2022-09-27 MacroBookSem-III Compressed

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MACRO r
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Bliss Point Studies 79 Ravindra N. Jha

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DEPARTMENT OF ECONOMICS
DELHI SCHOOL OF ECONOMICS
UNIVERSITY OF DELHI
Minutes of Meeting
Subject : B.A. (Hons) Economics - Third Semester

Course , Og (tnt"rrediate Macroeconomics-l)
Date of Meeting : 5 fvlay, 20'16 aL1.00 P.M'
Venue , O"p"'rir"nt of Economics, Delhi School of Economics'
UniversitY of Delhi, Delhi - 1 10 007
School of
Ghair: Mausumi Das, Oepartment of Economics' Delhi
Economics
Attended bY:
1 Nidhi GuPta SRCC

2 Sumeet GoYaIDRC
3 Kaileen Kaur SGGSCC
+ Uonini Aggarwal Rajdhani
5 Devendra Kr. JDMC
O S.f-. ChakravartY Aryabhatta
7 Anjana Singh LSR
8 Rashmi Chaudhary Kalindi College
9 Daisy Sals JMC
10 Nid Singh SatYawatiCollege (E)
1 1 D.B.ReddY S.V.college
l2Henna Sikka DCAC college
13 Malabika Pal MH
again underscored the need for a ioint
NOTE: The teachers present in the meeting once
2016 to take
:lt:tj:fl"rs of au the 3 macro courses of cBCS syllabus in December,
a more
view on the distribution of the topics across the 3 courses'
"o*pr"r,"nsive
Nochangeshavebeenmadeinthereadinglistfr-omtlgl.Sgtyear.Howeveritwas
"Ben Heijdra: Foundations of Modern
suggested that teachers take a look at in. 6oof'
possible refere.nce for Topic 2' Whether to
Macroeconomics ti"..Oi Cn"pter 3" as a
the next meeting.
include this as ,"rJing',or not *itt be decided in
"
Thetopic-wisereadingsforthecurrentsemesterareasfollows:
Topic wise Readings:
Gurve
Topic 1. The Aggregate Demand and Aggregate Supply
(Estimated number of lectures 17)
curves; interaction of aggregate demand

Derivation of aggregate demand and aggregate supply
and aggregate suPPlY
Readings: (5'1 to 5'3) and 7'

(a) RudigerDombusch and Stanley Fische(1994 -Ol91n I.9hs'5
+""0".1, pisz- p2e4'p' 300-306' ch6 and 7'
i6i ij.Bd;"haro(zoo6,
Ravindra N. Iha
Bliss Point Studies 8()
9811343411
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Topic 2. lnflation, Unemployment and Expectations
Phillips curve; adaptive and rational expectations; the policy ineffectiveness debate
Readings:
(a) O.Blanchard(2006,4tnedn),Chs. 8 and 9.
(b) C.L.F.Attfield, D. Demery and N.W. Duck (1991 , 2no end. ),p1- p28.
(c) Steven Sheffrin, (1996, 2noedn.),Ch. 2, p25- p4O.
Topic 3. Open Economy Models

Short run open economy models: the Mundell Fleming model;exchange rate determination:
purchasing power parity, asset market approach;Dornbusch's overshooting model. The monetary
approach to balance of payments; international financial markets.
Readings:
(a) RudigerDornbusch and Stanley Fischer(1994, 6tedn), Chs.6 and 20 (20.1 and 2O.2).
(b) D.Salvatore(20O8,8tnedn), Ch.14(14.1-14.6D and appendix),Ch.15 (including appendix)and
ch.20.6
Assessment:
1 . The internal evaluation will consist of two class tests of 10 marks each, with 5 marks being
allocated for attendance.
2. The End-semester Examination (75 marks) will have the following format:
The question paper will have total five questions ('15 marks each) with the following distribution
across topics: three questions from topics 1 and 2 and two questions from Topic 3. Question
should have internal choices. Question can be mathematical in nature
Reading List
1. RudigerDornbusch and Stanley Fischer(l994), Macroeconomics,6tn edition, McGraw Hill.
2. O. Blanchard (2006), Macroeconomics,4ti,edition, Pearson Education (Asia).
3. C.L.F.Attfiefd, D. Demery and N.W. Duck (1991), Rational Expectations in Macroeconomics,
2naedition, Blackwell.
4. Steven Sheffrin (1996), Rational Expectations,2naedition, Cambridge University Press.
5. D. Salvatore (2008), International Economics,8tn edition, Wiley (Asia).
Bliss Point Studies 81 Ravindra N. lha

