1) The government expenditure is financed by a combination of taxes, bonds issue and

a change in the monetary base:

~
Pt T t + D t +1+ Δ M t +1=Pt ( G t + X t ) + D t ( 1+i )

~
where T is real tax revenue, M is money supply, X is transfers. From this structure
derive a debt dynamics structure.

2) Some stylized facts about unemployment are given by

i. There is a clear negative relationship between the rate of growth in GDP and
the absolute change in the rate of unemployment.
ii. There is a lot of variability in the rate of unemployment in the short run.
iii. There is a lot of persistence in annual rates of unemployment.

Firstly, define facts above with a proper statistical concept for each. Then define and
discuss procyclicality and lagging of unemployment.

3) Explain each term of the following equation / using the aggregate labor below

1/ α
B( 1−α) P
L=n
( m p m w b Pe )
Find out natural rate of unemployment / find out what determines natural rate of
unemployment.

4) When money supply increases, thus when gmt increases, follow up the main effects
using the following relationships
i. Phillips curve, which relates the change in inflation to the deviation of the
unemployment rate from its natural rate.

π t −π t−1=−α (ut −ut −1)

ii. Okun’s law, which relates the change in unemployment rate to the deviation
of output growth from normal

ut −ut −1=−β ( g yt − ǵ y )

iii. The third is the aggregate demand relation, which relates output growth to
the difference between nominal money growth and inflation

g yt =g mt−π t

https://www.youtube.com/watch?v=eN20tOlnyb8

5)
i. Phillips curve is supply curve. Do you agree with this statement? Explain it.
(Romer ch. 11 page 528)
 ii. Discuss the global crisis in terms of business cycles parameters.

6)
i. Since central banks set the nominal rate rather than the real interest rate, the
Taylor rule is also often written as:

Rt =π t +α ( y t− y ¿t ) + β ( π t−π ¿ ) , α , β> 0

¿
which specifies the nominal interest rate R set by central bank and y t and π ¿
are targeted values for income and inflation, respectively. Show how to use
Taylor rule in case there exist deviations from targeted values.

ii. We write the money supply as follows

M s=M s (RD , Rd , RO , R R , H )

where R D=charges on demand deposits, Rd =discount rate (central bank rate

for lending to the commercial banks), RO =overnight loan rate, R R=required
reserve ratio and H=monetary base. Explain the relationship between money
supply and variables given in equation above.

http://www.mahfiegilmez.com/2017/01/merkez-bankas-faizleri-ve-faiz.html

7) The rental cost of capital, r k , is defined as follows:

Δ Pk
[
r k = i+ δ−
Pk ]
Pk

where i is nominal interest rate, δ is depreciation rate, Pk is price of capital and we

have marginal productivity, denoted by MP K . Using these definitions, discuss the
reasons for making investment.

8) Debt-income ratio is given by

Bt +1 (1+r t )
b t+1 = = b
Y t +1 (1+ g y ) t

Show the dynamics of budget deficit.

9)
i. Explain the following equation

π t =π et + μ−α ut
 where expected inflation ( π ¿ ¿ t e )¿ is defined as follows:

π et =π t−1
(Bl. Ch. 7-8)

ii. Under efficient wage model, show the existence of unemployment.

(Romer, Keynesian models, Case of efficiency wages)
(Sorensen, Akerlof’s Efficiency wage model)

iii. Define and formulate New Keynesian Phillips Curve and compare it with the
classical Phillips curve.
https://www.youtube.com/watch?v=UmHne5vnYhE

10) Compare the current income hypothesis and permanent income hypothesis.

11) Explain these terms: Tobin’s q, consumption smoothing, participation rate (labor),
wage rigidity

12) The production is given by

Y t =K αt ( At Lt )1−α

where τ is the tax rate, 0< τ <1, so τ Y t is the total tax at period t. The budget is
balanced, hence Gt =τ Y t . Government expenditure creates positive externalities,
hence
At =αG t , α >0

The capital accumulation is given by

K t +1=s ( 1−τ ) Y t + ( 1−δ ) K t

Assume that there is no population growth, Lt =L.

(1−α )/ α
i. Show that the production function is Y t =( ατL ) Kt
ii. Find out growth rate per capita
iii. Is there scale effect?
iv. Find out the optimal tax rate that makes growth rate maximum.

13)
i. Explain the following technological growth function

At +1− A t=δ LλA A ϕ

ii. Derive labor supply and labor demand functions. Using these functions, show
the equilibrium in labor markets.
 iii. When there are business fluctuations (aggregate demand falls), what occurs
there the labor market is competitive and wages are completely flexible, and
the source of incomplete adjustment is entirely in the goods market. Thus we
have the model “Sticky prices, Flexible Wages, and a Competitive Labor
Market”.
14)
i. If there is unemployment, suggest a fiscal or monetary to decrease this
unemployment. (in the model of IS-LM) – use IS-LM-PC
ii. Explain the concepts of convergence and Fisher equation.
iii. Explain that why aggregate demand (AD) is negatively sloped?
iv. How does an increase in currency ratio affect money multiplier?
v. Explain the following sentence: While an increase in money demand leads to
an increase in interest rate, an increase in interest rate leads to a decrease in
money demand.

