Intermediate Macroeconomics: Final Exam Review Questions

1 Intermediate macroeconomics : Final Exam Review QuestionsProf. Eric SimsUniversity of Notre DameDecember 6, 20121. In the context of the equilibrium model of production with flexible prices ( the realbusiness cycle model), show how changes inAt,At+1,Gt, andGt+1affect the price level, Describe in some detail the stylized business cycle facts as presented in In our baseline model of production, write down the maximization problem of a hypothetical social planner who desires to maximize the utility of the representative household subjectto the scarcity that the economy as a whole faces.

2 Discuss the main way in which this problemdiffers from the competitive equilibrium setup. Find the first order conditions characterizingthe solution to the planner s problem, and compare them to the first order conditions of thecompetitive equilibrium In the context of the real business cycle model, what is the only exogenous variable thatcan be the main source of business cycle fluctuations? Explain why? Are declines in thatexogenous variable welfare improving or welfare reducing? Should policy react to changes inthis exogenous variable? Why or why not?5. What is the primary friction that differentiates the New Keynesian model from the realbusiness cycle model?

3 Does that friction strike you as reasonable and intuitive?6. Graphically derive the LM curve and define it in Graphically show how the labor market works in the New Keynesian model. In words discusshow this differs relative to the real business cycle Graphically analyze the effects of exogenous increases inAt,At+1,Gt,Gt+1, and t+1in theNew Keynesian model, assuming that the money supply is Repeat the graphical analysis from the preceding question using the graphical apparatus ofthe New Keynesian framework, but assuming that prices are flexible ( as in the notes,use these graphs to show how the exogenous changes would affect the endogenous variableswhen prices are flexible, which effectively makes the position of the LM curve endogenous).

4 10. In words, describe how a welfare-maximizing central bank ought to conduct monetary policyin the context of the New Keynesian Describe in words and with graphs how the zero lower bound affects the New Keynesianmodel. Will shocks to demand (shifts ofYd) have bigger or smaller output effects when thezero lower bound binds?112. Describe the motivation for including a risk premium shock, , into our model. How doesthis relate to the Great Recession period? Graphically show how an increase in ought toaffect the economy in the New Keynsian model (both with and without the zero lower boundbinding).

5 13. In words, map the objectives of the non-standard monetary policy of 2008 onward into Discuss why fiscal stimulus (an increase inGt) might (i) be welfare-improving when the zerolower bound is binding) and (ii) might have bigger effects when the zero lower bound Speculate, in words and with graphs, on why ticket prices for the BCS national championshipgame fell after Alabama defeated Georgia in the SEC Championship