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  Macroeconomics   Academic  Year  2012/2013,  Block  3  

Uniseminar –  Macroeconomics  

Welcome to  Uniseminar!  


I n t r o d u c t i o n

Uniseminar offers   E x a m   P r e p a r a t i o n   S e m i n a r s ,   S u m m a r y   S c r i p t s   a n d   L e a r n i n g   C a r d s   for  students  of  the  Maastricht  University.  It  is  our  goal  to  op-­‐

timally prepare  you  for  your  exams  and  to  make  your  own  exam  preparation  as  

efficient as  possible.  In  order  to  achieve  this  goal,  we  have  developed  a  system  of  

seminars in  combination  with  an  extensive  summary  script,  which  is  proven  for   several  years  by  now.  

In university   it   is   often   the   case   that   there   is   a   lot   of   material   available   for   a   course  and  that  the  importance  of  this  material  is  hard  to  evaluate.  Since  we,  as  

students, have  made  this  experience  as  well,  you  are  provided  with  a  Uniseminar   Summary   Script   of   the   corresponding   course.   This   folder   contains   all   exam-­‐ relevant  material  and  it  gives  you  a  good  summary  of  all  course  topics.  The  con-­‐

tent of   the   folder   is   created   by   experienced   Master   or   PhD   students,   who   have   taught  this  course  already  several  times.  As  a  consequence,  it  is  possible  for  you   to   concentrate   on   the   actual   exam   preparation,   rather   than   spending   hours   searching  and  printing  the  right  material.  

At the   end   of   week   6   of   your   block,   normally   during   the   weekend,   our   E x a m  

P r e p a r a t i o n S e m i n a r s   take   place.   These   seminars   are   taught   by   above-­‐

average students,   who   have   already   mastered   their   studies   at   the   Maastricht   University  and  have  a  great  deal  of  experience  in  tutoring.  Since  they  have  stud-­‐

ied and   taught   at   the   Maastricht   University   they   know   exactly   where   potential   problems  may  lie  and  are  therefore  able  to  optimally  teach  you  the  whole  theory  

of the  course  and  practice  perfectly  tailored  examples  with  you.  Furthermore  you   can  bring  in  your  own  questions  during  the  seminar  and  discuss  individual  prob-­‐ lems  during  the  breaks.  

You are   able   to   pick   up   your   S u m m a r y   S c r i p t   a n d   L e a r n i n g   C a r d s   in   ad-­‐

vance of  the  Seminar  in  order  to  already  start  preparing  so  that  you  can  discover  

your own  difficulties  early  enough.  Later  in  the  Seminar  you  will  then  know  what  



           Uniseminar  –  Macroeconomics  

your weaknesses  are  and  be  able  to  pay  special  attention  to  these  sections  or  ask  

questions about   it.   Our   Summary   Script   and   Learning   Cards   are   updated   every  

year according  to  the  current  course’s  content  and  we  are  always  trying  to  opti-­‐

mize the  folder  as  much  as  possible.    

A b o u t  U U s  

Uniseminar was  by  two  students  at  the  University  of  St.  Gallen  in  order  to  make   Exam  Preparation  more  efficient  and  coherent.  Since  2005  we  have  expanded  our   vision  and  are  now  offering  seminars  and  material  for  an  efficient  exam  prepara-­‐ tion  in  Switzerland,  the  Netherlands,  Italy  and  Germany.  

Thanks to  this  longstanding  experience,  we  were  able  to  build  up  a  team  of  highly  

qualified tutors   and   editors   and   are   therefore   able   to   guarantee   high   quality   of   exam  preparation.  

The team  of  Uniseminar  is  grown  strongly  over  the  years  and  comprehends  sev-­‐

eral mathematicians,  statisticians  and  economists,  who  all  bring  a  great  didactical   experience.  All  tutors  of  Uniseminar  have  been  teaching  their  field  for  years  and  

know exactly  what  is  important  in  order  to  optimally  prepare  and  pass  the  exam.    

Uniseminar –  Macroeconomics  

S u m m a r y  SS c r i p t  


This aim  of  this  folder  is  to  support  you  with  your  exam  preparation  for  ‘Macroe-­‐

conomics’ as   much   as   possible.   Usually   it   consists   of   five   different   sections.   As   follows,  a  short  overview  of  the  content  of  this  folder:  

1 . T h e o r y : The  Theory  Script  summarizes  the  whole  theory  of  the  course  in  

a simple  and  understandable  way.  Concepts  are  explained  with  the  help  of   demonstrative  examples.  It  is  structured  according  to  the  seven  weeks  of   the  course  and  is  one  of  the  most  important  parts  of  your  exam  prepara-­‐ tion.      

2. E x a m s : In  this  part  you  will  find  old  exams  of  the  Maastricht  University,   with   extensive   answer   keys   by   Uniseminar.   During   the   seminar   you   will   then  receive  a  further  practice  exam.  

