2024 Final Exam

Below is the final exam answer sheet. Remember that I grade on the curve and not using the usual percentages you are used to!!!!!!!!! If you use the usual percentages you will cause yourself much unnecessary psychological distress! Better to compare your performance to this histogram to see what your percentile rank in the course is. Roughly speaking, the top 1/5 of scores (regardless of how low the percentage) get A’s and the bottom 1/2 get C’s (regardless of how low the percentage). In between get B’s.

I’ll work on the course grades tomorrow.

Practice Exam. Please do the practice exam before Wednesday’s class! But note that the material covered is somewhat different. Try everything, but don’t be alarmed if you don’t know some answers. You’ll learn something from trying to answer the questions and then later seeing the answer sheet.

Exercise: Calculating and Applying Elasticities of k* and y* (the Steady-State Capital to Effective Labor Ratio and Output to Effective Labor Ratio) to Exogenous Changes

Supplementary Readings Directly Tested:

Video Directly Tested:

Slides for the Last 1/3 of the Course:

Additional Practice:

2019 Midterm #2

2019 Final Exam

2024 Exam 2

2024 Exam 2

Translation from raw score to exam letter grade (as if it were the only thing I had to base a final grade on):

  • 44-46 A (There were 3 perfect scores of 46!)

  • 43 A-

  • 42 A-/B+

  • 38-41 B+

  • 36 B

  • 35 B-

  • 31-33 C+

  • 29-30 C

  • 21-28 C-

Links to the Supplementary Readings Directly Tested on 2024 Exam 2

Revised Slides to Help You Prepare for Exam 2

Practice Exam for Exam 2: 2022 Exam

2019 Exam 2

2018 Exam 2

Videos to Help You Prepare for the Exam

Exercises and Slides to Help You Prepare for the Exam

Helpful Hints

Additional Readings for Exam 2

2020 Exam 2: 2022 Exam 2 is better for a practice exam, because it is multiple choice, which is how I normally do exams in Economics 3080. In Spring 2020, in the early days of the pandemic, I did an essay exam for Exam 2. I think you will find these questions and the rubric for grading them very useful for studying, in a different way. Here they are:

2020 Exam 2 Questions

Rubric for Grading Question 1 (rubric by TA):

Up to 2.5 points for each of the following bullets:

  • carbon tax on fossil fuel emissions and methane leaks; give everyone an amount of transferable carbon tax equities.

  • the state establishes a goal for housing construction for each local government to meet, which would reduce regulatory and land costs; nationally standardized construction codes; increase construction productivity.

  • self-driving cars; dynamic tolls for road segments that are per vehicle; carpooling with ride-sharing service

  • writing: the argument effectively addresses the topic and has appropriate elaborations or exemplifications. No plagiarized sentence fragments. Word count between 400 and 600. Minor lexical or grammatical errors allowed. Students may bring in different ideas for each topic; but what Prof. Kimball wants to test is whether students read assigned blog posts.

Rubric for Grading Question 2 (rubric by TA):

Up to 4 points for the first two bullets below; up to 2 points for the third bullet below:

  • List and briefly explain (1) Messing with the Price System. (2) Menu Costs. (3) Messing with Our Minds. (4) Messing with the Minds of Legislators. (5) Messing with Debt Contracts. (6) Messing with the Opportunity Cost of Holding Money. (7) Inflation Getting the Blame for Things It Doesn’t Do (8)Inflation Making Real Wage Cuts Go Down More Easily

  • The costs of inflation push the optimal inflation target toward zero. Benefits of inflation can push the optimal inflation target above zero. Students could use pervasive examples to illustrate this. For example, discuss how the inflation target affects real interest rate with Fisher effect.

  • write a well-organized and coherent essay; develop and support main points with logically compelling reasons; no plagiarized sentence fragments; word count between 400 and 600. Minor syntactic errors allowed.

Rubric for Grading Question 3 (rubric by Miles):

1 point each for these bullets:

How the Fed determines the real interest rate r:

  • supply and demand for the monetary base determines nominal rate

  • inflation pi is sticky

  • r = i -pi

How rate cuts are stimulative

  • principle of countervailing wealth effects

  • borrower marginal propensity to spend > lender marginal propensity to spend

  • incentive effect ( also called substitution effect)

  • net exports go up because of depreciation

The role of monetary policy

  • Fed should keep AD equal to the natural level of output

  • in the long run, Fed can’t affect r

  • in the long run, the Fed can’t change other real things

Plus one point for anything else apt and interesting, but 10 points total is still the maximum.

Rubric for Grading Question 4 (rubric by Miles):

One point for each of the following bullets:

  • imperfect competition wedge (firms cheer when employment up)

  • marginal tax rate wedge (IRS cheers when employment up)

  • labor market imperfection wedge (people who want jobs cheer when employment up)

  • minimum wage and unions contribute to labor market imperfection wedge

  • search frictions contribute to labor market imperfection wedge

  • efficiency wage contribution to labor market imperfection wedge; higher wages for gratitude

  • efficiency wage contribution to labor market imperfection wedge: higher wages for fewer quits

  • efficiency wage contribution to labor market imperfection wedge: higher wages for better motivation

  • explaining the role of the opportunity cost of time (for workers or potential workers) and explaining the marginal cost product of labor and price times the marginal physical product of labor

  • explaining which magnitude is the social marginal benefit of an extra hour of work and and which is the social marginal cost

Plus up to two points for anything else apt and interesting, but 10 points total is still the maximum.

