Université d'Orléans - Année universitaire 2014-2015 Faculté de Droit, Économie et Gestion Licence Economie Gestion (Voie Européenne) – semestre 2 Macroeconomics April, 21st 2015

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 evolution of the Economy and to describe the effects of economic policies. By simplification, the economy could be characterized by the following characteristics (in billions). C = 50 + 0.8 Yd I = 100-2000i G = 1000 T = 900 Ms=1100 Md=0.2 Y - 8000i + 1050

1) Comment each equation. (1 point) 2) Is the consumption function a Keynesian consumption function? Why? (1 point) 3) Show graphically the equilibrium on the market for goods and services and explain the building of the IS curve. (1.5 points) 4) Show graphically the equilibrium on financial markets and explain the building of the LM curve. (1.5 points) 5) Build the IS and LM relation (1.5 points) 6) Give the value of the multiplier. Explain and comment (1 point) 7) Solve for equilibrium output and interest rate (1 point). 8) 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) 9) The government wants to reduce public deficit. They can increase taxes or reduce public spending. Describe the economic effect (on the GDP and the interest rate) of both policies. (1. 5 points) 10) Show the effects of a tax increase and a public spending decrease using the IS-LM graph. (1 point) 11) Which policy will be less costly in terms of GDP? Explain why. (1.5 points)

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12) The government decides to reduce public spending. G is now equal to 900. Build the IS and LM relations and find the new equilibrium output and interest rate. (1,5 points). 13) According to the Okun Law, what will be the impact on employment and unemployment? Explain shortly. (1 point). 14) The central bank is concerned by the level of unemployment. [In this example, full employment is one of the goals of the central bank]. They are ready to implement a policy aiming at reducing unemployment. What kind of policy she can do. Explain the economic effects. Show the effect using the IS-LM graph. (1,5 points) 15) Ms is now equal to 1200. Find the new IS-LM relation and the new equilibrium output and interest rate. (1,5 points). 16) Consumers are becoming more optimistic. How can you model such change? Explain the effect of such change and show it graphically using the IS-LM graph (1,5 points)

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