3. E x t r a s : In  the  Extras  part,  you  will  find  a  formula  sheet  as  well  as  a  glos-­‐ sary  that  contains  all  the  important  definitions  you  should  know.  

4. S e m i n a r :  In  this  part,  we  have  provided  you  with  some  notepaper  so  that   you   can   take   notes   during   the   seminar.   Furthermore   you   will   receive   a  

fourth practice  exam  during  the  seminar,  which  you  can  file  in  here.  In  case   you  have  not  subscribed  for  the  Macroeconomics  seminar  yet,  you  can  do   so  on  our  website  -­‐  -­‐  at  any  time.  


M a c r o e c o n o m i c s


           Uniseminar  –  Macroeconomics  

The Macroeconomics  exam  you  are  facing  will  consist  of  two  parts:  a  closed  part   and  an  open  part.  The  closed  part  consists  of  70  multiple-­‐choice  questions.  The   open   part   consists   of   several   questions,   where   you   have   to   apply   the   theory  

you’ve learned  to  actual  problems.  These  actual  problems  are  similar  to  the  ones,  

which were  discussed  during  the  analytical  skills  training.  The  closed  part  counts   for   70   points,   the   open   for   30.   In   Macroeconomics   it   is   crucial   that   you   under-­‐

stand the  theory  behind  the  models.  Therefore  you  should  first  of  all  focus  on  the   understanding  of  the  theory,  before  starting  with  calculations.    

H i n t s  aa n d    T T r i c k s  

Here are  some  tips  that  may  be  helpful  for  your  exam  preparation.  Many  students   make  typical  errors  when  preparing  for  their  first  exams  at  university.  We  there-­‐

fore want  to  help  you  to  avoid  these  mistakes,  so  that  you  can  focus  on  the  essen-­‐ tial  stuff,  rather  than  wasting  your  time  with  a  preparation  into  the  wrong  direc-­‐ tion!  

H o w  d d o    II    o o p t i m a l l y    p p r e p a r e    ff o r    aa n    ee x a m ?  

The exams  of  the  university  are  created  in  such  a  way  that  every  student  can  pass  them  

with an   average   preparation   time.   Since   there   is   a   lot   of   content   and   time   is   limited,  

planning is  the  basis  of  your  success.  You  don’t  need  to  be  a  genius  to  pass  the  exam,  but   you  should  still  take  care  of  a  few  things  and  try  to  develop  a  certain  discipline  in  the   following  weeks.  The  subsequent  hints  may  be  helpful  for  you:    

 T a k e  y y o u r    tt i m e !  

It is   totally   normal   that   you   will   be   slower   in   solving   exercises   in   the   be-­‐

ginning. You  can  be  sure  that  you  will  improve  your  efficiency  and  velocity   after  some  practice,  however  you  should  start  preparing  for  the  exam  early  








  Macroeconomics   Academic  Year  2012/2013,  Block  3  


T h e o r y


           Uniseminar  –  Macroeconomics  

The Theory   Script   summarizes   the   whole   theory   of   the   course   in   a   simple   and  

understandable way.   Concepts   are   explained   with   the   help   of   demonstrative   examples.  It  is  structured  according  to  the  seven  weeks  of  the  course  and  is  one   of  the  most  important  parts  of  your  exam  preparation.  Although  practice  is  very  

important, it  is  even  more  crucial  to  understand  the  basic  concepts  of  the  course  

in order  to  be  able  to  calculate  and  understand  all  different  kinds  of  exercises  and   exam  questions.    

T a b l e  o o f    C C o n t e n t s     1   T h e    ss h o r t -­‐-­‐rr u n  

1.1  The  goods  market  

1.2  The  money  market  




1.3  The  IS-­‐LM  model  


2 T h e    m m e d i u m -­‐-­‐rr u n  

1 2

2.1  Wage  setting,  price  setting  and  unemployment  


2.3  The  Philip’s  curve  and  Okun’s  law  


2.2  The  AS-­‐AD  model    

3 T h e    ll o n g -­‐-­‐rr u n  

3.1  Solow  Economy    

4 E c o n o m i c    P P o l i c y  


2 7 27  

3 3


2 Â


T h e   m m e d i u m -­�-­�rr u n  



                Uniseminar  –  Macroeconomics  

2 . 1  W a g e    ss e t t i n g ,    p p r i c e    ss e t t i n g    aa n d    u u n e m p l o y m e n t :    

T h e   w w a g e    ss e t t i n g    ee q u a t i o n :  