Shocks that Shift Curves in the International Finance Diagrams

Shocks Specific to the Short Run

Below, when I write “the Fed,” always interpret it as “the domestic central bank.”

The Fed can raise the real interest rate or cut (lower) the real interest rate. Often the shock will simply be stated that way. Sometimes, the question will be, in effect:

Q: Aggregate demand is too high. What should the Fed do? Or how should the Fed correct this?

A: Raise the real interest rate to reduce aggregate demand.

or

Q: Aggregate demand is too low. What should the Fed do? Or how should the Fed correct this?

A: Cut the real interest rate to increase aggregate demand.

Note that the Fed changes the real interest rate by changing the nominal interest rate. Inflation is sticky or “sluggish” in the short run. The Fed does not control inflation in the short run. With pi relatively unchanging in the short run, changing the nominal interest rate i changes the real interest rate by the definition of the real interest rate (Fisher equation) r = i - pi. So the Fed does control the real interest rate in the short run.

It is either unnecessary to deal with this directly when thinking about the Short-Run International Finance Diagram, or it can be dealt with totally separately in advance, but you should know that the Fed controls the short-term, risk-free nominal interest rate because (a) supply and demand for the monetary base determines the nominal interest rate, (b) the Fed completely controls the supply of the monetary base and (c) the Fed has many tools to modify the demand for the monetary base. And you should know that the short-term, risk-free nominal interest rate has a big effect on the full set of other interest rates. Usually, when it goes down, all of the other interest rates go down, too. Usually, when it goes up, all of the other interest rates go up, too.

Note that the supply and demand for loanable funds graph is useless in the short run because the Fed can and does override it in the short run.

Foreign Monetary Policy Shocks in the Short Run

Besides the Fed (the domestic central bank) raising or lowering its rate, there is one other type of shock that is unique to the short run: a foreign central bank raising or lowering its rate:

  • If a foreign central bank raises its rate, in the short run that shifts the Capital Flow curve, CF(r), outward, since capital wants to flow to where rates are high.

  • If a foreign central bank lowers its rate, in the short run that shifts the Capital Flow curve, CF(r), inward, since capital wants to flow away from where rates are low.

Every other type of shock begins its action by shifting the same curve in the same way in the short run as in the long run. That said, the general equilibrium effects of those shocks is often different in the short run than in the long run, even though they begin by the same curve shifting in the same way.

Shocks Specific to the Long Run

The Fed does not control the real interest rate in the long run. Instead, in the long run, the real interest rate is determined by the supply and demand for loanable funds.

  • The Fed can control inflation in the long run if it accepts the real interest rate determined by the supply and demand for loanable funds.

  • If the Fed keeps the real interest rate below the real interest rate determined by the supply and demand for loanable funds for a long time, it will cause hyperinflation.

  • If the Fed keeps the real interest rate above the real interest rate determined by the supply and demand for loanable funds for a long time, it will cause a serious recession (like the Great Recession) and deflation (=negative inflation). Imposing a zero lower bound on interest rates is one way the Fed might (and has in the past) kept the real interest rate above the real interest rate determined by supply and demand for loanable funds.

Note that when a big boom or even hyperinflation gets going, then for a while the Fed might need an interest rate substantially above the real interest rate determined by the supply and demand for loanable funds in order to effectively put on the brakes. When a bad recession gets going, then for a while the Fed might need an interest rate substantially below the real interest rate determined by the supply and demand for loanable funds in order to stimulate the economy enough and get it going again.

Monetary Policy Shocks in the Long Run

Expanding on the last few paragraphs, the “classical dichotomy” says that no real variable is affected by monetary policy in the long run. The exceptions are the things discussed as costs of inflation in Mankiw’s Chapter 5. Still, for moderate changes in inflation and any other moderate changes in monetary policy in the long run, start with the approximation “No real variable is affected by monetary policy in the long run.” That gives an easy answer to questions about monetary policy shocks as they show up in the Long-Run International Finance Diagram: they don’t. This includes foreign monetary policy as well as domestic monetary policy. All the variables shown in the Diagram are real. Nothing happens to any of them. (Versions of this question have appeared on many past exams.) An example of a long-run change in monetary policy would be a change in the target inflation rate. This has no effect on the real variables shown in the Long-Run International Finance Diagram.

Advanced note: The classical dichotomy has two components: Monetary Neutrality and Monetary Superneutrality. Monetary Neutrality is the idea that a single permanent change in the overall price level caused by monetary policy will have no effect on any real variable. Monetary Neutrality is expected to hold exactly, with only very trivial exceptions. Monetary Superneutrality is the idea that a permanent change in inflation that leads to a new steady level of inflation that people then get used to will have very little long-run effect on real variables. This is an approximate statement that holds for moderate changes in a central bank’s inflation target. The “costs of inflation” are some of the things that would change most in the long run with moderate changes in the inflation target.