31 1-45076221 9811343411
UNIT - I : THE AGGREGATE DEMAND AND AGGREGATE SUPPLY CURVI
(a) Rudiger Dornbusch and stanley Fischer (lgg4l, chs. 5(5. 1 to 5.3) and 7
(b) O. Blanchard (2006), p292 - p294, ch.6 and 7
Chapter - 5 /DORNBUSCH
Monetary and Fiscal PollcY
Problems
1. In ttre text we describe the effect of an open market purchase by the Fed.
(a) Define an open market sale by the Fed'
(b) Show the impact of an open market sa19 on the interest rate and
. output. show-both the immediate and the longer-term impacts.
2 Ttre economy is at fuI1 emplo5rment. Now the government wants to change

the composiiion of demand toward investment and away from consumption
without, however, allowing aggregate demand to go beyond firll emplo5rment'
What is the required policy mix? Use the IS-LM diagrarn to show your policy
proposal.
3 Discuss the role of the parameter Go, h, b and k in the transmission

mechanism linking an increase in government spending to the resrrlting
change in equilibrium income. In developing the analysis rrse the following
table :
(1) (21 (3)
Increase in G raises The increase in income The increase in interest
aggregate demand and raises money demand rates reduces
output and hence interest investment spending
rates. and hence dampens
output expansion
4 Srrppose the government cuts income taxes. Show in the IS-LM model the
imiict of thJtax cut under two assumptions: one, the government keeps
interest rates constant through an accommodating monetary policy; two, the
money stock remains gnchanged. Explain the difference in resglts.
5 Discuss tlee circumstances under which the monetary and fiscal policy
multipliers are each in turn, equal to zeto. Explain in words why this can
happen and how likely you think this is-
6 Consider two alternative programs for contraction. One is the removal of an

investment subsidy; the other is a rise in income tax rates. Use the IS-LM
model and the invlStment schedule, as shown in Figure 5-6, to discuss the
impact of these alternative policies on income, interest rates, and
investment.
Bliss Point Studies a2 Ravindra N. Jha

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7 Srrppose the parameters k and ao are O.5 ar,d 2, respectively. Assume there
is an increase of $t bitlion in government spending. By how much must the
real money stock be increased to hold interest rates constant?
8 In Figure 5-7 the economy can move to full emplo5rment by an expansion in
either money or the fi:ll-emplo5rrnent deficit. Which policy leads to E, and
which to Er? How would you expect the choice to be made? Who would most
strongly favor moving to E, ? To E, ? What policy would correspond to
"balanced growth"?
9 "We can have the GNP path we want equally well with a tight fiscai poiicy
and an easier monetary policy, or the reverse, within fairly broad limits. The
real basis for choice lies in many subsidiary targets, besides rea-l GNP and
inflation, that are differentially affected by fiscal and monetar5r policies."
What are some of the subsidiary targets referred to in the qrrote? How would
they be affected by alternative policy combinations?
10. Calculate the average real interest rate in the United States in 1999 1, and in
Germany, using Tables 5-5 and 5-6. What impact do you expect the
difference to have on investment rates in the two countries?
11. As of the middle of 1992, many observers believed that the short-term
interest rate in the United States would rise as the economy recovered from
the recession. The Treasury bill rate in the middle of L992 was below 4
percent as a result of expansionar5r monetary policy. How has the interest
rate changed since then? IJse a diagram like Figure 5-3 to explain these
recent changes.