15) In the mark-up pricing we have the following model

P= (1+ μ ) W
e
W =P ( a−bu )

where μ is the mark-up, Pe is the expected price, a and b are coefficients.

i. If expected prices come out to be true, find out natural rate of unemployment
level in terms of mark-up level.
ii. If mark-up increases, what happens to natural unemployment rate?

16) We have such an economy as

C=c o +c 1 (Y −T )
I =d o + d1 Y
M =mY
G=G0 and X =X 0

i. Derive IS curve and draw it.

ii. What is the change in net export after an increase in government
expenditure?

17) Explain Hodrick-Prescott filter and discuss this on its methodology.

18)
i. Show that the existence of union can cause unemployment. Discuss the
results of your model.
ii. Show the determinants of natural rate of unemployment. Discuss the impacts
of structural parameters on unemployment.

19) Discuss MP curve, Taylor model and endogeneity of money.

20) Show the connection between interest rate arbitrage and relative purchasing power
parity in the long run.

21) Construct links between coordination failures and business cycles using the game
theoretical arguments.

22) Construct a model in which there are both imperfections in labor and product
market. Discuss the impact of markup in product market during the business cycles.

23)
i. Show the effect of fiscal policy in an open economy with flexible exchange
rate.
ii. Explain the relationship between Marshall-Lerner condition and J-curve.
iii. If the inflation rate in Turkey and US are 12% and 2% respectively, what do
you expect to happen to nominal exchange rate according to PPP? And why?

24) Discuss the main concepts of business cycles and statistical parameters that describe
them. Volatility, Persistence, Correlation, Countercyclical/Procyclical, Leads and Lags.

25) In a two-period model show that there is no difference between of tax finance and
debt finance of government spending. Discuss the implications of this result.

https://www.youtube.com/watch?v=hI8IC5Fjhjk
http://www.economics.soton.ac.uk/staff/alicesch/Teaching/200910/Econ2004/ch6b
_slides.pdf

26) Firstly, derive labor demand functions using these function following equation

max Π =Pf ( L )−WL

L

and then using the labor supply function below, show the equilibrium in labor market

Ls =g
( WP )
e

Discuss unemployment in labor market in the light of New Keynesian models.

27) Derive augmented Phillips curve by using the following economic structure

Price setting:
The representative employer in sector i uses a technology described by the
production function:

Y i= A L1−α
i ,0< α <1
 (K is fixed in the short run; hence not added to function.)
The employer representing industry i produces a differential product and therefore
has some monopoly power; thus downward-sloping demand curve of the firm:

−σ
Pi Y
Y i= ( )
P n
, σ >1

Wage setting:
The labor demand curve implies that employment in sector i is a decreasing function,
W
Li ( wi ), of the real wage, w i= i . The union’s utility function can therefore be written
P
as:

μ
Ω ( w i )=(wi −b) [ Li ( wi ) ]

28)
i. Discuss the Ricardian equivalence and its criticisms.
https://www.youtube.com/watch?v=hI8IC5Fjhjk

ii. Discuss the global crisis in terms of business cycles parameters.

iii. Coordination problems can be mitigated by economic policies. Do you agree
with this statement?
iv. Discuss arguments against permanent income hypothesis.

29) Show that wage efficiency wage that leads to unemployment in a model.

30) The AS-AD Model: Suppose that the interest rate has no effect on investment.

i. What does this imply for the slope of the IS curve?

ii. What does this imply for the slope of the AD curve?

31)
i. Define Taylor rule including unemployment rate and exchange rate.
ii. Convert Phillips curve (PC) into a supply curve.

32) Construct an investment model with adjustment cost. Define the main structure with
required functional forms.

33) Assume that the nominal wage is rigid at Ẃ and that nominal prices are flexible, and
continue to assume that output and employment are related by production function.
Now, however, assume that the goods market is imperfectly competitive. With
imperfect competition, price is a markup over marginal cost. So price is given by

W
P=μ ( L )
F' ( L)
 W
Where is marginal cost and μ ( L ) is the markup. Discuss the conjectural
F' ( L)
business effects on real wage.

34)
i. Construct a debt dynamic model in a simple framework and explain why
divergence between real interest rate (r ) and growth ( g) determines the path
of dynamic debt path.
ii. Construct links between coordination failures and business cycles using the
game theoretical arguments.