Hyperinflation is both a very large change in inflation that would matter a lot even if it were a long-run change. And the acute stage of hyperinflation often plays out so quickly it can be thought of as happening in the short run.

The Demand for Loanable Funds

The Demand for Loanable Funds curve, D, is the horizontal sum of the Capital Flow curve, CF(r), and the Investment Demand curve, I(r). Thus, any shifts in the Demand for Loanable Funds curve are instigated by a shift in either the Capital Flow curve or the Investment Demand curve. Shifts in those two curves—which affect the Demand for Loanable Funds curve—will be discussed below.

The Supply of Loanable Funds

The Supply of Loanable Funds curve, S, shows national saving as a function of the real interest rate. National saving is the sum of saving by households, the government (federal, state and local), and firms. Each of these can spend more than what they take in, so saving can be negative as well as positive. Negative saving by the government is called a budget deficit. Some of the shocks that can shift the Supply of Loanable Funds curve are:

  • An increase in the government budget—by raising government purchases, raising transfers or cutting taxes (that don’t have a big effect on saving in other ways)—shifts S back.

  • A reduction in the government budget deficit—by cutting government purchases, reducing transfers or raising taxes (that don’t have a big effect on saving in other ways)—shifts S out.

  • Because people care about the after-tax real interest rate (or more broadly, the after-tax real rate of return), if household saving is increasing in the real interest rate, then cutting taxes on interest, dividend and capital gains income—or cutting corporate taxes so companies have more to give to their stockholders and bondholders—will raise household saving. Of course, cutting taxes on interest, dividend and capital gains income, or cutting corporate taxes, can raise the government budget deficit. So the details matter for whether a tax cut designed to raise national saving will, in fact, raise national saving. Similarly, the details matter for whether a tax increase will raise or lower national saving.

  • Current tax policy has created the institution of tax-favored retirement savings accounts. Regardless of whether the creation of tax-favored retirement savings accounts raises or lowers national saving, detailed policies about retirement savings accounts can unambiguously raise or lower national saving. In particular, automatic enrollment of employees into retirement savings accounts can raise national saving. And raising the default contribution rates can raise national saving. The government can encourage automatic enrollment and higher contribution rates (a) at a lower level by “safe-harbor” laws that an employer can’t be sued for automatically enrolling its employees in a retirement savings account certain types of funds and with a substantial contribution rate and (b) at a higher level by requiring employers to automatically enroll their employees at a substantial contribution rate. So far, the US federal government has taken step (a) but not step (b). (Note that “automatic enrollment” has an opt-out: there is a bureaucratic procedure for an employee to choose not to enroll. But if the employee does nothing, they will be enrolled.)

  • Retirement savings accounts have a penalty for taking the money out before a certain age (59.5 in the US). The government can create various exceptions that allow penalty-free withdrawal before that age. These exceptions reduce national saving but can serve other purposes. Some possible exceptions are withdrawals (a) to spend during a recession, (b) to pay large medical expenses, (c) to buy a house, (d) to pay adoption expenses, (e) when unemployed, or any combination of these and other exceptions. Allowing people to withdraw penalty-free during a recession is an interesting policy. The version of this the US government does is to loosen the rules for exceptions during a recession.

  • The government can require people to save (for example, by payroll deduction). Denmark does this.

Shocks that Start by Shifting the Same Curve the Same Way in the Short Run and the Long Run

Shifts in the CF(r), I(r) and NX(epsilon) curves happen the same way whether it is the short run or the long run.

Shocks that Shift the CF(r) Curve

  • If the level of automatic enrollment and the default contribution levels to US retirement savings accounts (such as 401(k)s) stays the same, but the default asset allocation is shifted toward more foreign assets, such as “international” or “global” or “emerging market” mutual funds, this shifts the CF(r) curve out.

  • If the level of automatic enrollment and the default contribution levels to retirement savings accounts (such as 401(k)s) stays the same, but the default asset allocation is shifted toward less foreign assets this shifts the CF(r) curve in.

  • If a foreign government raises the level of automatic enrollment raises the default contribution levels to retirement savings accounts in that foreign country or shifts the default asset allocation toward assets that are outside that foreign country, the CF(r) curve as viewed by the US shifts in. More generally, anything that a foreign government does that either encourages capital flow out of that foreign country or encourages more saving for any interest rate shifts the CF(r) curve as viewed by the US in. You can figure out the statements going in the opposite direction.

  • If a foreign government does something to shift its I(r) curve out, such as the foreign country doing an investment tax credit, this shifts the CF(r) curve as viewed by the US out, as funds go out from the US to, for example, take advantage of those investment incentives in the foreign country.

  • In general, most actions by foreign governments show up from the US point of view as shifts in the CF(r) curve. The big exception is that changes in tariffs and non-tariff trade barriers by a foreign government show up from the US point of view as shifts in the NX(epsilon curve). Always remember that an outflow from the rest of the world is an inflow (negative CF) to the US and an inflow to the rest of the world is an outflow (positive CF) from the US.

