# ESSAY QUESTIONS (Total points = 155) Provide brief answers to the following questions. Donâ??t write

### Need your ASSIGNMENT done? Use our paper writing service to score better and meet your deadline.

Order a Similar Paper Order a Different Paper

ESSAY QUESTIONS (Total points

= 155)

Provide brief answers to the

following questions. Donâ€™t write long explanations. Use graphs and notations as

given in class /textbook. Also, be neat in your works. Poor labeling (of

graphs) can cost you significant points. The space provided for each question

indicates is enough for writing your answer. In case you need extra space, you

can use the back page.

Chapter 3 Production and National

Income (30 points). (This question is similar to one of the questions in the

homework whose solution was partly provided)

1.

a. Suppose the production output in Macro Land only

depends on two types of workers and with some level of technology. The production

is described by the following:

Y=AU0.4S0.7?where : whereYis the output,Uis low-skilled labor,Lis skilled labor,

andAis technology parameter. BothU

andSare the inputs in the production.?a. Show that the production function

exhibits increasing returns to scale?(5 points)

b. Suppose that 10%

of the skilled workers in Macro Land emigrate to foreign countries (brain

drain), while the number of unskilled labor does not change. What will be the

effect on the real wages of unskilled and skilled workers? By how much will

they change? You need to show the calculation.(10 points)

c. Now, assuming

that the 10% decrease in the skilled workers is compensated by a 10% increase

in the level of technology employed in the production (in other words,Aincreases by 10%). What will be the effect on the real wages of unskilled

and skilled workers? By how much will they change? Does the technological

progress benefit the low-skilled workers? You need to show and explain your

calculations.(15 points)

4

Chapter 3 Production and

National Income (25 points)

2. Assume a closed

economy. Suppose that the government increases taxes and government purchases

by equal amounts. What happens to the interest rate, investment, and

consumption in response to this balanced-budget change? Explain how your answer

depends on the marginal propensity to consume.

a. Using the

framework discussed in class and the textbook, explain the effect on this

policy on consumer spending. (5 points)

b. Use a

fully-labeled diagram to explain the effect of the policy on the interest rate

and investment. Write two brief sentences to explain your diagram. (10 points)

c. Using the

framework and equations discussed in class and the textbook, how does your

answer in parts (a) and (b) above depend on the marginal propensity to consume?

Explain. (10 points)

5

6

3. Chapters 4-5 Money,

Inflation, and Monetary Policy (30 points)

From January 2007

to September 2013, the US monetary base has more than tripled, increased from

$813.38 billion to $3.429 trillion. Yet, over the same period, the money

supply, measured by M2, only increased by 52%, up from $7.081 trillion to

$10.771 trillion.

a. Using the

framework and equations discussed in class and the textbook, explain why, in

general, the growth rate of money supply can be much slower than the growth

rate of monetary base.(5 points)

b. Now, put your

explanations above within the context of the US economy in the last five years.

How do you explain the slow growth in the money supply in compared to the rapid

growth in the monetary base?(7.5 points)

c. In light of your

answer in part (b) and using the framework and equations discussed in class and

the textbook, should we expect higher inflation rates both in the short-run and

long-run? Explain.(7.5 points)

d. How does your

answer in part (a) and (b) depend on currency-to-deposit ratio and

reserve-to-deposit ratio? If the Fed imposes a policy that all commercial banks

must lower their reserve-to-deposit ratio, what would be the effect on money

supply and inflation?(10 points)

7

4. Chapter 6 Open Economy (20

points)

Assume that the

nominal exchange rate for the euro is .75 euros per dollar. Suppose that a

Volkswagen Golf costs 15,000 euros in Germany, while it costs $20,000 in the

United States.

a. What is the real

exchange rate? Does purchasing power parity hold?

b.Suppose that the expected inflation rate is 3 percent in the United States

and 8 percent in European Union. The real interest rate is 2 percent in both

countries. What is the nominal interest rate in each economy?

c. Suppose the

percentage change in nominal exchange rate is 3 percent. What is the expected

percentage change in the real exchange rate?

d. What would the

nominal exchange rate have to be for purchasing-power parity to hold?

8

5. Chapter 6 Open Economy (30

points)

Suppose Amazon is a

small, open economy. The country is experiencing twin deficits (budget deficit

and trade deficit). Some policy makers and economic analysts in the country

propose that the solution to both problems (deficits) is to enact a

contractionary fiscal policy.

a. Using the

framework and equations discussed in class and the textbook, analyze the merit

of the policy.

b. Using a

fully-labeled diagram, analyze the merit of the policy above and explain your

diagram in two sentences.

c. Suppose also

that the policy makers in Amazon are worried about the appreciation of their

currency, Azin. To prevent the appreciation of Azin, the government of Amazon

pegs Azin against world major currency as well as the currencies of their main

trading partners. That means the real exchange rate is fixed at some level.

Analyze the effectiveness of the contractionary fiscal policy above in solving

the twin-deficit problem.

9

6. Chapter 7 Unemployment and

bonus question

a. Recently, the US

government has extended the unemployment insurance to almost two years. Analyze

the effect of this policy on: (20 points)

i. finding rate?ii.

separation rate?iii. unemployment rate

Bonus question (5

points)

b. If the

unemployment insurance is replaced by a one-time support for unemployed people

for six months, how do you think your answers will be different from part (a)

above?