(ECON112) (2010) (F) Final-1406 10221

(ECON112)[2010](f)final~1406^_10221.pdf downloaded by htyuad from http://petergao.net/ustpastpaper/down.php?course=ECON112&id=3 at 2015-10-14 02:52:49. Academic use within HKUST only.
The Hong Kong University of Science and Technology

ECON 112 (L1, L2)
Macroeconomics
Final (Fall 2010) *
*Solution and marking scheme**
Instructor: Prof. Li, Yao Amber
TA: Fok Pik Lin, Astor
December 14, 2010
Part II
SHORT ANSWER QUESTIONS (55/100 marks)
INSTRUCTION:
1. PLEASE PUT YOUR NAME, STUDENT NUMBER AND SECTION
NUMBER IN THE SPACE BELOW.
2. PLEASE ENTER YOUR ANSWERS IN THE INDICATED BLANKS.
3. YOU NEED TO WRITE DOWN NECESSARY STEPS TO DERIVE
RESULTS.
4. THERE ARE 12 PAGES IN PART II.
STUDENT NAME
STUDENT NUMBER
SECTION NUMBER
1
General reminder: when you draw diagrams, remember to label the axes.
Question 1: Long Run Growth Model (17 marks)
Consider an artificial economy, the Republic of Solowakia, which has the following production
function: Yt = At Kt Nt(1-) where <1.
Assume for now that At is constant over time (there is no technological progress in this economy, so
At=A), n is the growth rate of N and n>0, is the rate of depreciation in this economy, and s is the
saving rate.
a). Rewrite the production function as per worker version, using lowercase letter as per worker term.
(1 mark)
[as long as you get the last equation/formula correct, you get full credit.]
b) Write down one single equation/expression which characterizes the feature of Golden Rule
steady state of this economy. (2 marks)
MPK = + n
c) Write down one single equation to characterize the steady state condition for this economy.
For a given saving rate s, a depreciation rate, , and a positive population growth rate n, give
expressions for the steady state values of capital per worker (k*), output per worker (y*),
consumption per worker (c*), and the steady state value of break-even investment, in terms of
those given parameters: s, , n, and A. Draw a diagram that shows all these steady state values
you calculated (Hint: You just need to indicate in the diagram which part or which position
denotes c*, or y*, or k*, or the break-even investment). (5 marks)
answer:
at the steady state, you should write down one equation to characterize it: (1 mark)
s f(k*) = (+ n) k* (1)
or kt+1 - kt = s y - (+ n) k =0 (you must denote it is equal to 0) or any other variant form of the
previous two equations, for example, Kt+1/N - Kt/N = s y - (+ n) k =0
2
c) Consider an open economy with flexible exchange rates. Briefly explain your answers with
necessary words/equations/diagrams (no calculations required). What are the effects of a
monetary contraction abroad on domestic income and domestic net export (NX)? What are the
effects of a fiscal contraction abroad on domestic income and domestic NX? (6 marks)
(You don't have to draw diagrams as long as you show the following effects.)
answer:
in total, explanation counts as 4 marks. For each situation, there are two effects. Each effect
counts as 1 mark.
1. monetary contraction abroad, in foreign country, shifts the LM curve to the left, there are
two effects:
(1) i* increases
IP curve shifts to the left/up/in, E decreases. (0.5 mark)
NX increases based (0.5 mark) on Marshall-Lerner condition. Y increases.
(2) Y* decreases (0.5 mark)
X decreases, NX decreases. (0.5 mark) Y decreases.
Lower foreign output lowers domestic net exports NX, but the depreciation caused by the rise in
i* raises domestic net exports. The net effect is ambiguous on domestic NX and in turn domestic
output Y is ambiguous.
2. fiscal contraction abroad in foreign country, shift IS to the left, there are two effects:
(1) i* decreases, E increases, (0.5 mark) NX decreases. (0.5 mark) Y decreases
(2) Y* decreases, (0.5 mark) X decreases NX decreases, (0.5 mark) Y decreases.
Hence fiscal contraction abroad decreases output Y and the domestic trade balance NX,
unambiguously.
ANSWER
[2 marks for filling in blanks, each 0.5]
Monetary contraction abroad:
Domestic income will
ambiguously).
Domestic net export will
ambiguously).
(increase/decrease/remain unchanged/behave
Fiscal contraction abroad:

Domestic income will
ambiguously).
Domestic net export will
ambiguously).

(ECON112) (2010) (F) Final-1406 10221

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(ECON112)[2010](f)final~1406^_10221.pdf downloaded by htyuad from http://petergao.net/ustpastpaper/down.php?course=ECON112&id=3 at 2015-10-14 02:52:49. Academic use within HKUST only.

The Hong Kong University of Science and Technology

Fiscal contraction abroad:

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