đ?‘žđ?‘ž = đ?‘ˇđ?‘ˇđ?’†đ?’† đ?’‡đ?’‡(đ?’–đ?’–⊖ , đ?’›đ?’›âŠ• ) Â

The  wage  demanded  by  the  workers  will  depend  on  the  expected  price  level,  the  

unemployment  rate   and   a   catchall   variable   called   z.   The   role   of   the   price   level   should  be  obvious  because  no  one  cares  about  the  nominal  value  of  his  wage  but  

of  the  value  of  his  wage  in  term  of  goods.  If  wage  setters  expect  a  strong  increase  

in  the  price  of  goods  they  will  also  bargain  a  higher  wage  to  keep  the  amount  of  

goods  they  are  able  to  buy  constant.  In  this  case  it  is  not  the  real  price  level  but   the   expected   price   level   instead   because   it   is   assumed   that   wages   are   fixed   in   advance   and   therefore   wage   setters   need   to   include   their   expectations   of   the  

future  price  level.  The  other  part  of  the  wage  is  a  function  of  the  unemployment   rate  and  the  catchall  variable.  The  unemployment  rate  is  negatively  related  to  the   wage  because  higher  unemployment  means  that  many  workers  are  looking  for  a  

job.  Such  competition  for  jobs  decreases  the  wages.  On  the  other  hand  if  there  are   only   very   few   unemployed   people   firms   may   want   to   hold   their   employees  

because  it  will  be  hard  for  them  to  find  replacement.  This  will  therefore  increase  

the  wage.  The  last  term,  the  catchall  variable  is  defined  to  be  positively  related  to  

wage.  It  measures  all  other  terms,  which  will  be  important  in  the  determination   of   wages,   e.g.   unemployment   benefits.   Obviously   unemployment   benefits   will   tend   to   increase   the   reservation   wage   (the   minimum   wage   necessary   to   make   someone  take  a  job  instead  of  not  working)  and  thereby  also  the  general  wage.  


T h e   p p r i c e    ss e t t i n g    ee q u a t i o n :  

đ?‘ˇđ?‘ˇ = đ?&#x;?đ?&#x;? + đ?? đ?? đ?‘žđ?‘ž Â

12 Â

Uniseminar  –  Macroeconomics  






This  equation  defines  how  firms  set  the  price  of  their  products.  It  depends  on  two  

things:  The   price   of   the   inputs   of   the   firm   and   the   mark-­�up   of   the   firm.   For  

simplification  a   one   input   production   function   is   assumed,   which   means   that  

production  only   relies   on   labour.   Hence   capital   or   other   products   inputs   are  

ignored.  Additionally   it   is   assumed,   that   one   worker   produces   exactly   one  

product,  so   that   the   wage   would   be   equal   to   the   price   if   the   mark-­�up   was   zero.   Obviously  prices  of  the  product  and  the  price  of  the  only  input,  namely  the  wage,  

are  positively  correlated.  Hence  a  wage  increase  increases  the  costs  of  the  firms  

and  is   then   followed   by   an   increase   in   the   price   of   the   products   of   the   firms.   Finally,   the   mark-­�up   term   puts   a   wedge   between   the   costs   of   the   firms   and   the   price  they  ask.  In  a  perfectly  competitive  market,  this  mark-­�up  would  be  equal  to   zero,  however,  as  soon  as  competition  decreases  firms  may  be  able  to  ask  a  mark-­� up  and  thereby  make  a  profit.      

E q u i l i b r i u m   rr e a l    w w a g e    aa n d    u u n e m p l o y m e n t :  

To  plot  the  wage  and  price  setting  equations  in  a  space  with  unemployment  on  

the  x-­�axis   and   the   real   wage   W/P   on   the   y-­�axis   a   bit   of   rewriting   is   necessary.   Assuming  that  wage  setters  hit  the  target  and  expect  the  price  level  correctly  the   wage  setting  equation  can  be  rewritten  as  follows:   �� = ����(��⊖ , ��⊕ )  



|   Dividing  both  sides  by  P   �� = ��(��⊖ , ��⊕ )   ��

This  expression  gives  us  the  real  wage  as  a  function  of  u  and  z.  Without  knowing   the   exact   function   it   is   clear   that   an   increase   in   u   will   lead   to   a   decrease   in   the  

real  wage  since  the  two  are  negatively  related.  The  following  steps  are  necessary   to  rewrite  the  price  setting  equation  also  in  terms  of  the  real  wage:   đ?‘ˇđ?‘ˇ = đ?&#x;?đ?&#x;? + đ?? đ?? đ?‘žđ?‘ž     đ?‘žđ?‘ž đ?‘ˇđ?‘ˇ



đ?&#x;?đ?&#x;?đ?? đ??




|   Dividing  both  sides  by  W  and  taking  the  inverse  

13 Â





                Uniseminar  –  Macroeconomics  

By  checking   the   rewritten   form   of   the  

price  setting  equation  we  realize  that  the  

real  wage  is  always  equal  to  one  divided   by   one   plus   the   mark-­�up.   This   equation   does   not   depend   on   unemployment.  

