PART 1 (4 points)

Answering sheet for the multiple choice questions, questions 1 until 12.

Score for n correct answers is 4·(n 3)/9; a negative score is rounded to

zero.

1. The graph below gives the inflation rate according to the GDP deflator and the
inflation rate according to the CPI in the U.S. Are the following statements then true
or not true?

I. Curve 1 gives the inflation rate acccording to the GDP deflator, and curve 2
gives the inflation rate according to the CPI.
II. The graph implies that between 1960 and 2000 nominal GDP was always larger
than real GDP.

1. Statement I is true; statement II is true.

2. Statement I is true; statement II is not true.
3. Statement I is not true; statement II is true.
4. Statement I is not true; statement II is not true.

14
curve 1
12 curve 2
10
in percent

8
6
4
2
0
-2
’50 ’60 ’70 ’80 ’90 2000 ’10

1
2. The graph below gives the participation rate and the employment rate in the 12 core
countries of the Euro area. Are the following statements about this graph true or not
true?
I. Curve 1 is the participation rate and curve 2 is the employment rate in the 12
core countries of the Euro area.
II. The di↵erence between both curves (i.e. the vertical distance between both
curves) gives the unemployment rate in the 12 core countries of the Euro area.

1. Statement I is true; statement II is true.

2. Statement I is true; statement II is not true.
3. Statement I is not true; statement II is true.
4. Statement I is not true; statement II is not true.

80
curve 1
curve 2
in percent

70

60

50
’50 ’60 ’70 ’80 ’90 2000 ’10

3. Are the following statements true or not true?

I. Even macroeconomic models that are based on assumptions without convincing
empirical evidence may be useful.
II. The policy implications of macroeconomic models may be ideologically biased,
even if they are formulated in math.

1. Statement I is true; statement II is true.

2. Statement I is true; statement II is not true.
3. Statement I is not true; statement II is true.
4. Statement I is not true; statement II is not true.

2
4. Are the following statements true or not true?

I. Currency in circulation is an item at the asset side of the balance sheet of the
Central Bank.
II. If the reserve-deposit ratio is equal to 100%, then M 1 is equal to the monetary
base B.

1. Statement I is true; statement II is true.

2. Statement I is true; statement II is not true.
3. Statement I is not true; statement II is true.
4. Statement I is not true; statement II is not true.

5. Are the following statements true or not true?

I. In the circular flow model for a closed economy, an increase in autonomous

investment leads to a higher real interest rate, and therefore also to higher private
saving.
II. In the circular flow model for a small open economy, an increase in autonomous
investment leads to an appreciation of the domestic currency and lower private
saving.

1. Statement I is true; statement II is true.

2. Statement I is true; statement II is not true.
3. Statement I is not true; statement II is true.
4. Statement I is not true; statement II is not true.

6. Are the following statements true or not true?

I. The more the interests of the outsiders are taken into account in the collective
wage bargaining between the trade unions and the employers, the less structural
unemployment there will be.
II. Collective wage bargaining between the trade unions and the employers can only
lead to efficient wages if the negotiated wages are not too high and therefore do
not lead to structural unemployment.

1. Statement I is true; statement II is true.

2. Statement I is true; statement II is not true.
3. Statement I is not true; statement II is true.
4. Statement I is not true; statement II is not true.

3
7. Consider an economy which is described by the Keynesian Cross model. Assume
a proportional tax system, where taxes T are proportional to aggregate income Y :
T = T̄ + t·Y , where T̄ represents autonomous taxes and t is the tax rate (with
0 < t < 1). Are the following statements then true or not true?

I. The higher the tax rate, the smaller the multiplier of government purchases.
II. The higher the tax rate, the steeper the IS-curve.

1. Statement I is true; statement II is true.

2. Statement I is true; statement II is not true.
3. Statement I is not true; statement II is true.
4. Statement I is not true; statement II is not true.

8. Consider an economy which is described by the liquidity preference model. Assume

that the economy is initially in equilibrium. Are the following statements then true
or not true?