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ChaPter - 7/ DORNBUSCH
Aggregate Demand and Supply : An Introduction

Problems
1. (a) Explain why we need to introduce the aggregate demand and
supply model.
(b) Define the aggregate demand and supply cun/es'
prices
2 Discuss, using the IS-LM model, what happens to interest rates as
change along a given AD schedule'
3 ShowgraphicallythattheADcurveissteeperthelargertheinterest
,."p""Ji"d"""* oi the demand. for money and the smaller the multiplier'
4 Explain why the classical supqly culve is vertical and in
explain the
the classical
mechanisms tl.at conUnueh-nill emplo5rment of labor
case. "rr"rr"
5 Suppose full-employment output increases from Y* to Y*'' What does the
qrritttity theory preAict will happen to the price level?
6 Ingoodsmarketequilibriuminaclosedeconomy,S+TA-TR=I+G.Use
thiJ equation to why, in tfre classical case, a.fiscal expansion must
"*pl"in
lead to full crowding out.
show, using IS and LM curves, why money is neutral in the classical supply
case. (Refer to footnote 6 for hints.)
8 Suppose the government reduces the personal income tax rate from t to t''
(a) What is the effect on the AD schedule?
(b) What is the effect on the equilibrium interest rate?
(c) What haPPens to investment?
9 suppose there is a decline in the demand for money' At each output level
and interest rate the public now wants to hold lower real balances'
(a) In the Keynesian case, what happens to equilibrium output and to
prices?
(b) In the classical case, what is the effect on output and on prices?
Repeat problem 9, using the quantity theory of money to explain the effect
of
10.
the money demand shift on Prices.
11 Suppose the government undertakes a balanced _ budget increase in
Government spending rises from G to G', and there is an
.".o*pirrying increase in tax rates so that at the initial level of output the
"p"rrairtg.
budget remains balanced.

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(a) Show the effect on the AD schedule.
(b) Discuss the effect of the balanced budget policy on or.rtput and
interest rates in the Keynesian case.
(c) Discuss the effect in the classical case.
l2 (a) Define the strict quantit5r theory.
(b) Define monetarism
(c) What type of statistical evidence would you need to collect in order to
support or refute the major argument of monetarism presented in this
chapter?
13 Explain the meaning of the statement that in Chapter 5, crowding out in a
demand phenomenon, whereas in the classical supply case, it is a supply-
side phenomenon.

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Chapter 6 I Blanchard
The Labor Market
Quick Check
1. Using the information in this chapter, label each of the following statements
true, false or uncertain. Explain briefly.
(a) Since 1950, the participation rate in the United States has remained
roughlY constant at 60%;o-
(b) Each month, the flows in and out of employment are very small
compared to the size of the labor force'
(c) One-third of all unemployed workers exit the unemplo5rment pool
each year.
(d) The unemplo5rment rate tends to be high in recessions low in
, expansions.
(e) Most workers are typically paid their reservation wage'
(0 workers who do not belong to unions have no bargaining power.
(g) It may be in the best interest of employers to pay wages higher than
their workers reservation wage.
(h) The natural rate of unemplo5rment is unaffected by policy changes.
2. Answer the following questions using the information provided in this

chapter.
(a) As a percentage of the employed workers, what is the size of the flows
in and oqt of employment (i.e., hires and separations) each month?
(b) As a percentage of the rrnemployed workers, what is the size of the
flows from unemplo5rment into emplo5rment each month?
(c) As a percentage of the rrnemployed, what is the size of the total flows
out of the labor force each monttr?
(d) As a percentage of the labor force, what is the size of the total flows in
and out of the labor force each month?
(e) What percentage of the flows in the labor force is due to new workers
entering the labor force?
3. The natural rate of unemplo5rment : Srrppose that the firms' markup over
costs is 5o/o, arrd the wage-setting equation is W = P(l - u), where u is the
rate
. unemPlo5rment
(a) What is the real wage as determined by the price-setting equation?
(b) What is the natural rate of unemplo5rment?
(c) Suppose that the markup of prices over costs increases to lOo/". What
happens to the natural rate of unemployment? Explain the logic
behind yoLrr Ernswer.

