ECO 320L Exam Three April 2021
Y0 = 70 gY = XXXXXXXXXXYt = Ctyoung + Ctearners + Ctretired + It
r0 = gY x = XXXXXXXXXXz = 0.28 Bt =
Yt = (1+gY)Y(t-1) Cretired = (1+r)*B(t-1) - xYt
Cearners = Yt - (1+r)*B(t-1) - Bt Cyoung = Bt - xYt
1. Complete TABLE ONE.
(5 points each)
2. Consider an increase in the interest rate (r). Specifically, r0 = 0.08 and r1 = r2 = 0.12.
All other parameters are unchanged. Complete TABLE TWO.
(5 points each)
The mark on the horizontal axis on GRAPH ONE indicates output in period one (Y1) plus wealth
(W). The ray from the origin indicates points at which consumption for earners in period one
(now, horizontal axis) is equal to consumption for the same people in retirement (future, period
two, vertical axis).
3. Based on the equations (calculations) above, label the graph clearly and completely to show
the amount (output plus wealth):
a) paid by period 1 earners to period 1 retirees
b) loaned by period 1 earners to period 1 young
c) received by period 2 retirees from period 2 earners
d) transferred by period 2 retirees to period 3 young
[This graph has no indifference curves.]
Consider the interest rate increase from question #2. The interest rate change has consequences,
but all other parameters (e.g., growth rate of output) are unchanged.
4. On the same GRAPH ONE, add clear and complete labels to show the consequences of the
higher interest rate. Specifically,
1) the new intertemporal budget line
and the amount (output plus wealth):
2) paid by period 1 earners to period 1 retirees
3) loaned by period 1 earners to period 1 young
4) received by period 2 retirees from period 2 earners
5) transferred by period 2 retirees to period 3 young
Questions 3 and 4 must be on a single graph.
Given the aggregate supply curve and aggregate demand curve,
= ? + (? − ??) + ? = −
increases in potential output (YP) cause the inflation rate () to decline unless offset by increases
in (i.e., "demand conditions" and/or "policy stimulus").
5. On one AD/AS graph, show
a) an economy in long-run equilibrium
b) a new long-run equilibrium resulting from an increase in potential output
c) a new long-run equilibrium resulting from the SAME increase in potential output and an
increase in (so that inflation in the new equilibrium is the same as in the original
[Label the graph clearly and completely. Do not change slopes.]
A policy stimulus (to increase ) might take the form of a lower real interest rate (r, monetary
policy) or a larger government budget deficit (higher government spending (G) and/or lower
taxes (T), fiscal policy).
6. Use TABLE THREE to show the differences that result, in the long run, when fiscal stimulus is
more prominent than monetary stimulus. The table shows the higher real interest rate and the
higher level of government spending.
(2 points each)
➢ lower (),
➢ higher (),
➢ no difference is implied by the scenarios = not different (ND), or
➢ difference is implied, but not enough information (??).
Y = C + I + G + NX w is the real wage. E is the nominal exchange rate.
C E w
I r Y
EX NX G