I. If aggregate production Y increases, money velocity V increases as well.

II. If the aggregate price level P decreases, aggregate production Y increases.

1. Statement I is true; statement II is true.

2. Statement I is true; statement II is not true.
3. Statement I is not true; statement II is true.
4. Statement I is not true; statement II is not true.

9. The table below gives macroeconomic data for the U.S. in 1992 and 1993: S pub is
public saving (as a percentage of GDP), i is the nominal interest rate (in percent),
and gY is the growth rate of real GDP (in percent). The best way to describe these
data in the IS-LM model is to assume that

1. both the IS-curve and the LM-curve have shifted to the right.
2. the IS-curve has shifted to the right, while the LM-curve has shifted to the left.
3. the IS-curve has shifted to the left, while the LM-curve has shifted to the right.
4. both the IS-curve and the LM-curve have shifted to the left.

1992 1993

S pub -5.7 -4.9

i 3.7 3.2
gY 3.0 3.0

4
10. Are the following statements true or not true?

I. Seigniorage is the wage of an employee paid in cash.

II. The higher seigniorage is, the higher is also the inflation tax.

1. Statement I is true; statement II is true.

2. Statement I is true; statement II is not true.
3. Statement I is not true; statement II is true.
4. Statement I is not true; statement II is not true.

11. Consider an economy which is described by the Mundell-Fleming model. Are the
following statements then true or not true?

I. Fiscal policy is e↵ective with floating exchange rates, but not with fixed exchange
rates.
II. Monetary policy is e↵ective with floating exchange rates, but not with fixed
exchange rates.

1. Statement I is true; statement II is true.

2. Statement I is true; statement II is not true.
3. Statement I is not true; statement II is true.
4. Statement I is not true; statement II is not true.

12. Are the following statements true or not true?

I. The slope of the Phillips curve depends on the slope of the aggregate demand
curve.
II. Demand pull inflation is described by an upward shift of the Phillips curve.

1. Statement I is true; statement II is true.

2. Statement I is true; statement II is not true.
3. Statement I is not true; statement II is true.
4. Statement I is not true; statement II is not true.

5
PART 2 (1.5 points)
Answering sheet for the multiple choice questions, questions 13 until 22.
9 n 10/3
Score for n correct answers is 4 10
; a negative score is rounded
to zero.

Below is described how the economy reacts to a decrease of autonomous real money
demand according to the IS-LM-model.

A number of terms or phrases in the description are left out. Look for the most ap-
propriate term or phrase in the list which the term between curled brackets refers to. The
list with possible answers is not in this exam copy, but is handed out seperately. Make
on your answering sheet the bullets black that correspond with the correct answers. The
answer for the first phrase that is left out corresponds on your answering sheet with the
answer for question 13, the answer for the second phrase that is left out corresponds on
your answering sheet with the answer for question 14, etc. The answer for the last phrase
that is left out corresponds on your answering sheet with the answer for question 22.

Assume the economy is in equilibrium when it is hit by the shock.

Assume that the central bank keeps the interest rate constant.

Description

i. The shock causes {13. disequilibrium} in the money market. The economic agents
therefore try to {14. transaction} bonds. To avoid that this a↵ects the interest rate,
the Central Bank performs an open market operation by {15. transaction} bonds
and letting {16. variable} {17. change}, until equilibrium in the money market is
restored. Note that the goods market remains in equilibrium all the time.

ii. Compared with the initial equilibrium, in the new equilibrium

• aggregate production {18. change}

• aggregate consumption {19. change}
• aggregate investment {20. change}
• the real money supply {21. change}
• the interest rate {22. change}

6
PART 3 (1.5 points)
Answering sheet for the multiple choice questions, questions 23 until 40.
9 n 18/3
Score for n correct answers is 4 18
; a negative score is rounded
to zero.

Below is described how the economy reacts to a increase in autonomous net export
according to the Mundell-Fleming-model.