Shocks that Shift the I(r) Curve

Note: In the long run graphs,

anything that shifts the I(r) curve outward thereby shifts the Demand for Loanable Funds curve, D, outward;

anything that shifts the I(r) curve inward thereby shifts the Demand for Loanable Funds curve, D, inward.

But the I(r) curve itself shifts the same way in the short run as in the long run.

  • An investment tax credit or other tax cut that reduces the after-tax cost of capital will shift the I(r) curve out.

  • A tax increase on investment that raises the after-tax cost of capital will shift the I(r) curve back.

  • A technological change that increases (physical) domestic investment opportunities will shift the I(r) curve outward.

  • A slowdown in technological progress that reduces (physical) domestic investment opportunities will shift the I(r) curve inward.

Shocks that Shift the NX(epsilon) Curve (which is also called the Demand for Dollars Curve)

  • An increase in US trade barriers (against imports), such as tariffs, quotas and other non-tariff barriers such as ridiculously tough inspections will shift the NX(epsilon) curve outward.

  • A reduction in US trade barriers (against imports) will shift the NX(epsilon) curve inward.

  • An increase in foreign trade barriers (against US exports), such as tariffs, quotas and other non-tariff barriers such as ridiculously tough inspections will shift the US NX(epsilon) curve inward.

  • A reduction in foreign trade barriers (against US exports) will shift the US NX(epsilon) curve outward.

  • The effect of a trade deal that has both the US and foreign countries reduce trade barriers on the NX(epsilon) curve depends on the details. Some deals will shift NX(epsilon) outward, other deals will shift NX(epsilon) inwards.

  • Increased popularity of US goods abroad (either from new goods or from a shift in preferences toward US goods) will shift the NX(epsilon) curve outwards.

  • Reduced popularity of US goods abroad will shift the NX(epsilon) curve inwards.

  • Increased popularity of foreign goods in the US (either from new goods or from a shift in preferences toward foreign goods) will shift the NX(epsilon) curve inwards.

  • Reduced popularity of foreign goods in the US will shift the NX(epsilon) curve outwards.

2024 Exam 1

REVISED:

Translation of Raw Scores to a Letter Grade, as if this Exam were the only thing I was basing your course grade on. (There will be a lot more differentiation after all the exams and other assignments! Don’t worry if your grade is a little lower than you hope. It will be easy to raise it by extra effort.)

TO GET YOUR RAW SCORE, DON’T FORGET THAT FOR BONUS QUESTIONS A CORRECT ANSWER IS 2 POINTS; AN INCORRECT ANSWER IS 1 POINT. (FOR ALL OTHER QUESTIONS, A CORRECT ANSWER IS 1 POINT; AN INCORRECT ANSWER IS 0 POINTS.)

A: 43-45

A-: 42

A-/B+: 41

B: 39-40

B-: 37

C+: 35-36

C: 32-34

C-: 19-28

C-/D+: 15-18

************

Note: The Shell will tell you which of your blog post reading assignments will have questions on the exam.

Special Note: On Exam 2 (not Exam 1) I will have some questions asking you to interpret one or more monetary policy articles from the Wall Street Journal. They usually appear at the top of the second page and appear almost every day.

Main Practice Exam (that you should take before class on Monday, February 12:

Plan to do this practice exam on the February 10-11 weekend. You need to time yourself! Try to do it in 50 minutes just as if it were a real exam. Once the 50 minutes are up, then take all the time you want to try to get more questions, without looking at the answers. Only then should you look at the answers.

Exercises and Handouts to Help You Prepare for the Exam

  1. Make sure you have read “The Logarithmic Harmony of Percent Changes and Growth Rates"

  2. Growth Rates and Percentage Changes Powerpoint File

  3. Growth Rates and the Rule of 70 (.doc download)

  4. MV=PY, or equivalently %ΔM+%ΔV=%ΔP+%ΔY

  5. Cobb-Douglas with Constant Returns to Scale Exercise

  6. Returns to Scale Exercise (This semester you won’t need this exercise for an exam until Exam 2)

  7. %ΔQ = elasticity %ΔP; %Δ (PQ) = %ΔP+%ΔQ

  8. Supply and Demand: Elasticities and Comparative Statics

  9. Rule of 70 Exercise

  10. Comparative Statics in a Long-Run Model Exercise

Extra Practice Exams

2020

2019

2018

2017

Detailed Outline of the Course

On Reading and Learning

This is a tough course, but you can learn a lot if you study smart as well as hard.

Growth Rates and Percentage Changes Using Logarithms

Macoeconomists use logarithms all the time because they make it easier to understand things quantitatively. Talking about percent changes without using logarithms is a pale shadow of talking about percent changes with logarithms.

Chapter 1—The Science of Macroeconomics

What happens in the long run is very different from what happens in the short run.

Chapter 2—The Data of Macroeconomics

What happens with things that are a big share of people’s budgets, such as housing, matters a lot for economic welfare.