Graphing  both   lines   allows   determining  

the  real   wage   and   the   unemployment  

rate.  As   derived   above,   there   is   a  

downwards-­�sloping  wage   setting   graph,   showing   that   an   increase   in  

unemployment  will  decrease  the  real  wage  earned  and  a  horizontal  price  setting   curve.   This   curve   is   horizontal   because   the   price   setting   decision   of   firms   does  

not  depend  on  unemployment  and  therefore  the  real  wage  in  this  equation  is  the   same   for   all   possible   unemployment   rates.   Recap   the   assumption   that   wage   setter  expected  the  actual  price  level  and  that  therefore  the  graph  shows  the  real   wage  and  unemployment  in  this  specific  situation  where  P  equals  P  .    

T h e   n n a t u r a l    rr a t e    o o f    u u n e m p l o y m e n t    aa n d    ee x p e c t a t i o n s :  

The  concept  of  the  natural  rate  of  unemployment  is  pretty  logical.  As  seen  above,  

whenever  wage   setters   expect   a   price   level,   which   is   equal   to   the   actual   price  

level,  then  the  model  gives  a  level  of  unemployment  at  the  crossing  point  of  the  

two  lines.  This  unemployment  is  referred  to   as   the   natural   rate   of   unemployment   or   short   �� .   Hence,   whenever   the   price   level  

and  the   expected   price   level   are   equal   unemployment   is   equal   to   its   natural   rate.  

The  situation  is  different  if  the  expectations   of  the  wage  setters  are  false.  Recap  that  the   wage  setters  choose  the  expected  price  level  

in  advance  when  they  fix  their  wage  contracts.  The  following  graph  displays  the   situation   for   a   case   in   which   the   expected   price   level   has   been   too   high   and   is   14  

Uniseminar  –  Macroeconomics  

3 Â

T h e   ll o n g -­�-­�rr u n  






3 . 1  S o l o w    E E c o n o m y   T h e    m m o d e l :  

The  Solow  model  is  a  model,  which  focuses  on  economic  growth  in  the  long  run.  

In  the   previous   analysis   of   the   short   and   the   medium-­�run   it   was   shown   that  

economic  policies   are   able   to   stimulate   output   for   a   short   time,   but   that   in   the  

medium-­�run  output  will  be  back  at  its  natural  level.  These  models  are  suitable  for   the   discussion   of   booms   and   recessions   but   they   do   not   allow   for   sustainable   economic  growth.  The  Solow  model  will  allow  for  this  type  of  economic  growth.    

At  the   core   of   the   model   is   the   production   function.   Output   depends   on   the  

amount  of   capital   K,   the   amount   of   workers   N   and   the   state   of   technology   A.  

Technology  improves   the   performance   of   workers   and   is   therefore   multiplied   with  labour.  This  term  is  then  called  effective  labour  or  effective  workers.  

đ?‘Œđ?‘Œ = đ?‘“đ?‘“(đ??žđ??ž, đ??´đ??´đ??´đ??´) Â

worker Â



|  dividing   both   sides   by   AN   to   get   output   per   effective   đ??žđ??ž đ?‘Œđ?‘Œ = đ?‘“đ?‘“( , 1)   đ??´đ??´đ??´đ??´ đ??´đ??´đ??´đ??´

It  is   simply   possible   to   drop   the   one   at   the   end   because   it   cannot   change   and   therefore  does  not  change  the  results  either.    

The  next  step  is  to  think  how  the  capital  stock  of  an  economy  can  change.  Capital   is  the  result  of  investment.  If  a  company  invests  in  new  machines  or  a  new  plant   it  increases  its  capital  stock.  Therefore  the  new  capital  that  is  accumulated  each   year  equals  the  amount  of  investment.  However,  investment  does  not  come  from  

nowhere.  Banks   finance   the   investments   of   companies,   but   also   banks   cannot  

simply  create  money  and  therefore  the  amount  of  investments  (what  banks  lend   to   companies)   needs   to   equal   the   amount   of   savings   (what   consumers   lend   to   banks).  

đ??źđ??ź = đ?‘†đ?‘†  27  





                Uniseminar  –  Macroeconomics  

Individuals  face   two   possibilities   what   they   can   do   with   their   money.   They   can  

either  spend  it  on  consumption  of  save  it.  Therefore  the  amount  of  savings  equals   total   income   times   the   savings   rate.   Be   sure   that   the   savings   rate   is   between   0   and  1  and  that  the  consumption  share  equals  1-­â€?s.   đ??źđ??ź = đ?‘ đ?‘ đ?‘ đ?‘     



|  plugging  in  the  production  function  for  Y   đ??źđ??ź = đ?‘ đ?‘ Ă—đ?‘“đ?‘“(

đ??žđ??ž ) Â đ??´đ??´đ??´đ??´

The  above   is   true   for   the   accumulation   of   capital,   however,   capital   also   depreciates.   Think   of   an   old   machine   in   a   factory.   At   some   point   in   time   this  

machine  is   too   old   to   produce   output.   This   is   exactly   what   happens   to   the   total   capital  stock,  it  depreciates.  Assuming  a  constant  rate  of  depreciation  equal  to   �� ,  

the  change  in  capital  is  then  equal  to  the  accumulation  of  new  capital  minus  the  

depreciation  of  old  capital.  

