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FINAL EXAMINATION (OPEN-BOOK)

SEMESTER I, ACADEMIC SESSION 2021-2022

MASTER’S DEGREE / Ph.D

EPPE6024

MACROECONOMICS

INSTRUCTION: ANSWER ALL QUESTIONS.

Question 1

(a)	Using a diagram, analyze the effect of an increase in the expectation of appreciation in foreign currency among traders on the Uncovered Interest Parity (UIP) condition and UIP curve. [5 marks]

(b)

Because of the movement control orders (MCOs) implemented to stop the rise in COVID- 19 cases in many countries, labor productivity has decreased. Using the AD-ERU and the WS-PS diagrams and assuming the real wage is W/P, explain the effects of the fall in labor productivity on the real wage, the real

exchange rate and equilibrium unemployment of an economy. [5 marks]

(c) Due to emergence of COVID- 19 cases because of the Omicron variant, a small open economy which practices a flexible exchange rate system has experienced a permanent negative aggregate demand shock due to a drastic decrease in investment.

(i) Based on this situation and assuming only domestic price is relevant, draw the PC-MR, the IS-RX, and the AD-ERU diagrams to explain the path back to medium-run equilibrium (MRE). [7 marks]

(ii) Explain why RX curve is flatter than the IS curve. [3 marks]

Question 2

(a) Using appropriate diagrams, explain the derivation of BT curve. [7 marks]

(b) Using AD-BT-ERU and WS-PS diagrams, analyze the following shocks to the

equilibrium employment, real exchange rate, trade balance, and real wage (W/Pc).

(i) A rise in the tax wedge. [7 marks]

(ii) A decline in autonomous investment. [6 marks]

Question 3

(a) Explain parameters that aﬀect the slope of the MR and PC curves. [6 marks]

(b) Using IS−PC−MR diagram, explain how the initial interest rate response to an

inﬂation shock varies with the slope of the MR. [6 marks]

(c) Due to a rise in uncertainty because of COVID- 19 pandemics, an economy which has already been in zero-lower bound situation, suffers a drastic decline in autonomous consumption and investments.

Using the 3-equation model of IS-PC-PR, discuss the effects of this phenomenon and explain how the economy can achieve its equilibrium. [8 marks]

Question 4

(a)

(i)

A new government is trying to achieve an output level which is higher than output at the equilibrium level. Using the 3-equation model of IS- PC-PR, discuss the effect of this ambition on the inflation and output at

the equilibrium level. [8 marks]

(b) (i) Using the debt dynamics equation, explain factors to be considered in addressing the high level of public debt. [6 marks]

(ii)

Suppose that the federal government has experienced a persistence primary budget deficit, and the economic growth rate is higher than the real interest rates. Using a graphical analysis of debt dynamics, explain the distinctive effects of the current situation on the existing debt to GDP

ratio (b) along the phase line. [6 marks]

Question 5

(a) During COVID- 19 pandemics, the government has implemented many

programs to assist the affected citizens. Using the Beveridge curve and WS-PS model, explain the impact of an extension of unemployment benefit duration during a downturn on economy’s vacancy and unemployment rate. [10 marks]

(b) (i) Discuss why a firm pays higher wages to its workers relative to the other similar firms in the market. [4 marks]

(ii)	Using the efficiency wages WS-PS diagram, explain the effect on the unemployment when a firm employs a new technology that improves monitoring of the workers. [6 marks]