A number of terms or phrases in the description are left out. Look for the most ap-
propriate term or phrase in the list which the term between curled brackets refers to. The
list with possible answers is not in this exam copy, but is handed out seperately. Make
on your answering sheet the bullets black that correspond with the correct answers. The
answer for the first phrase that is left out corresponds on your answering sheet with the
answer for question 23, the answer for the second phrase that is left out corresponds on
your answering sheet with the answer for question 24, etc. The answer for the last phrase
that is left out corresponds on your answering sheet with the answer for question 40.

Assume that net export is only a function of the real exchange rate (and not of aggre-
gate income).

Assume the economy is in equilibrium when it is hit by the shock.

Assume floating exchange rates.

An increasing exchange rate means that the domestic currency appreciates; a decreas-
ing exchange rate means that the domestic currency depreciates.

Excess demand on the foreign exchange market means that there is more demand for
foreign currency than supply of foreign currency; excess supply on the foreign exchange
market means that there is more supply of foreign currency than demand for foreign cur-
rency.

Unless mentioned otherwise, all variables refer to their domestic values.

Description

i. The shock causes planned aggregate expenditures to {23. change} (given the exchange
rate). This leads to a shift {24. shift} {25. curve} to the {26. direction}, and {27.
disequilibrium} in the goods market.

ii. As a result, the interest rate starts to {28. change}. However, this immediately
causes an {29. flow} of capital, until the interest rate is again equal to the interest
rate abroad. This capital flow causes {30. disequilibrium} in the foreign exchange
market, such that the exchange rate {31. change}. As a result, {32. variable} {33.
change}, such that the disequilibrium in the goods market declines. This process
continues until the economy is again in equilibrium.

7
 iii. Compared with the initial equilibrium, in the new equilibrium

• aggregate production {34. change}

• aggregate consumption {35. change}
• aggregate investment {36. change}
• net export {37. change}
• the real money supply {38. change}
• the interest rate {39. change}
• the exchange rate {40. change}

PART 4 (1 point)
Answering sheet for the numerical questions, questions 1 until 8.

Give only your solutions (not your derivations)!

Score for n correct answers is n/8.

Consider a closed economy described by the IS-LM-model:

Y = C +I +G
C = C(Y T)
I = I(i)
M̄
= L(i, Y )
P
Y is aggregate production, C is aggregate consumption, I is aggregate investment, G
is government purchases, T is taxes, M̄ is nominal money supply, and P is the aggregate
price level. i is the interest rate. G, T , M̄ and P are determined exogenously.
Assume the following functional forms and parameter values:

G = 500, T = 400, M̄ = 3000, P =3

C(Y T ) = 220 + 45 (Y T )
I(i) = 400 40i
L(i, Y ) = 12 Y 100i

Compute now the equilibrium values of the following variables:

1. aggregate production Y .

2. the interest rate i.

Assume now that the aggregate price level P increases from 3 to 5.

Compute the new equilibrium values of aggregate production Y and the interest rate i,
assuming that the Central Bank keeps the nominal money supply constant:

3. aggregate production Y .

8
 4. the interest rate i.
Compute the new equilibrium value of aggregate production Y , assuming that the Central
Bank keeps the interest rate at the level which you found in question 2, and compute the
nominal money supply M̄ which is required to achieve this.
5. aggregate production Y .
6. the nominal money supply M̄ .
Compute the new equilibrium value of the interest rate i, assuming that the Central Bank
keeps aggregate production constant at the level which you found in question 1, and compute
the nominal money supply M̄ which is required to achieve this.
7. the interest rate i.
8. the nominal money supply M̄ .

PART 5 (1 point)
Answering sheet for the numerical questions, questions 9 until 12.

Give only your solutions (not your derivations)!

Score for n correct answers is n/4.