∆đ?‘˛đ?‘˛ = đ?’”đ?’”Ă—đ?’‡đ?’‡ đ?‘˛đ?‘˛, đ?‘¨đ?‘¨đ?‘¨đ?‘¨ − đ?œšđ?œšđ?œšđ?œš Â

This  gives  an  expression  for  the  change  in  capital,  but  the  model  is  built  up  per   effective  worker  and  therefore  it  is  necessary  to  rewrite  the  equation  a  bit  


đ?‘˛đ?‘˛ đ?‘˛đ?‘˛ đ?‘˛đ?‘˛ = đ?’”đ?’”Ă—đ?’‡đ?’‡ − đ?œšđ?œš + đ?’ˆđ?’ˆđ?‘ľđ?‘ľ + đ?’ˆđ?’ˆđ?‘¨đ?‘¨  đ?‘¨đ?‘¨đ?‘¨đ?‘¨ đ?‘¨đ?‘¨đ?‘¨đ?‘¨ đ?‘¨đ?‘¨đ?‘¨đ?‘¨

The  derivations   needed   to   get   to   this   are   not   included   in   this   block.   Therefore  

make  only   sure   to   understand   this   result   intuitively.   The   change   in   capital   per   effective  worker  equals  investment  in  capital  per  effective  worker  (note  that  the  

production  function  is  now  also  in  terms  of  effective  labour)  minus  depreciation,  

population  growth   and   technology   growth.   Especially   the   changes   in   the   last   term   need   an   explanation.   The   depreciation   term   has   the   same   logic   as   before,  

capital  depreciates  at  a  constant  rate  ��  and  this  decreases  both  capital  and  capital  

per  effective   worker.   However,   let’s   think   about   population   and   technology  

growth  for   a   moment.   Both   increase   the   amount   of   effective   workers   and   therefore   capital   per   effective   worker   would   decrease   since   the   denominator  

increased.  In  order  to  stay  constant  capital  per  effective  worker  has  to  increase   28  

Uniseminar  –  Macroeconomics  






by  the  same  proportion  as  population  and  technology  to  make  up  for  this.  Hence  

��  and   ��   appear   in   the   equation   with   a   negative   sign.   The   first   term   of   the  

equation  is   called   actual   investment   because   it   shows   how   much   is   actually   invested   to   accumulate   capital.   The   second   term   �� + �� + ��

 is   called   break-­�

even  investment   because   it   shows   how   much   needs   to   be   invested   in   order   to   hold  capital  per  effective  worker  constant.  Whenever  actual  investment  is  larger  

than  break-­�even  investment  the  change  in  capital  per  effective  worker  is  positive  

and  therefore  capital  per  effective  worker  increases.  If  break-­�even  investment  is   larger   than   actual   investment,   then   we   find   that   capital   per   effective   worker  

decreases. Â

In  order   for   the   economy   to   come   to   a   halt   the   change   in   capital   per   effective  

worker  needs  to  be  equal  to  zero.  If  capital  per  effective  worker  does  not  change  

anymore  output   per   effective   worker   is   also   constant   since   it   only   depends   on   capital   per   effective   worker.   This   situation   is   called   the   steady   state   in   which   it   always  holds  that:  

đ?‘˛đ?‘˛ đ?‘˛đ?‘˛ đ?’”đ?’”Ă—đ?’‡đ?’‡ = đ?œšđ?œš + đ?’ˆđ?’ˆđ?‘ľđ?‘ľ + đ?’ˆđ?’ˆđ?‘¨đ?‘¨  đ?‘¨đ?‘¨đ?‘¨đ?‘¨ đ?‘¨đ?‘¨đ?‘¨đ?‘¨

How  the   steady   state   is   reached   becomes   more   intuitive   if   displayed   in   a   graph.   Whenever   the   economy   is   in   a   situation  

beneath  its   steady   state   the   actual   investment   line   is   higher   than   the   break-­�

even  investment   line.   Therefore   capital  

per  effective   worker   will   increase   until   the   economy   reaches   its   steady   state.  

Whenever  the   economy   is   above   its  

steady  state,   break-­�even   investment   is  

larger  and  therefore  capital  per  effective  worker  will  decrease  until  the  economy  

is  back   to   its   steady   state.   This   Solow   model   with   technology   is   a   more   general   29  





                Uniseminar  –  Macroeconomics  

form  of   the   classic   Solow   model   without   technology   growth.   Whenever   we   set   technology  level  A  equal  to  one  and  its  growth  rate  to  zero  we  get  the  following   expression:  


đ??žđ??ž đ??žđ??ž = đ?‘ đ?‘ Ă—đ?‘“đ?‘“ đ?‘ đ?‘ đ?‘ đ?‘

�� + ��

đ??žđ??ž Â đ?‘ đ?‘

This  is   exactly   the   same   what   Blanchard   gets   in   chapter   10   and   11   if   the   assumption  of  no  population  growths  is  also  included  which  sets  ��  equal  to  zero.  

