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Economics 307: Intermediate MacroeconomicsFinal ExamStudent ID#: __________________________Please answer the following questions to the best of your ability. Remember, this exam is intended to be closed books, notes, and neighbors. No programmable calculators may be used while taking this exam. If you have any questions, please raise your hand. Be sure to show your work if you want partial credit. Don’t feel compelled to fill up all the space given with your answer. Concise correct answers are worth full points. Points possible are in parenthesis after each question. Good Luck and have a great spring break.1.Throughout class we have made the assumption that consumption is a function of disposable income. However, household spending may be a negative function of interest rates as well. For instance, higher interest rates may induce households to increase savings (and reduce consumption) or simply to avoid making purchases using borrowed funds (which grow more expensive as interest rates increase). Assume the graphs below were drawn under the traditional assumptions (i.e., interest rates do not impact consumption). On the graphs below, show how these graphs change if consumption is negatively related to interest rates. (12)-381000125095M/PrPLrYYYAE45C+I+GLMISMsMdLRASSRASAD00M/PrPLrYYYAE45C+I+GLMISMsMdLRASSRASAD2.Some economists believe that income taxes have an important effect on labor supply. They argue that higher income taxes cause people to want to work less and that lower income taxes cause them to want to work more. Consider how this effect alters the macroeconomic effect of tax changes.a. Under these circumstances, how does an income tax cut affect the aggregate demand curve? The long-run aggregate supply curve? The short-run aggregate supply curve? (6)b. What is the short-run impact of an income tax cut on output and the price level? How does your answer differ from the case where income taxes do not impact the labor supply? (6)c. What is the long-run impact of an income tax cut on output and the price level? How does your answer differ from the case where income taxes do not impact the labor supply? (6)3.Economists have noted that the annual growth rate of real GDP dropped considerably during the 1970s. This productivity slowdown is easily noted when comparing the average growth rates of economic variables before and after 1975. Some examples appear in Table 1.Table 1: Average Annual Growth Rates of Population, Nominal andReal GDP in the United StatesYearsReal GDPNominal GDPPopulation1953-19743.82%6.89%1.40%1975-19993.17%7.49%.98%a. Assuming the velocity of money is constant, during which subperiod (1953-1974 or 1975-1999) experienced greater monetary growth? What is your best guess at the growth rate of the money supply in each subperiod? (6)b. Which subperiod experienced greater technological growth? What is your best guess at the technological growth rate in each subperiod? (6)c. Do either of your answers to a and b help understand the productivity slowdown in the second subperiod? Explain. (4)4.a. Imagine that the economy below was simultaneously in the long-run steady state level of growth and in macroeconomic equilibrium (AD=SRAS=LRAS). Assume that firm owners cannot immediately distinguish between increases in the price level and increases in the price for their product. Further assume that population is growing at 2% per year and technology is growing at 3% per year. And that, absent any external shocks, investment demand grows at the same rate as real GDP and likewise, the money supply grows at the same rate as real GDP. On the graphs below, use a solid line to document how the variables requested evolve over time. (5)-355600152400Unemp.RateRealInterest RatePriceLevelTimeTimeTimeTimeTimeNominalInterest RateRealGDPT↑ShortRunLongRunPost-Long Run00Unemp.RateRealInterest RatePriceLevelTimeTimeTimeTimeTimeNominalInterest RateRealGDPT↑ShortRunLongRunPost-Long Runb. Imagine that President Obama increases taxes at the time period indicated on the chart above. With a DASHED LINE, demonstrate the impact this increase in taxes has on the economy over time. (15) c. In part b, what determines the length of time that the short-run period lasts? (4)d. Imagine that the increase taxes was something announced ahead of time in such a way that firm owners realized what would happen to prices ahead of time. What changes in part b of your answer would result? (4)5.Consider the Solow growth model in which:y = k.5s = .12 = .02n = .02g = .02a. Find the steady state level of capital per effective worker. (8)b. Imagine that this economy begins with one unit of capital per effective worker. On the graph below, sketch the paths of the requested variables over time. Assume they reach their steady states by time t1. (15)-63500110490kyY/LYcTimeTimeTimeTimeTimet100kyY/LYcTimeTimeTimeTimeTimet1c. Imagine at time t1 an immigration law is passed which allows a one-time influx of immigrants to enter the country equal to 10% of the labor force. After this influx, the population continues to grow at 2% per year. On the graph above, sketch the progression of this economy over time. (10) ................
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