Consider an economy where two di↵erent goods are produced. The table below gives the
production quantities and prices of both goods in year 1 and year 2:
year 1 year 2

production quantity
- of good 1 1 2
- of good 2 8 4

price
- of good 1 10 12
- of good 2 5 3

Compute then the following variables:

9. The inflation rate according to the GDP deflator if the base year is year 1 (⇡def l ).
10. The inflation rate according to the CPI if the base year is year 1 (⇡CP I ).
11. The growth rate of real GDP between year 1 and year 2 if the base year is year 1 (g).
12. The growth rate of chain-weighted real GDP between year 1 and year 2 (g ch ).
Note
xt+1 xt
⇤ Always compute the growth rate of a variable x between period t and t + 1 as xt .
⇤ Approximate pa geometric mean by the arithmetic mean;
so if 1 + x = (1 + x1 )(1 + x2 ), approximate x by x ⇡ 12 (x1 + x2 ).

9
PART 6 (1 point)
Answering sheet for the numerical questions, questions 13 until 16.

Give only your solutions (not your derivations)!

Score for n correct answers is n/4.

Consider an economy which is described by the AD-AS model. The short run aggregate
supply curve and the aggregate demand curve are given by the following equations:
1
ln Pt = ln E(Pt ) + ·(ln Yt ln Yn )
↵
ln Yt = ln Vt + ln Mt ln Pt

where Mt = M̄ and Vt = V̄ .

Pt , Yt , Mt and Vt are, respectively, the aggregate price level, aggregate production, the
nominal money supply and money velocity in period t. Yn is the natural level of aggregate
production. ↵, M̄ , V̄ and Yn are exogenous parameters, and are strictly positive: ↵ > 0,
M̄ > 0, V̄ > 0 and Yn > 0. E(Pt ) is the price level in period t that was expected in period
t 1.

Assume the following parameter values for the exogenous variables in the model:

↵ = 2
Yn = 1
M̄ = 1
V̄ = 1

Assume that the economy is in a long run equilibrium in period 0. The aggregate price
level in period 0, P0 , is then equal to 1:

P0 = 1

Assume now that in period 1 money velocity decreases (and then remains constant after-
wards), such that from period 1 onwards V̄ is not equal to 1 anymore, but to 0.85.

Assume first that the economic agents have adaptive expectations, where E(Pt ) = Pt 1 . As
we have seen during the last tutorial, we can then compute the inflation rate between pe-
riod 0 and period 1. We then find that the inflation rate is equal to -5%, such that P1 is 0.95.

Assume, however, that the economic agents do not have adaptive, but rational expec-
tations. Also assume that the economic agents did not anticipate in period 0 that money
velocity would decrease in period 1. But in period 1, when the economic agents discover
that money velocity is lower than what they had expected, they do expect money velocity
to remain constant at 0.85, also in the periods after period 1. Compute then the following
variables:

10
 13. The aggregate price level in period 1 (P1 ).

14. The aggregate price level in period 2 (P2 ).

Assume now that the economic agents have rational expectations, but did expect already
in period 0 that money velocity would decrease in period 1. So economic agents expected
already in period 0 that money velocity would be equal to 0.85 from period 1 onwards.
Compute then again the following variables:

15. The aggregate price level in period 1 (P1 ).

16. The aggregate price level in period 2 (P2 ).

11
Lists for Part 2

curve

1. the IS-curve
2. the LM-curve

disequilibrium

1. excess demand
2. excess supply

direction

1. right
2. left

transaction

1. buys/buy/buying
2. sells/sell/selling

variable

1. consumption demand
2. investment demand
3. the nominal money supply
4. real money demand

change

1. increases/increase/has increased
2. does not change/do not change/has not changed
3. decreases/decrease/has decreased

shift

1. of
2. along
Lists for Part 3

curve

1. the IS*-curve
2. the LM*-curve

disequilibrium

1. excess demand
2. excess supply

direction

1. right
2. left

flow

1. inflow
2. outflow

transaction

1. buys/buy/buying
2. sells/sell/selling

variable

1. investment demand
2. net export
3. the nominal money supply
4. real money demand

change

1. increases/increase/has increased
2. does not change/do not change/has not changed
3. decreases/decrease/has decreased