Therefore  the   classical   Solow   model   is   a   special   case   of   the   Solow   model   including  technological  growth.  

Additionally  please   note   that   the   approach   taken   here   is   a   very   formal   one  

because  it   does   not   classify   the   production   function.   Whatever   production   function  is  used  can  simply  be  plugged  into  the  steady  state  condition  of  break-­�

even  investment   being   equal   to   actual   investment   to   solve   for   the   steady   state   values  of  K/AN  and  Y/AN.5    

Note  that   in   steady   state   output   and   capital   per   effective   worker   are   constant   which   does   not   mean   that   output   and   capital   are   constant.   Output   and   capital  

grow  proportionally   to   the   population   and   technology,   which   is   a   condition   for   output   and   capital   per   effective   worker   to   be   constant.   This   also   implies   that  

output  per   worker   grows   at   a   rate   equal   to   technology   growth.   All   this   can   be   summarized  in  the  following  table:   Variable   K  or  Y  

K/N  or  Y/N   K/AN  or   Y/AN  

Growth  rate  in  SS  (Solow  model  with   Growth  rate  in  SS  (Solow  model  without   A)  

Not  growing  

�� + ��  ��  

A) Â

Not  growing  

đ?‘”đ?‘” Â

Does  not  exists  as  there  is  no  A  

                                                                                                                       5  In  fact  some  assumptions  to  the  returns  of  production  function  are  made.  As  one  can  see  in  the   graph   the   production   function   has   decreasing   returns   to   capital.   This   assumption   is   necessary   because  otherwise  the  accumulation  of  capital  would  lead  to  more  and  more  output  and  there   would  be  no  steady  state.  The  function  of  that  would  not  be  concave  but  convex  and  it  is  easy  to   prove  that  then  there  is  no  steady  state.   30  






  Macroeconomics   Academic  Year  2012/2013,  Block  3    



E x a m s


                                         Uniseminar  –  Macroeconomics  

You should   start   early   with   the   calculation   of   exams,   because   you   need   to   get   a   general   feeling   of   how   the   exams   are   built   up.   You   will   soon   discover   how   the  

exams are  constructed  and  that  there  are  general  tendencies,  which  repeat  from  

exam to   exam.   In   this   part   you   will   find   old   exams   of   the   Maastricht   University  

with extensive   answer   keys   by   Uniseminar.   During   the   seminar   you   will   then   receive  a  further  practice  exam  constructed  by  Uniseminar.  

T a b l e  o o f    C C o n t e n t s    

C l o s e d  P P a r t s   2011/12  Resit  


2011/12 First  Sit  

2010/11 Resit  (incl.  extensive  answer  key  by  Uniseminar)  

2010/11 First  Sit  (incl.  extensive  answer  key  by  Uniseminar)   2009/10  Resit  (incl.  extensive  answer  key  by  Uniseminar)  

2009/10 First  Sit  (incl.  extensive  answer  key  by  Uniseminar)   2008/09  Resit  (incl.  extensive  answer  key  by  Uniseminar)  

2008/09 First  Sit  (incl.  extensive  answer  key  by  Uniseminar)  

O p e n  P P a r t s  

2011/12 Resit  

2 1 7

2011/12 First  Sit   2010/11  Resit  

2010/11 First  Sit   2009/10  Resit  

2009/10 First  Sit   2008/09  Resit  

2008/09 First  Sit  


Uniseminar –  Macroeconomics  

E x t e n s i v e  A A n s w e r    K K e y    ––    1 1 0 / 1 1    rr e s i t  


1 )  – –    D D :  

The value  added  by  a  company  is  the  difference  between  the  price  they  can  sell   the   product  for  and  the  price  they   bought   if   for.   More   economically   this   is   total   sales  minus  costs  of  intermediate  goods.  800 − 100 = 700  

2 )  – –    A A :  

In the  AS-­‐relation  the  price  level  depends  on  output,  expected  prices,  the  mark-­‐ up  term  and  the  catchall  variable  z.    

3 )  – –    B B :  

Demand factors  explain  short-­‐term  fluctuations  in  output  as  supply  needs  more  

time to  adapt.  In  the  medium  run,  however,  supply  factors  determine  output.    

4 )  – –    D D :  

People who   would   like   to   work   but   gave   up   looking   are   called   discouraged   workers.  These  people  are  not  part  of  the  definition  of  the  labour  force.    

5 )  – –    C C :  

The difference   between   nominal   and   real   GDP   is   the   price   level.   As   long   as   the   nominal  increase  is  higher  than  the  real  increase  inflation  must  be  positive.    

6 )  – –    C C :  

An increase   in   the   inventory   is   not   an   investment   as   no   additional   production   possibilities  follow  from  it.      