Chapter 3—National Income: Where It Comes From and Where It Goes

In the long run, extra government purchases comes at the expense of consumption or investment (or net exports in an open economy). Also, in the long run, increasing government transfers or cutting taxes leads to extra consumption that crowds out investment or government purchases. Finally, efforts to avoid taxes (which are often exacerbated by unfortunate ways in which real-world taxes are designed) can cause people to make decisions that are often not in the national interest. Hence, we should think carefully about government purchases, government transfers and how the government raises revenue.

Imperfect Competition and Increasing Returns to Scale as Foundations of Macroeconomics

Sticky prices don’t make sense without imperfect competition, and imperfect competition doesn’t make sense without increasing returns to scale. Hence, imperfection competition and increasing returns are central to macroeconomics. They are true of very large chunks of the real world.

Chapter 4—The Monetary System: What It Is and How It Works

The Fed is moving to a system where the nominal interest rate in the economy is essentially determined by the interest rate on reserves. The smooth running of this system requires the Fed to keep the monetary base quite large.

Monetary Policy

The Fed and other central banks have the power to choose the level of aggregate demand. They should use this power to choose aggregate demand at a level that keeps inflation steady—the “natural” or “neutral” level of output and employment (and unemployment).

Chapter 5—Inflation: Its Causes, Effects and Social Costs

Inflation has important costs. Some of the most important costs of inflation are cognitive costs. The costs of inflation can be lowered by reducing inflation, but reducing inflation safely requires a willingness to use negative interest rates.

Chapter 6—The Open Economy

Net exports—also called the balance of trade or the the trade surplus/trade deficit—is determined by international capital flows—the international flow of funds for portfolio investment.

Chapter 7—Unemployment and the Labor Market

Output and employment are below their frictionless optimum because of three “wedges”: (1) imperfect competition, which puts price above marginal cost; (2) marginal tax rates, which put the amount a firm pays workers above what the workers receive in their paycheck, and (3) labor market distortions that for many people put the amount they would receive in their paycheck if they could get a job above the value of their leisure time.

Chapter 10—Introduction to Economic Fluctuations

Different dimensions of macroeconomic policy to affect aggregate demand are substitutes, so whatever the other dimensions of macroeconomic policy, monetary policy can choose the level of aggregate demand. (This may sometimes require negative interest rates.) It is important to get the level of aggregate demand right: if aggregate demand is too high, it will cause a boom that leads to inflation; if aggregate demand is too low, it will cause a recession.

Chapter 8—Economic Growth I: Capital Accumulation and Population Growth

In the long run (in this case, over the course of decades), saving supports investment that can have a big effect on the level of consumption an economy can deliver.

Chapter 9—Economic Growth II: Technology, Empirics and Policy

Technology—thought of broadly as anything that helps produce a large amount of output from a small amount of input—is the Big Kahuna of economic growth once a government is governing an economy reasonably well. However, it is also possible for economies—or parts of economies—to govern an economy so badly that it gets in the way of economic growth. In the area of technology, for many countries, the key is copying technology developed elsewhere. For the US, the key is developing new technology.

Negative Interest Rate Policy

Positive interest rates are when a borrower pays a lender for the privilege of using funds. Negative interest rates are when a lender pays a borrower to store funds. Negative nominal interest rates are important for enabling monetary policy to do its job of keeping the economy at the natural level of output and employment. Several central banks have begun using negative interest rates. Deeper negative rates are possible if a central bank is careful to deal with the bank profits problem and the paper currency problem. Central banks worry about political flak from using negative interest rates.

2022 Final Exam

Practice Exams:

Additional Practice:

2019 Midterm #2

2019 Final Exam

Supplementary Readings Directly Tested:

“The Future of Inflation” series (Ruchir Agarwal and Miles Kimball in the International Monetary Fund’s online journal “Finance and Development”):

  1. Will Inflation Remain High?

  2. How Costly is Inflation?

  3. The Electronic Money Standard and the Possibility of a Zero Inflation Target

At this link is a table detailing some of the costs and benefits of inflation we address in Part II

I highly recommend that you listen to the associated podcasts as well. Here are the links: “Ruchir Agarwal and Miles Kimball on Negative Interest Rates and Inflation—IMF Podcasts.” In theory, the exam questions should be answerable based on what is in the 3 readings 1,2,3 above, but the podcasts are going to make things a lot easier to understand.

Other supplementary readings directly tested:

  1. Two Types of Knowledge: Human Capital and Information

  2. Bonnie Kavoussi's Tweetstorm on "Restoring American Growth"

  3. America's Big Monetary Policy Mistake: How Negative Interest Rates Could Have Stopped the Great Recession in Its Tracks

  4. Janet Yellen is Hardly a Dove—She Knows the US Economy Needs Some Unemployment

Videos You Need to Watch:

  1. Analyzing the Great Depression Using Supply and Demand for the Monetary Base (9 min.)

  2. More Analysis of the Great Depression Using Supply and Demand for the Monetary Base (5 min.)

  3. The Costs of Inflation (20 min.)

  4. How Interest Rate Cuts Stimulate the Economy (24 min.)

  5. Why We Want More Jobs (47 min.)

  6. Keeping Aggregate Demand on Track (22 min.)

  7. Why the Fed Should Keep the Output Gap Equal to Zero (13 min.)

  8. Percent Changes in Things Measured as Percentages (7 min.)

  9. Lecture on Negative Interest Rate Policy (66 min.)

  10. Takeaways about Economic Growth (15 min.)

  11. Hans Rosling's 200 Countries, 200 Years, 4 Minutes - The Joy of Stats - BBC Four

  12. 200 years that changed the world (Hans Rosling)

2022 Exam 2

Practice Exam for Exam 2: 2019 Exam 2

Additional Practice Exam for Exam 2

Videos to Help You Prepare for the Exam

Exercises and Slides to Help You Prepare for the Exam

Helpful Hints

Additional Readings for Exam 2

2020 Exam 2: 2019 Exam 2 is better for a practice exam, because it is multiple choice, which is how I normally do exams in Economics 3080. In Spring 2020, in the early days of the pandemic, I did an essay exam for Exam 2. I think you will find these questions and the rubric for grading them very useful for studying, in a different way. Here they are:

2020 Exam 2 Questions

Rubric for Grading Question 1 (rubric by TA):

Up to 2.5 points for each of the following bullets:

  • carbon tax on fossil fuel emissions and methane leaks; give everyone an amount of transferable carbon tax equities.

  • the state establishes a goal for housing construction for each local government to meet, which would reduce regulatory and land costs; nationally standardized construction codes; increase construction productivity.

  • self-driving cars; dynamic tolls for road segments that are per vehicle; carpooling with ride-sharing service

  • writing: the argument effectively addresses the topic and has appropriate elaborations or exemplifications. No plagiarized sentence fragments. Word count between 400 and 600. Minor lexical or grammatical errors allowed. Students may bring in different ideas for each topic; but what Prof. Kimball wants to test is whether students read assigned blog posts.

Rubric for Grading Question 2 (rubric by TA):

Up to 4 points for the first two bullets below; up to 2 points for the third bullet below:

  • List and briefly explain (1) Messing with the Price System. (2) Menu Costs. (3) Messing with Our Minds. (4) Messing with the Minds of Legislators. (5) Messing with Debt Contracts. (6) Messing with the Opportunity Cost of Holding Money. (7) Inflation Getting the Blame for Things It Doesn’t Do (8)Inflation Making Real Wage Cuts Go Down More Easily

  • The costs of inflation push the optimal inflation target toward zero. Benefits of inflation can push the optimal inflation target above zero. Students could use pervasive examples to illustrate this. For example, discuss how the inflation target affects real interest rate with Fisher effect.

  • write a well-organized and coherent essay; develop and support main points with logically compelling reasons; no plagiarized sentence fragments; word count between 400 and 600. Minor syntactic errors allowed.

Rubric for Grading Question 3 (rubric by Miles):

1 point each for these bullets:

How the Fed determines the real interest rate r:

  • supply and demand for the monetary base determines nominal rate

  • inflation pi is sticky

  • r = i -pi

How rate cuts are stimulative

  • principle of countervailing wealth effects

  • borrower marginal propensity to spend > lender marginal propensity to spend

  • incentive effect ( also called substitution effect)

  • net exports go up because of depreciation

The role of monetary policy

  • Fed should keep AD equal to the natural level of output

  • in the long run, Fed can’t affect r

  • in the long run, the Fed can’t change other real things

Plus one point for anything else apt and interesting, but 10 points total is still the maximum.

Rubric for Grading Question 4 (rubric by Miles):

One point for each of the following bullets:

  • imperfect competition wedge (firms cheer when employment up)

  • marginal tax rate wedge (IRS cheers when employment up)

  • labor market imperfection wedge (people who want jobs cheer when employment up)

  • minimum wage and unions contribute to labor market imperfection wedge

  • search frictions contribute to labor market imperfection wedge

  • efficiency wage contribution to labor market imperfection wedge; higher wages for gratitude

  • efficiency wage contribution to labor market imperfection wedge: higher wages for fewer quits

  • efficiency wage contribution to labor market imperfection wedge: higher wages for better motivation

  • explaining the role of the opportunity cost of time (for workers or potential workers) and explaining the marginal cost product of labor and price times the marginal physical product of labor

  • explaining which magnitude is the social marginal benefit of an extra hour of work and and which is the social marginal cost

Plus up to two points for anything else apt and interesting, but 10 points total is still the maximum.

Notes on Analyzing Shocks with the International Finance Diagrams

The graphs referred to here can be found in “International Finance Slides.” The Powerpoint file Shocks that Can Shift Things in the International Finance Diagrams tells exactly how the curve shifts that gets the ball rolling. But then you need to know several things: 

  1. If either the CF(r) curve or the I(r) curve shifts, then the Demand for loanable funds curve (labeled "D") shifts in the same direction by the same horizontal amount. 

  2. The shift of the curve that gets the ball rolling has a bigger effect on that variable than the movement along the curve as r adjusts. (See “The Effects of Shifts in the CF(r) Curve on the Long-Run International Finance Diagram Are Not Ambiguous After All.” Also, apply this same kind of logic to shifts of the I(r) curve.)

