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LUBS2610

Intermediate Macroeconomics

Mock Exam 2022/2023

Answer both of questions

1. Consider an IS-LM-PC model where output is equal to its natural rate and the  real policy interest rate is positive and equal to its natural rate (r  = rn ). Due to  a short-term global energy shock, there is a rise in the mark-up of firms (m) for two years. After exactly two years (i.e. in the medium term) the mark-up falls again as the global energy shock passes.

Explain the central bank’s response and resulting economic outcomes in the following scenarios:

a)  If inflation expectations are anchored and the central bank immediately   responds to short-term shocks to keep inflation at its target rate versus if the central bank only responds to shocks that last at least three years.

Critically discuss the costs and benefits of both approaches. (25 marks)

b)  If inflation expectations are adaptive and the central bank immediately  responds to short-term shocks to stabilise inflation versus if the central bank only responds to shocks that last at least three years. Critically discuss the costs and benefits of both approaches. (25 marks)

For each part of your answer use a three-panel graph of the IS-LM-PC model and a graph of inflation over time to help explain your answer.

2. Before the industrial revolution global per capita income levels were relatively stagnant. Over the last two-hundred years global per capita income levels have increased rapidly.

a)  Briefly explain key trends in cross-country-group income differences during this period. Using the two-panel Solow model diagram, illustrate and explain how you could most easily model this using the Solow growth model. (25 marks)

b)  Critically discuss whether modelling growth in this way can help forecast future growth of global per capita income levels. (25 marks)