# Advanced Macro I – Ramirez Final Edition

1. Consider the following Mundell-Fleming model:

Suppose we take the total derivative and transform the system of equations into a matrix problem with exogenous variables on the right and endogenous variables on the left.

The result will take the following form:

$latex \begin{bmatrix} F_1 & \frac{dI}{dr} & -X_\rho\\ L_Y & \frac{dX}{d\rho} & 0\\ X_Y & \sigma_r & X_\rho \end{bmatrix} \begin{bmatrix} dY\\ di\\ d\rho \end{bmatrix} = \begin{bmatrix} F_2\\ d\frac{M}{P} – \frac{dL}{dY}dT\\ F_3 \end{bmatrix} \\\\$

Identify F1, F2, and F3.

(Based on 2014 #II.2.a)

Hints:

1. Endogenous variables include the interest rate, the real exchange rate, and output.
2. Suppose that the country of interest is small, so that Y* is not a function of Y.
3. π^e is notation for expected π, not π raised to the power of e.
4. Let $latex \frac{dI}{d(i – \pi^e)}$ and $latex \frac{dI}{Y_{-1}} = \frac{dI}{dY}$.
5. Let $latex \sigma(i – i*)’ = \frac{d\sigma}{dr}i – \frac{d\sigma}{dr}i^*$

Thanks to Bryan, Ennio, and Josh for doing most of the work for this problem!

2. Is the following statement true or false, or are you uncertain? Explain.

According to the efficiency wage theory, imposing a minimum wage is good for the economy because it generates some unemployment, and this induces workers to exert more effort to avoid getting fired.

(Practice Final #I.2)

3. Is the following statement true or false, or are you uncertain? Explain.

High real interest rates are good for the economy because with high interest rates, savings is stimulated, and more savings leads to more growth.

(Practice Exam #I.1)

4. Is the following statement true or false, or are you uncertain? Explain.

Only unanticipated changes in the money supply affect output. Anticipated changes have no real effects.

(Practice Exam, #I.3)

5. Let the following diagram be called D1:

Which of the following statements are valid according to the Stiglitz and Weiss model of credit rationing?

(Not from a previous exam)

6. Is the following statement true or false, or are you uncertain? Explain.

A tax cut financed by government borrowing is good for the economy because it would stimulate consumer spending, and hence raise employment and output.

(Practice Exam #I.4)

7. Is the following true or false, or are you uncertain? Explain.

According to the neoclassical model of consumer behavior, if the interest rate is zero, then consumption should be decreasing over time.

Let:

$latex F_1 = \frac{C_{t+1}}{C_{t}} = (\frac{1+r}{1+\rho})^{\frac{1}{\theta}} \\\\ F_2 = \frac{C_{t+1}}{C_{t}} = (\frac{1+r}{1+\rho})^{\frac{1}{\theta}-1}$

(2014 I.1)

8. Is the following question true or false, or are you uncertain?

According to the neoclassical model of consumer behavior, if the rate of time preference is zero, then consumption should NOT be decreasing over time.

Let:

$latex F_1 = \frac{C_{t+1}}{C_{t}} = (\frac{1+r}{1+\rho})^{\frac{1}{\theta}} \\\\ F_2 = \frac{C_{t+1}}{C_{t}} = (\frac{1+r}{1+\rho})^{\frac{1}{\theta}-1}$

(2014 I.2)

9. Is the following statement true or false, or are you uncertain? Explain.

Current income is a very important explanatory variable of current consumption. This is strong evidence against Hall’s hypothesis that consumption should follow a random walk (or that current consumption should be explained by lagged consumption only).

(Practice Exam #I.5)

10. Is the following true or false, or are you uncertain? Explain.

According to the Ricardian Equivalence, an increase in taxes has no effect on the current account.

(Practice Exam #I.6)