Université d'Orléans - Année universitaire 2013-2014 Faculté de Droit, Économie et Gestion Licence Economie Gestion (Voie Européenne) – semestre 2 Macroeconomics 15th April 2014

Exam #2

Aucun document autorisé Calculatrice autorisée After your studies in economics at the University of Orléans, you become chief economist for a bank. You role is to analyze the evolutions of the French economy between 2007 and 2012. The following figure gives the evolution of the GDP between 2006 and 2012.

French GDP Constant $ (2005) in billions 2260 2240

GDP

2220 2200 2180 2160 2140 2120 2006

2007

2008

2009

2010

2011

2012

Year Source: World Development Indicators (World Bank)

Part A. The French Economy in 2007 (7 points) By simplification, the French economy in 2007 could be characterized by the following characteristics (in billions). C = 100 + 0.8 Yd I = 100-2000i G = 1000 T = 900 Ms=1000 Md=0.1 Y - 3000i + 800

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1) Comment each equation. (1 point) 2) Show graphically the equilibrium on the market for goods and services and explain the building of the IS curve. (1.5 points)

3) Show graphically the equilibrium on financial markets and explain the building of the LM curve. (1.5 points) 4) Build the IS and LM relation (1.5 points) 5) Solve for equilibrium output and interest rate (1 point). 6) We know that the public deficit is equal to (G-T). What is the level of public deficit in percentage of GDP (0.5 points)

Part B. The financial crisis (2007-2008) (3.5 points) After the collapse of Lehman Brothers in September 2008, the financial crisis exploded in the US. Private investors reduced their expectations all over the World. We will model this effect through a reduction of autonomous investments. The new investment function is now the following: I = 60-2000i

7) Before making any calculation, explain the effect of such change. Show graphically the dynamic in the IS-LM graph. Is it what was observed in France in 2008-2009? (1.5 points)

8) Build the new IS and LM relation and find the new equilibrium output and interest rate. (1.5 points).

9) What is the new level of public deficit (in % of the GDP). Comment. (0.5 point). Part C. Fiscal expansion (2008-2009) (4.5 points) In 2008-2009, most industrialized countries decided to relaunch the economy using the fiscal policy. France has decreased some taxes and increase the level of public spending. The new level of G and T are now equal to: G=1050 and T=850

10) Theoretically, between tax cuts and government spending increases, what will be the more efficient tool in terms of GDP ? Explain why. (1 point) 11) Before making any calculation, explain what would be the effect of such fiscal expansion. Show graphically the effects on the IS-LM graph. (1.5 points) 12) Find the new IS and LM relations and find the new equilibrium output and interest rate. Comment. (1.5 points) 13) What is the new level of public deficit (in % of GDP). Comment. (0 .5 pointw)

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Part D. Fiscal consolidation (2010-2012) (2 points) 14) The government is concerned by the level of public deficit and want to reduce it. In order to minimize the consequences on GDP, what the government should do ? Explain (0.5 points). The government decides to raise taxes. T is now equal to 950. 15) Build the new IS and LM relations. Find the new equilibrium output and interest rate. Comment. (1 point). 16) Calculate the new level of public deficit. Comment. (0.5 points). Part E. Monetary expansion (3 points) 17) The European Central Bank decides to increase the money supply. Before making any calculation, describe the effects of such policy. Show the effects in the IS-LM graph. (1.5 points) We now have : Ms=1025. 18) Build the new IS and LM relations. Find the new equilibrium output and interest rate. Calculate the new level of public deficit (in % of GDP). Comment. (1.5 points). Bonus (2 points) In the situation described in question 18, discuss the efficiency of monetary and fiscal policies. Use IS-LM graphs to illustrate.

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