Exams Â


7 )   – –    B B :  

Uniseminar  –  Macroeconomics  

Disposable  income   is   equal   to   income   minus   taxes   and   it   can   be   used   for   two   things  only,  consumption  or  savings.  Hence  the  sum  of  consumption  and  savings   must  equal  disposable  income.          

8 )   – –    C C :  

Note  that   in   this   case   there   are   no   fixed   taxes,   but   a   tax   rate.   Hence   the   propensity   to   consume   is   not   0.8   but    0.8 ∗ (1 − 0.2) = 0.64.   Therefore   the  

multiplier  is  given  as   9 )    – –    C C :  


= 2.78. Â

The  propensity   to   consume   is   equal   to   the   slope   of   the   ZZ   curve.   Hence   an   increase  in  the  propensity  to  consume  will  make  the  ZZ-­�curve  steeper  which  will  

increase  equilibrium  income.          

1 0 )   – –    B B :  

Another  condition   for   goods   market   equilibrium   is   that   investment   equals  

savings.  The   condition   leads   to   exactly   the   same   findings   as   output   equal   to   demand.  Due  to  this  it  must  hold  that  savings  equal  investments  as  long  as  output  

equals  demand.   Points   B,D   and   E   lie   on   the   45°   degree   line   and   hence   in   those   points  savings  and  investment  are  equal.  Moreover,  point  A  is  above  the  45°  line  

which  means  there  is  more  demand  than  output  and  hence  more  investment  and   consumption   which   hints   to   less   savings.   The   logic   is   reversed   in   point   C   and   hence  in  this  point  savings  exceed  investments.    

1 1 )   – –    B B :        

The  bond   formula   is:   950 1 + đ?‘&#x;đ?‘&#x; = 1000.   Solving   for   đ?‘&#x;đ?‘&#x;   gives:   đ?‘&#x;đ?‘&#x; =

0.053 = 5.3%     



Uniseminar –  Macroeconomics  

1 2 )  – –    B B :  


If money  supply  is  less  than  money  demand  the  interest  rate  will  increase  in  the  

money market   to   bring   down   money   demand.   As   interest   rate   and   bond   prices   are   inversely   related,   an   increase   in   the   interest   rate   will   lead   to   a   decrease   in   bond  prices.    

1 3 )  – –    C C :  

A contractionary  monetary  policy  means  that  the  money  supply  decreases.  Hence   the   central   bank   has   to   sell   bonds.   Moreover,   as   a   result   the   interest   rate   will   increase.    

1 4 )  – –    A A :  

If the  central  bank  sells  bonds,  it  is  able  to  take  the  money  is  sold  it  for  out  of  the  

market. Hence  the  monetary  base  drops.  The  money  multiplier  depends  only  on   the  reserve  ratio  and  the  share  of  money  people  wish  to  hold  as  currency.    

1 5 )  – –    C C :  

An increase   in   the   reserve   ration   means   that   less   money   circulates   in   the  

financial markets   as   bank   need   to   hold   more   money   in   reserves.   Hence   the   money  multiplier  goes  down.          

1 6 )  – –    A A :  

Real refers  to  the  value  of  something  in  terms  of  goods  instead  of  money.  You  can  

find it   by   dividing   the   nominal   value   by   the   price   level,   in   terms   of   the   money   

supply this  gives    .   






  Macroeconomics   Academic  Year  2012/2013,  Block  3  




E x t r a s

Uniseminar –  Macroeconomics  

In this   part   you   find   several   extras   that   will   be   very   helpful   for   your   exam  

preparation. In  this  course  you  will  a  formula  sheet  that  contains  all  the  relevant   formulas  as  well  as  a  glossary  with  all  important  definitions.    

T a b l e  o o f    C C o n t e n t s    

F o r m u l a  SS h e e t  


G l o s s a r y



Uniseminar –  Macroeconomics  

G o o d s  m m a r k e t :  

𝒀𝒀 ≡ 𝑪𝑪 + 𝑰𝑰 + 𝑮𝑮 + [𝑿𝑿 − 𝑰𝑰𝑰𝑰]  



with:               𝑪𝑪 =   𝒄𝒄𝟎𝟎 + 𝒄𝒄𝟏𝟏 ×(𝒀𝒀 − 𝑻𝑻)  

T h e  gg o o d s    m m a r k e t    m m u l t i p l i e r :  

𝟏𝟏 𝟏𝟏 − 𝒄𝒄𝟏𝟏

M o n e y  m m a r k e t :  

𝑴𝑴𝑫𝑫 = $𝒀𝒀×𝑳𝑳(𝒊𝒊⊖ )  


I S -­‐-­‐L L M  m m o d e l :  

𝒀𝒀 = 𝑪𝑪 𝒀𝒀 − 𝑻𝑻 + 𝑰𝑰 𝒀𝒀, 𝒊𝒊 + 𝑮𝑮  

𝑴𝑴𝑺𝑺 = 𝑴𝑴𝑺𝑺                  and                                                    𝒀𝒀𝒀𝒀




For given  C,  T,  I,  G,  L,  M  and  P  this  solves  as  a  system  of  two  equations  with  two   unknowns,  i  and  Y.    

