Riis a Sariag ia . PoPACE? oo IKE sec -8 Indian Institute of Management Ahmedabad ‘Macroeconomics and Policy (MEP) ~ PGP 1 (2022-23) End-Term Examination Sections (B&D Instructions 1. Itisa closed book/nore examination 2. Use of scientific calculators is allowed No other electronic devices are allowed during the examination. 3. Maximum marks: 70 4 Maximum time allowed is 2.50 hours (150 minutes) 5. Questions are divided imo two parts ~ Part I: Multiple Choice Questions (28 marks - 14 ‘questions, 2 marks each); Part Il: Analytical and Numerical Questions (42 marks). 6. Choose only ONE solution for each Multiple Choice Question. There is no part marking and no negative marking for MCQs. 7. Use of plain papers for rough work is allowed. QL. Suppose that the interest rate in India rises. We expect capital ---— to/from India and the price of Indian Rupee in terms of foreign currencies to -—-, all other things equal a) outflows; fall b) inflows; fall ©) outflows; rise Arinflows; rise 2. fa country nuns a deficit on its current account, to pay fr its imports, it must a) raise taxes» ») print new money- «97S asses to foreigners 4) decrease its exports -v, fe iy Q3. Inthe Solow growth model, if a nation's savings rate decreases, then ®) the long-run income per capita will temporarily inerease leading toa higher standard ot living +) the long-run capital-tabour ratio will permanently increase leading to a higher standard of living. ©) the growth rte ofthe aggregate output temporarily decreases but eventually returns to its long-run trend. > 4) the growth rate of the ag gregate output will permanently decrease leading to a lower standard of living. y- (G4 Inthe neoclassical growth model an increase inthe rate of population growth will 72) se the growth rate of ouput andthe level of ouput pe capt in he steady sate-- fase the growth ate of output but lower he level of output per capita inthe steady tate, 6) lower the grow rate of output bt has no impact on output per capt inthe steady state ‘raise the growth rate of output but has no impact on output pet capita in the steady sate ‘QS. When the nation’s population grows at a constant rat, atthe golden rule steady state “n-+= 26. nominal money supply grows by 6% and real GDP by 4%, then the inflation rate will 4) decrease by 6% minus the percentage change in velocity ») increase by 6% plus the percentage change in velocity ©) increase by 2% minus the percentage change in velocity 79) increase by 2% plus the percentage change in velocity 27, Under a fixed exchange rate regime, ithe country experiences capital inflows, then is centr bbank’s action to maintain the fixed exchange rate: 4) is likely to reduce inflation >) is likely to increase inflation ©) increases the money supply in the economy 4) Both (b) and (c) Page 2 015 fWey ws O<% 0 QS: If wages adjust instantly due to rational expectations of workers, which one should we expect? 8) Output is always atthe full employment level >) Output is below atthe fall employment level ©) Output tends to prow but slower than the wages 4) Output will prow faster than the wages Q°. One ofthe problems that the RBI has when conducting monetary policy is that 4) it cannot influence the market interest rate by its open market operations by it can set the overnight interbank interest rate but cannot influence the benchmark ‘monetary policy rate (repo rate), which is determined by banks x -¢) it can control the supply of high-powered money but cannot always accurately predict the size ofthe money multiplier 4) it can control the size of the money multiplier but cannot always control the amount of high-powered money 10. In an open economy with flexible (rely floating) exchange rate, if a central bank were to set a domestic interest rate target that is different from the sum of the world interest rate and country risk premium, and stick with the target. \ >< 8) much of the economy's instability would be eliminated p ») inflation would no longer bea problem since the central bank would have credibility \Ler"fe economy would quickly get integrated with the world economy 74) the central bank would have to impose restrictions on capital flows-~ QUI. Developed countries that direct their investment cowards physical capital rather than research ‘and development can expect to 4) have a higher level of output in the short run and a higher long-run growth rate ») have a lower level of output in the short run and lower long-run growth rate ¢) have a lower level of output in the short run but a higher long-run growth rate \rhave a higher level of output in the short run but a fower long-run growth rate (212, If there is greater inflation in a foreign country, the domestic country’s real exchange rate a) depreciates Drefpreciates ¢) re-evaluate d) doesn’t changeQ13. If global economic conditions improve, the IS curve will 4) Shift right by Shit left ©) Shift up 4) Shift down, 14. Under the fixed exchange rate regime and Mundell-Fleming model assumptions, A) Monetary Policy is ineffective in boosting output ») Fiscal Policy is ineffective in boosting output ©) Both monetary and fiscal policies are ineffective in boosting output 4) Both monetary and fiscal policies are effective in boosting output Part TI: Analytical and Numerical Questions (10 marks] ‘QI. Using the IS-LM-BP Mundell Fleming model, show the effect of fiscal expansion by instead government expenditures ina fixed exchange rae sytem inthe shorLrun and inthe Jong run. the IS-LM and AD-AS planes, = (3#24245-12 marks} Q2. Consider an economy where output is produced by two inputs: labour and capital. Suppose that the capital share of output is 0.40. More specifically, assume that aggregate production follows this function: Y= A KL, we 2) If labour growth rate is 0.8% and capital growth rate ig 1.2%, Find the technical growth progress if the output growth is 2%, ) Now assume thatthe rate of technical progress is doubled (that isthe only change compared to part a). What is the new output growth rate?- ne (ste he rodsionfneton in perworkr ems, \= A 4) Assume that in the steady stat technology is constant while the population growth rate is ~ 2 percent. The savings rate is given by s= 0.40 and the depreciation rate is only 8 percent, Find the steady-state level of eapital-> 5 ays bee /s Page 4 0f5 WY Fane + let = 3{6618-20 marks} Q3. Consider an open economy Wimwiland with a fixed r ty ‘imwiland with a fixed exchange rate and perfect capital mobili described by the following equations’ oe ean Consunprion C= 800 + 0.8(¥ = TA) 2 Investment = 2000 -100r Net exports NX-= 700 + 500e -0.2Y Government purchases G=0 Taxes TA=0 & Real money demand function m= L(r,X) = 100-4 Price level P=I a Pe World interest rate r= 20 (ic. 20%) Seer ¢ isthe real exchange rate, Note that a higher value ofe indicates depreciation isthe world interest rate. Assume there is no country rsk premium forthe Wimwiland economy. 4) Derive the IS and LM equations for this economy with nominal money supply Ms. Caleulate r in terms of ¥ and e for the IS curve, and r in terms of Y and Ms for the LM curve. ») At what level should the central bank set the nominal money supply (Ms) to achieve the fixed exchange rate target of e = 1? Based on your solution, show the IS and LM curves (sin terms of Y) and the IS-LM-BP equilibrium numerically for rand Y and graphically. ©) Suppose the central bank plans to devalue the real exchange rate by 20 percent (to ¢ = 1.2) in order to improve Wimwiland’s export competitiveness. How would the central bank achieve this target? Show the solution both numerically and graphically. Compare the new 1S-LM-BP equilibrium and changes in the relevant curve(s) with part (b.