  3. The quantity of CF determined up in the top three graphs also determines the location of the vertical Supply of $ curve. 

  4. Monetary policy has no effect on the long-run international finance diagram. Nothing on the graphs changes. 

  5. In the short run, monetary policy just changes r: basically, the central bank chooses r. In the short run, the horizontal line showing the r the central bank has chosen replaces the market for loanable funds curve. 

  6. Aggregate demand is determined by I + NX: that is it goes the same direction as I + NX    (unless a change in the C(Y) curve or in G got the ball rolling). 

  7. If the Fed is cancelling an effect on I + NX, it just needs to raise r if AD went up to make AD go back down or lower r if AD went down to make AD go back up. 


That is pretty much it. But you really do need to practice. It is really helpful to get together with a friend from the class to practice on this.


The Effects of Shifts in the CF(r) Curve on the Long-Run International Finance Diagram Are Not Ambiguous After All

  • Assume that the Supply of Loanable Funds curve is upward-sloping

  • Assume that the I(r) curve is downward sloping. 

  • Both of these assumptions are crucial to what follows. 

  • Now, Consider a case when the CF(r) curve shifts out. (After you read the rest of this post, make sure you work through the case when the CF(r) curve shifts back for yourself. Actually, in general you should always work through the opposite directions of things as part of your studying. The simplest way to make an exam question is to do the opposite direction from what was covered in class.)

  • Since the Demand for Loanable Funds is the horizontal sum of the I(r) curve and the CF(r) curve, the outward shift in the CF(r) curve also shifts the Demand-for-Loanable-Funds out. 

  • This raises the interest rate r.  

  • The increase in r moves things up and left along the CF(r) curve. 

  • It might seem that the outward shift in the CF(r) curve combined with a shift up and to the left along the CF(r) curve might make the direction the quantity of CF goes ambiguous. But not so! 

  • Since the I(r) does not shift, the increase in r lowers the quantity of investment I. 

  • Since the Supply-of-Loanable-Funds curve does not shift, the increase in r raises the quantity of saving S. 

  • S = I + CF, since physical investment and sending funds abroad with CF are the two possible uses of overall national saving. (Remember that national saving is household saving + corporate saving + government saving.)  

  • Since quantity of S increases, while the quantity of I decreases, the only way that the equation S = I + CF can be satisfied is for the quantity of CF to increase. 

  • Thus, the quantity of CF moves in the same direction that the CF(r) curve shifts. 

  • The quantity of CF determines the location of the vertical Supply of Dollars. With the quantity of CF increasing, the Supply of Dollars curve, which is vertical at the quantity of CF, shifts to the right. 

  • A very similar analysis can be used to analyze shifts in the I(r) curve. Try it!

Posts on International Finance

2022 Exam 1

Practice Exam:

Plan to do this practice exam on the February 12-13 weekend. You need to time yourself! Try to do it in 50 minutes just as if it were a real exam. Once the 50 minutes are up, then take all the time you want to try to get more questions, without looking at the answers. Only then should you look at the answers.

Exercises and Handouts to Help You Prepare for the Exam

  1. Make sure you have read “The Logarithmic Harmony of Percent Changes and Growth Rates"

  2. Growth Rates and Percentage Changes Powerpoint File

  3. Growth Rates and the Rule of 70 (.doc download)

  4. MV=PY, or equivalently %ΔM+%ΔV=%ΔP+%ΔY

  5. Cobb-Douglas with Constant Returns to Scale Exercise

  6. Returns to Scale Exercise (This semester you won’t need this exercise for an exam until Exam 2)

  7. %ΔQ = elasticity %ΔP; %Δ (PQ) = %ΔP+%ΔQ

  8. Supply and Demand: Elasticities and Comparative Statics

  9. Rule of 70 Exercise

  10. Comparative Statics in a Long-Run Model Exercise

Extra Practice Exam

NOTE: Since we got a little further this year, also take a look at at the last five questions in Exam 2 from last year. They are on comparative statics in the LR Model of Chapter 3:

Exams from 2018 and 2017

Writing in Economics 3080

On Writing and the Writing Assignments

Employers are much more likely to care whether you can write well than what your grades were. The main way to hone your writing is to practice by writing a lot. It also gets easier with practice. Here are some other tips.

Final Exam 2020

Final Letter Grade Distribution:

Everyone who got 48% or more of the total possible points passed the class. And everyone who passed got at least a C-. There was a big gap between that and all the failing grades. The highest failing grade was 41%. Everyone who received a failing grade showed the characteristic of having written few blog posts, and most who received a failing grade wrote none. It took an overall score above 55% to get a C or above rather than a C-. 