shift

1. of
2. along
Solutions
Part 1 - Answering sheet for the multiple choice questions
1. 4. Statement I: Recall that during the oil crises in the 1970s the inflation rate according to the
CPI has reacted stronger on the price increases of crude oil than the inflation rate according
to the GDP deflator. The reason for this is that crude oil is an important component of the
goods basket which the CPI is based upon, and that a lot of this oil was imported (as the U.S.
imports more oil than that it produces oil). Statement II: Whether nominal GDP is larger
or smaller than real GDP depends on the base year which was used to compute real GDP.
The inflation rate according to the GDP deflator does imply, however, that the growth rate
of nominal GDP has always been higher than the growth rate of real GDP between 1960 and
2000.
2. 2. Statement I: The participation rate is always larger than the employment rate. Statement
II: The participation rate is the labor force divided by the population at working age, and the
employment rate is the number of employed divided by the population at working age. The
di↵erence between the participation rate and the employment rate is therefore the number
of unemployed divided by the population at working age. This, however, is not the same as
the unemployment rate: the unemployment rate is the number of unemployed divided by the
labor force.
3. 1. See the slides for the “Prologue”.
4. 3. See lecture notes.
5. 4. Statements I and II: Private saving is defined as Y T C(Y T ), and therefore does
not depend on autonomous investment.
6. 2. See lecture notes.
7. 1. See Mankiw, p. 335, ex. 3.
8. 2. Statement I: M and P are exogenous and do not change, so M/P remains constant as
well. From the quantity equation follows that V = P Y /M . So as Y increases, money velocity
V increases as well. Statement II: Y is exogenous, and is therefore not a↵ected by P .
9. 3. S pub has increased. This represents a fiscal contraction, which has shifted the IS-curve to
the left. At the same time, the growth rate of real GDP remained constant at the growth rate
of the natural level of aggregate production. So the shift of the IS-curve to the left apparently
did not have consequences for the growth rate of real GDP - which is consistent with the
assumption that at the same time the LM-curve has shifted to the right, for instance because
of a monetary expansion. A shift of the IS-curve to the left and of the LM-curve to the
right is also consistent with the decrease in the nominal interest rate. The Clinton-Greenspan
policy mix in 1993 can indeed by summarized as a combination of a fiscal contraction with a
monetary expansion (see lecture notes).
10. 3. Statement I: Seigniorage is the revenue for the government of printing money. Statement
II: The more money the government prints, the higher is the inflation rate, and the more the
initial money balances lose their purchase power.
11. 3. See lecture notes.
12. 4. Statement I: The Phillips curve is not derived from the aggregate demand curve, but from
the short run aggregate supply curve. Consequently, the slope of the Phillips curve does not
depend on the slope of the aggregate demand curve, but depends on the slope of the short
run aggregate supply curve. Statement II: Demand pull inflation (i.e. inflation caused by a
positive aggregate demand shock) is described by a shift along the Phillips curve to the left
(such that the inflation rate increases and the unemployment rate declines).
Part 2 - Answering sheet for the multiple choice questions
13. 2 , 14. 1 , 15. 2 , 16. 3 , 17. 3
18. 2 , 19. 2 , 20. 2 , 21. 3 , 22. 2

Part 3 - Answering sheet for the multiple choice questions

23. 1 , 24. 1 , 25. 1 , 26. 1 , 27. 1
28. 1 , 29. 1 , 30. 2 , 31. 1 , 32. 2 , 33. 3
34. 2 , 35. 2 , 36. 2 , 37. 2 , 38. 2 , 39. 2 , 40. 1

Part 4 - Answering sheet for the numerical questions

1. Y = 3000, 2. i = 5, 3. Y = 2600, 4. i = 7
5. Y = 3000, 6. M̄ = 5000, 7. i = 5, 8. M̄ = 5000

Part 5 - Answering sheet for the numerical questions

9. ⇡def l = 10%, 10. ⇡CP I = 28%, 11. g = 20%, 12. g ch = 10%

Part 6 - Answering sheet for the numerical questions

13. P1 = 0.95, 14. P2 = 0.85, 15. P1 = 0.85, 16. P2 = 0.85