Module Code:

ECO00014C

BSc Degree Examinations 2020-1

Department:

Economics

Title of Exam:

Macroeconomics 1

Time Allowed: 24 Hours

(PLEASE NOTE: Submissions up to 30 minutes late will receive a 5 mark penalty deduction. Submissions late by more than 30 minutes, will not be marked.)

Time Recommended:

ONE hour and THIRTY minutes

Word limit:

The word limit per question is: 1000 words

The word count does not include figures, graphs and equations.

Allocation of Marks:

Section A is worth 30%, Section B is worth 30% and Section C is worth 40%

Instructions for Candidates:

Answer ALL questions.

In Section A, if you write more than one choice per question, then you will be awarded zero.

Any answers you do not wish to be included in the marking, must be clearly crossed out.

A note on Academic Integrity

We are treating this online examination as a time-limited open assessment. You are therefore permitted to refer to written, and online materials, to aid you in your answers.

However, you must ensure that the work you submit is entirely your own, and for the whole time the assessment is live you must not:

● communicate with departmental staff on the topic of the assessment

● communicate with other students on the topic of this assessment

● seek assistance with the assignment from the academic and/or disability support services, such as the Writing and Language Skills Centre, Maths Skills Centre and/or Disability Services. (The only exception to this will be for those students who have been recommended an exam support worker in a Student Support Plan. If this applies to you, you are advised to contact Disability Services as soon as possible to discuss the necessary arrangements)

● seek advice or contribution from any third party, including proofreaders, friends, or family members.

We expect, and trust, that all our students will seek to maintain the integrity of the assessment, and of their award, by ensuring that these instructions are strictly followed.

Failure to adhere to these requirements will be considered a breach of the Academic Misconduct regulations, where the offences of plagiarism, breach/cheating, collusion and commissioning are relevant - see AM.1.2.1” (Note this supersedes section 7.3 of the Guide to Assessment).

SECTION A

1. Suppose policy makers overestimate the natural rate of unemployment. In situations like these, policy makers will likely implement policies that result in:

(a) less unemployment than necessary.

(b) an unemployment rate that is "too low."

(c) a lower inflation rate than necessary.

(d) a steadily increasing inflation rate.

[6 points]

2. Economists sometimes refer to the neutrality of changes in nominal money growth. This neutrality of nominal money growth implies that changes in nominal money growth have no medium-run effect on which of the following?

(a) the inflation rate.

(b) the price level.

(c) output growth.

(d) nominal wages.

[6 points]

3. Use the Solow model to address the following question: Suppose two countries are identical in every way with the following exception. Economy A has a higher saving rate than economy B. Given this information, we know with certainty that:

(a) steady state consumption in A is higher than in B.

(b) steady state consumption in A is lower than in B.

(c) steady state growth of output per worker is higher in A than in B.

(d) none of the above.

[6 points]

4. One surprising insight from viewing policy as a "game" is that:

(a) central bankers should project an image of being conservative on economic policy matters, regardless of their personal views.

(b) it is more difficult to control inflation when the central bank is highly independent.

(c) uncertainty over the impact of policy makes little difference in designing an optimal policy.

(d) money growth has little or no impact on inflation in the long run.

[6 points]

5. If uncertainty about the effects of policy on output decreases, we would expect that:

(a) policy makers would more frequently implement fine tuning policies.

(b) policy makers would implement more active policies.

(c) all of the above.

(d) none of the above.

[6 points]

SECTION B

6. The estimated Okun’s law for an economy is given by

ut — ut-1 = -0.4(gyt — 3%）

where ut and gyt are respectively unemployment rate and growth rate of output at year t.

a) What growth rate of output leads to an increase in the unemployment rate of 1% per year? How can the unemployment rate increase even though the growth rate of output is positive?

[10 points]

b) Suppose output growth is constant for the next four years. What growth rate would reduce the unemployment rate by 2 percentage points over the next four years?

[10 points]

c) How would you expect Okun’s law to change if the rate of growth of the labour force was higher by 2 percentage points? Discuss the impact on output growth and unemployment.

[10 points]

SECTION C

7. Abstract from any Brexit or COVID-19-related issues and assume that the UK economy is on a balanced growth path. In these normal times, you read a headline in a newspaper stating that:

“The UK needs a one-time investment boost in new infrastructure in order to sustain long-term economic growth.”

Use the Solow model and graphically illustrate and explain what you would expect the effects of such a policy to be on GDP per capita and GDP per capita growth over time. Do you agree that this is a well-suited policy to foster long run economic growth? Or would you propose alternative strategies? If so, which ones?

[40 points]

END OF PAPER