Here are minimum overall scores for each grade. I know it was a tough course with low numerical scores. There was a lot there to learn! But as I promised, the low numerical scores all washed out with the curve that is your friend: 

Passing (C- or above): >48%

C or above: >55%

C+ or above: >63%

B- or above: >69.5%

B or above: >71%

B+ or above: >74.5%

A- or above: >78.5%

A: >82.75%

High overall score: 88%

Final Exam Itself

BE SURE TO ALSO LOOK AT THESE SLIDES: Shocks that Can Shift Things in the International Finance Diagrams

Practice Exams:

2019 Midterm #2

2019 Final Exam

Lectures Going over the Answers to the Practice Exams:

22. Answers to 2019 exam questions on returns to scale and imperfect competition

23. Why a Reduction in MC Reduces AC and P

24. Discussion of the Answers to 2019 Midterm #2

25. International Finance Diagram 2019 Final Exam Answers

26. Discussion of the Answers to the 2019 Final Exam

Online Lectures and Supplementary Readings in Preparation for the Final Exam, Spring 2020

Online Lectures

10. Takeaways about Economic Growth

11. Restoring American Growth: The Video

12. Solow Growth Model—Mankiw Chapter 8 (Watch this short Hans Rosling video on 200 years that changed the world first!)

13. Technological Progress and the Golden Rule—Mankiw Chapter 9

14. Open Economy Accounting (Mankiw Chapter 6)

15. Why Open Economy Macro Is Also Called International Finance

16. Keeping Aggregate Demand on Track

17. Why the Fed Should Keep the Output Gap Equal to Zero

18. International Finance Comparative Statics: Shifts of NX(epsilon), S and target r

19. More International Finance Comparative Statics

20. Percent Changes in Things Measured as Percentages

21. Lecture on Negative Interest Rate Policy

Slides

Supplementary Readings:

Notes and Exercises

2020 Exam 2

2020 Exam 2

Rubric for Question 1 (rubric by TA):

Up to 2.5 points for each of the following bullets:

  • carbon tax on fossil fuel emissions and methane leaks; give everyone an amount of transferable carbon tax equities.

  • the state establishes a goal for housing construction for each local government to meet, which would reduce regulatory and land costs; nationally standardized construction codes; increase construction productivity.

  • self-driving cars; dynamic tolls for road segments that are per vehicle; carpooling with ride-sharing service

  • writing: the argument effectively addresses the topic and has appropriate elaborations or exemplifications. No plagiarized sentence fragments. Word count between 400 and 600. Minor lexical or grammatical errors allowed. Students may bring in different ideas for each topic; but what Prof. Kimball wants to test is whether students read assigned blog posts.

Rubric for Question 2 (rubric by TA):

Up to 4 points for the first two bullets below; up to 2 points for the third bullet below:

  • List and briefly explain (1) Messing with the Price System. (2) Menu Costs. (3) Messing with Our Minds. (4) Messing with the Minds of Legislators. (5) Messing with Debt Contracts. (6) Messing with the Opportunity Cost of Holding Money. (7) Inflation Getting the Blame for Things It Doesn’t Do (8)Inflation Making Real Wage Cuts Go Down More Easily

  • The costs of inflation push the optimal inflation target toward zero. Benefits of inflation can push the optimal inflation target above zero. Students could use pervasive examples to illustrate this. For example, discuss how the inflation target affects real interest rate with Fisher effect.

  • write a well-organized and coherent essay; develop and support main points with logically compelling reasons; no plagiarized sentence fragments; word count between 400 and 600. Minor syntactic errors allowed.

Rubric for Question 3 (rubric by Miles):

1 point each for these bullets:

How the Fed determines the real interest rate r:

  • supply and demand for the monetary base determines nominal rate

  • inflation pi is sticky

  • r = i -pi

How rate cuts are stimulative

  • principle of countervailing wealth effects

  • borrower marginal propensity to spend > lender marginal propensity to spend

  • incentive effect ( also called substitution effect)

  • net exports go up because of depreciation

The role of monetary policy

  • Fed should keep AD equal to the natural level of output

  • in the long run, Fed can’t affect r

  • in the long run, the Fed can’t change other real things

Plus one point for anything else apt and interesting, but 10 points total is still the maximum.

Rubric for Question 4 (rubric by Miles):

One point for each of the following bullets:

  • imperfect competition wedge (firms cheer when employment up)

  • marginal tax rate wedge (IRS cheers when employment up)

  • labor market imperfection wedge (people who want jobs cheer when employment up)

  • minimum wage and unions contribute to labor market imperfection wedge

  • search frictions contribute to labor market imperfection wedge

  • efficiency wage contribution to labor market imperfection wedge; higher wages for gratitude

  • efficiency wage contribution to labor market imperfection wedge: higher wages for fewer quits

  • efficiency wage contribution to labor market imperfection wedge: higher wages for better motivation

  • explaining the role of the opportunity cost of time (for workers or potential workers) and explaining the marginal cost product of labor and price times the marginal physical product of labor

  • explaining which magnitude is the social marginal benefit of an extra hour of work and and which is the social marginal cost

Plus up to two points for anything else apt and interesting, but 10 points total is still the maximum.

Online Lectures and Supplementary Readings in Preparation for Exam #2, Spring 2020

2020 Syllabus and Course Mechanics

MAKE SURE TO READ THE SYLLABUS RIGHT AWAY IF YOU HAVEN'T!!!!!

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