W a g e  aa n d    p p r i c e    ss e t t i n g :  

𝑾𝑾 = 𝑷𝑷𝒆𝒆 𝒇𝒇 𝒖𝒖⊖ , 𝒛𝒛⊕



𝑷𝑷 = 𝟏𝟏 + 𝝁𝝁 𝑾𝑾

T h e  n n a t u r a l    rr a t e s :  

𝑰𝑰𝑰𝑰 𝑷𝑷 = 𝑷𝑷𝒆𝒆  𝒕𝒕𝒕𝒕𝒕𝒕𝒕𝒕  𝒖𝒖 = 𝒖𝒖𝑵𝑵   𝒀𝒀𝒏𝒏 =   (𝟏𝟏 − 𝒖𝒖𝒏𝒏 )𝑳𝑳   𝝁𝝁 + 𝒛𝒛 𝒖𝒖𝒏𝒏 =   𝜶𝜶


Uniseminar –  Macroeconomics  


A d a p t i v e e x p e c t a t i o n s :   a   method   of   tacking   this   year’s   expectation   of   a   certain  variable  equal  to  the  value  of  the  variable  of  last  year.  Mostly  used  when   forming  the  expectations  of  the  price  level  or  inflation    

A g g r e g a t e d e m a n d   r e l a t i o n   ( A D ) :   a  relation  between  output  and  the  price  

level being   derived   from   IS-­‐LM   model   (equivalently   goods   and   money   market).   In  the  relation  output  depends  negatively  on  the  price  level    

A g g r e g a t e s u p p l y   r e l a t i o n   ( A S ) :   again   a   relation   between   output   and   the   price   level   but   being   derived   from   the   price   and   wage   setting   equation   (equivalently  labour  market).  Now  the  price  level  depends  positively  on  output    

A u t o n o m o u s s p e n d i n g :  the  part  of  demand  Z  which  does  not  depend  on  the  

level of  output,  namely  government  spending,  taxes,  investment  and  autonomous   consumption   c₀.   This   equals   the   intercept   of   the   demand   line/   overall   goods   market  relation  line  of  the  Keynesian  cross    

B a l a n c e d g r o w t h   p a t h :   the   growth   path   of   output   and   capital   if   the   Solow  

economy is   in   steady-­‐state.   Output   and   capital   both   grow   at   the   rate   of   technological   progress   plus   population   growth.   Output   per   capita   just   grows   at   the  rate  of  technological  progress  

B o n d : a   financial   assets   which   central   banks   can   buy   to   increase   the   money  

supply and  can  sell  to  decrease  the  money  supply    

B u d g e t  d d e f i c i t :  the  sum  of  interest  payments  plus  government  spending  minus  

tax revenue.  The  budget  deficit  is  equal  to  the  change  in  public  debt    



             Uniseminar  -­‐  Macroeconomics  

C a p i t a l a c c u m u l a t i o n :   the   increase   of   capital   or   capital   per   (effective)  

worker in   the   Solow   model.   In   a   position   beneath   the   steady-­‐state   capital  

accumulation is   positive.   In   a   position   above   the   steady-­‐state   capital   is  

decreasing. The   accumulation   of   capital   is   equal   to   actual   investment   minus   break-­‐even  investment  

C a t c h a l l v a r i a b l e   z :   the   variable   has   a   positive   impact   on   the   wage   and  

measures how   systematic   factures   influence   the   wage.   Large   unemployment   benefits  increase  z  and  thereby  the  wage  workers  ask  for.  

C h e c k a b l e d e p o s i t s :   deposits   which   can   be   checked   immediately   and   which   therefore   require   banks   to   hold   a   certain   percentage   of   their   value   in   cash-­‐ reserves    

C e n t r a l b a n k s :   Institutions   which   decide   about   the   money   supply   within   an   economy  (monetary  policy).  In  almost  all  western  nations  they  are  independent   from  the  government.  Examples  are  the  ECB  and  the  FED  

C o l l e c t i v e  b b a r g a i n i n g :  this  takes  place  if  different  workers  bargain  their  wage   together   as   a   labour   union.   Stronger   unions   lead   to   an   increase   in   the   catchall-­‐

variable z    

C o n s u m e r p r i c e   i n d e x   ( C P I ) :   a   way   to   measure   the   price   level   by   taking   a  

goods-­‐basket consisting   of   every   day   products   consumers   need   and   then   evaluating   the   price   of   the   basket   through   different   years.   Changes   in   the   consumer  price  index  give  therefore  an  approximation  to  inflation    

C o n s u m p t i o n ( C ) :   the   amount   of   the   total   demand   which   is   consumed.  

Consumption consists   of   two   parts,   one   not   depending   and   the   other   one   depending  on  output.  Income  which  is  not  consumed  is  saved