Saving to GDP Ratio
(2011 – 2022 )
Growth
Rate
National
Income (%)
Private
Consumption
(%)
Saving/GDP
(%)
Economic
Economic Recovery Period
Recession Period
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
-20.3 12.7 8.6
9.0
10.4 10.8 4.7
-1.7 1.0
-4.9 3.0
-14.4 10.1
9.5
8.9
9.0
9.5
8.5
0.1
4.6
-2.2
1.3
10.1
11.0
12.4
14.3
14.5
17.3
8.5
7.2
5.1
10.3
10.4
Problem sets A1a, A1b, and A1c refer to Table 1.
A1a. Explain theoretically how consumption patterns will change if it is assumed that there will be
expectations of a permanent increase in income. Compare if it will be temporary/transitory
increases in income. (5 points)
A1b. Compare the average national income growth and the average consumption growth in the 20132018 recovery period. Determine whether during this period the change in income is permanent or
temporary. Explain your argument. (5 points)
A1c. Do the same with part b for the 2019-2021 recession period. Is your conclusion the same as that
in part b? Explain. (5 points)
A2. Country XYZ has just finished holding an election where the President-elect promised to cut taxes. The
public believes that the elected president will keep his promise.
The following is the IS – LM relations that you can utilize to answer the questions below:
𝐼𝑆 ∶ 𝑌 = 𝐴 (𝑌, 𝑇, 𝑟, 𝑌′𝑒 , 𝑇 ′𝑒 ,𝑟 ′𝑒 ) + 𝐺
(1)
𝐿𝑀 ∶ 𝑟 = 𝑟̅
(2)
where 𝑌′𝑒 , 𝑇 ′𝑒 , 𝑟 ′𝑒 respectively indicate the expected income in the future, the expected tax in the
future, and the expected real interest rate in the future.
A2a. Determine the effect of the President-elect's promises on output and the real interest rate when Central
Bank XYZ decides not to change the policy rate. Hint: Use the IS-LM curve framework to help you
explain your answer. (10 points)
A2b. The elected President of XYZ then made a sudden policy to elect a new Central Bank Board of
Governors, who will start work next year. Market players believe that the new Board of Governors
will exercise monetary policy by increasing the policy rate. Referring to equations (1) and (2) above,
explain what will happen to interest rates and output in the future. Also, explain what will happen to
the current output and interest rate. Hint: Use the IS-LM curve framework to help you clarify your
answer (10 points)
B. Open Economy (Total 35 points)
B1. Explain how the monetary policy through interest rates can influence demand for domestic goods
in an open economy. (8 points)
B2. Consider a country experiencing a balance of payments crisis due to a significant current account
deficit. Policymakers aim to address the current account deficit to prevent a recession and maintain
output levels. The exchange rate system is flexible, so a devaluation policy is not an option. Assume
that the Marshall-Lerner condition is satisfied and the law of one price applies, meaning there is no
difference between domestic and international prices of goods. The price level is fixed, and capital
flows freely into and out of the country.
a. If a policymaker wants to implement a mixed policy to address the balance of payments
crisis, what policy should be implemented? Explain your answer systematically and
comprehensively. (12 points)
b. Explain how the aggregate demand components, particularly government expenditure,
investment, and net exports, change from the initial to the new equilibrium conditions after
the mixed policy intervention in part a is conducted. (Hint: compare the changes in
components of the goods market before and after the intervention).
c. Suppose the country has a fixed exchange rate system, and it is assumed that the
government cannot devalue the domestic currency due to concerns about increasing
investor distrust and country risk. Assuming ceteris paribus, can the government achieve
its goal of reducing the balance of payments crisis without lowering the output level?
Explain. (7,5 points)
C. Fiscal and Monetary Policy (Total 35 points)
C1. Explain why an economy incurs debt from within and outside the country. (10 points)
C2. Explain the meaning of the term "primary deficit." Calculate the primary deficit to GDP ratio and
explain your results given the official budget deficit is 7.8% of GDP, the debt to GDP ratio is 123%,
the inflation rate is 0.4%, and the nominal interest rate is 0.25%. (10 points)
C3. The following is the Taylor’s rule, a guideline for a central bank to change the interest rate:
𝑖𝑡 = 𝑖̅ + 𝑎 (𝜋𝑡 − 𝜋̅) − 𝑏(𝑢𝑡 − 𝑢𝑛 )
where 𝑖𝑡 = the policy rate; 𝑖̅ = the target nominal interest rate; 𝜋𝑡 = the inflation rate ; 𝜋̅ = the target
inflation rate; 𝑢𝑡= the unemployment rate; 𝑢𝑛= the natural unemployment rate; and a, b = positive
parameters
Explain how central banks use Taylor's rule above to manage inflation that is not directly under the
control of the central bank. (15 points)
Good Luck