Macroeconomics I EA, Final Take-Home Exam
Kang-Kook Lee, 2021 Fall semester
Taufiqur Rohman Khairurrijal - 52212100323
(You can refer to any resources such as academic papers in your answers. Please
include the references list.)
I. Questions about the macroeconomic model
1. Assume that the government has increased expenditure, and answer these
questions.
a) Assume that we are living in the normal world with normal IS and LM
curves. Draw the graph of IS-LM, and AD-AS. Show the first, second, and
third multiplier effects in the graphs. Be careful to show consistent
movements of equilibrium in both graphs.
b) Present the multiplier effects by showing dY/dG using total differentiation in
each case.
c) If the government issues debts to finance this spending because of fiscal
deficit, and we assume ‘Ricardian equivalence’ by New Classical
macroeconomics, what will happen to the analysis?
d) Assume that we are living with the ‘liquidity trap’ and a steep IS curve
(though not vertical). In this case, draw the IS-LM and AD-AS when the
government increases spending. And present the multiplier effects using
total differentiation. Which parameter is infinite and how multiplier effects
are different from 2)?
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e) If the government cuts taxes instead of increasing expenditure, and if we
believe that the argument of supply-side economics is correct, how do you
show the change in the equilibrium using IS-LM, and AD-AS?
f) Now we assume that we are living in the New Classical world with totally
rational expectation and people believe that fiscal stimulus would just raise
inflation even in short run. In this case, draw the IS-LM, AD-AS curve.
2. Answer the following questions using the graph of IS-MP analysis.
a) Demonstrate why and how deflation is bad to the economy with a
deflationary spiral using the IS-MP, and AD-IA curves.
b) Demonstrate how quantitative easing policy could work with the zero lower
bound for interest rates, using this framework.
c) Show how large fiscal expansion could be effective in this situation.
II. Essay questions
3. Show how the shape of the Phillips curve is different from normal one in
stagflation and the new economy boom, using the AD-AS curve. Also, discuss
why the curve has become flat these days?
4. Present your opinion about QE (quantitative easing) policy. Discuss its
backgrounds, achievements and side effects. What kind of other unconventional
monetary policy is possible, except for QE, and what are their benefits and
costs? What do you think of its implications in developing country context?
5. In response to the COVID-19, governments in developed countries such as the
US made huge efforts to implement fiscal stimulus and quantitative easing as
well. Present your opinion about this policy response based on recent
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developments in macroeconomics. Also show the shock of the pandemic and the
government response using IS-LM and AD-AS, taking the hysteresis effect into
account.
6. Present your evaluation about the current mainstream New Keynesian DSGE
model in macroeconomics, especially in relation to inequality. Also, discuss the
current state and the future direction in macroeconomics from your own
perspective.
7. Imagine that you are a top economic advisor to the president of your own
country. Using macroeconomic data, present an assessment of your country’s
current economic situation and report the future economic prospects. In
particular, discuss several recent events such as the pandemic and domestic
policy changes such as monetary and fiscal policy.
