EXAM 1 SPRING 2025 – INTERMEDIATE MACRO
DISTRIBUTED 3/14/2025; DUE 3/23/2025 AT MIDNIGHT EST ON THE ASSIGNMENT TAB IN CLASSES – LATE WORK MAY BE PENALIZED UP TO 50%
FEEL FREE TO HANDWRITE THE EXAM BUT PLEASE SUBMIT IT AS A SINGLE DOCUMENT
ATTEMPT ALL 5 QUESTIONS - SHOW AND EXPLAIN YOUR WORK THOROUGHLY FOR FULL CREDIT. USE GRAPHS AND NARRATIVE TO AID YOUR DISCUSSIONS
AUTHENTIC WORK, PLEASE. EVIDENCE OF CHEATING MAY RESULT IN A FAILURE OF THE EXAM OR COURSE
QUESTION 1 – refer to the information in the table
For the Simple Keynesian/Keynesian cross model, for which:
r = 0
(i) use the relevant set of equations to solve for equilibrium level of income. What is the equilibrium level of consumption? Graphically illustrate and explain
(ii) what happens if planned investment exceeds 150? Is less than 150? Illustrate and explain
QUESTION 2 - refer to the information in the previous table
(i) Use the relevant set of equations to derive the IS and LM curves and solve for equilibrium levels of income and interest rate.
(ii) Suppose taxes are cut by 20% and the money supply simultaneously decreased by 20%. What is the effect on equilibrium income and interest rate? Graphically illustrate the changes compared to (i) and thoroughly comment on the results.
QUESTION 3
(A) Explain how the following will affect the IS (shift, move along and in what direction). Be sure to trace the effects to the relevant markets and use graphs to help.
(i) An decrease in interest rate resulting in a increase in investment
(ii) A decrease in the money supply
(B) Explain how the following will affect the LM (shift, move along and in what direction). Be sure to trace the effects to the relevant markets and use graphs to help.
(i) An increase in the aggregate price level
(ii) An increase in liquidity preference resulting in an increase in demand for money
(iii) Refer to the article below: “Consumers are Pulling Their Cash from NYCB…” Read the first paragraph in bold – how would this affect the LM curve (assuming the such a withdrawal is more widespread in the economy).
(iv) Refer to the article “Consumer confidence plunges to 29-month low as economic uncertainty grows.” How would this affect the LM curve?
Question 4
(A) Refer to the opinion article below: “Global liquidity trap requires a big fiscal response”. The last paragraph says:
This is a once in a lifetime crisis. Policymakers have responded strongly, averting an even deeper recession. Monetary policy has and will remain central to this effort, but with the world in a global liquidity trap it is time for a global synchronized fiscal push to lift up prospects for all.
(a) Use IS/LM graphs to illustrate and explain what she means when she says “…world in a global liquidity trap…”
(b) Use IS/LM graphs to illustrate and explain what she means when she calls for “…a global synchronized fiscal push to lift up prospects for all.”
(c) Why does she call for fiscal stimulus as opposed to expanding monetary stimulus?
(B) For the IS/LM framework, assume the economy is in equilibrium in the vertical portion of the LM curve. Which policy – contractionary fiscal or monetary – will be more effective in curbing output and inflation? What does this suggest about the appropriateness of Federal Reserve’s current monetary policy?
QUESTION 5
(A) Refer to the article below: “Weapons of mass distractions.” Use the open economy IS/LM framework to illustrate and explain the bold italicized section for the two types of economies. NOTE - Relatively closed economies imply large open economies and relatively open economies imply small open economies. USE GRAPHS
(B) Use the IS/LM framework to illustrate and explain the state of the Japanese economy as described in the “too low for comfort” section of the article. What problems did this pose for Japan? USE GRAPHS