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Dig Deeper
4. Reservation wages : In the mid-198Os, a famorls supermodel
once said that
she would not get ou,t of bed for less than glO,OOO (presumably per
day).
(a) What is your own reservation wage?
(b) Did your first job pay more than your reservation wage at t].e time?
(c) Relative to your reservation wage at the time you accept each job,
which job pays more: your first one or the one jro, .*p".t to have in
10 years?
(d) Explain your a.nswers in terms of the efficiency wage theory.
5. Bargaining power and wage determination
Euen in tlrc absence of collectiue bargaining, taorkers d.o lnue some
bargainirg pourer
tlnt allows th'em to tyages higl,er {han ttrcir reseruation u)age. bo"i utorker,s
-receiug
bargaining pouer depend.s boih onlhe nature of his job and. on {to economg wid.e
labor market conditions. Let's cortsider eachfactir in tirn.
(a) Compare the- job of a delivery person and a computer network administrator.
In which of these jobs does a worker have more targaining power?
why?
(b) For any given job, how do labor market conditions affect the worker,s
bargaining power? Which labor market variable would you look
labor market conditions? at to assess
(c) Suppose for given labor market conditions (the variable you identified
in part
(b)), worker bargaining power throughout the economy
increases. what effect
worrldthis have on the real wageln the medium run? In the short run?
what determines the real wage in the model described in this chapter?
6. The existence of unemplo5rment
(a) Suppose the unemploJrment rate is very low. How easy is it
for firms to find
workers to hire? How easy is it for a6out the relativl u"rgxr.irrg
workers and firms when the unemploJrment rate is very low? fower of
what
a.nswers impy about what happeni to the wage as thJ unemptoyment do your
gets very low? rate
(b) Given your answer to part (a), why is there unemplo5rment in
(what would happen to real *agJ" if the .lre*pioy*ent ratethe economy?
zero?)
was equal to
7. The informal labor market

You learned in Chapter 2 thqt informar *ôry-at home (e.g. prepaing
mears, taking
care children) is not counted. as part of GDP. Such work also d.oes
-of
emplogment in lo.bor market sfafisfics. wiTh these obseruations not constitute
economies, each with 7oo utorkers, dis-tibuted. as
in mind., con-sid.er two
preparation, 7o emploged- (in the formal labor ma*Lt1 foltows: 25 d.euoted. to food.
preparation, and 5 unemploged. (i.e., not uorking in in qreas other than food"
fooi preparation or in ang other
area, but looking for work in the fonnal labor iartltl. Assume that
the 75 workers

011-4507622,- 9811343411
achtal qnd measured output in both
outside of food preparation produce the same
economies.
tllorkers cook for their families at
In the first ecoflomll, Eatln, the 25 food. nree'vratio\ and eaten at home'
home and do not rjorrc outside the-1ouie.
Au meats are prepared
-noi
do seek utork in the fonnal
The 25 food preparotion taorkers in this economa looking uork). In tlrc second
labor market (and uhen asked "og ,:n"ig-ii" -""i or" .iftoged' for
utorkers bg restaurants' All
economa, EatAtt, the 25 food. preparatioi
meals are purchased in restaurants'
(a) Calculate measured employment and unemployment and the measured
measured unemployment rate
labor force for each economy. calculate the
andparticipationratefor.^"r,".o''"*v.r,whicheconomyismeasrrred
GDP higher?
(b)SupposenowthatEatln'seconomychanges'-AfewrestaurantsopenandlO restantrants. The
of the food preparatior, *".r."r'" take" jobs in these
remaining15foodpreparationworkers.onti.,u.toworkathomeanddonot
calculating the numbers, what will
seek jobs in the formal "..tor.'*iit orrt
unemployment' and the- measured
happen to measured emplo5rmtttt "aparticlp"ti"., rate in Eatln? what will
labor force, unemploym..rt r"il,^lnJ
haPPen to measured GDP in Eatln?
(c)SupposethatyouwishtoincludeworkathomeinGDPandtheemployment
statistics.Howwouldyo.,*.^",rethevalueofworkathomeinGDP?How out of
worrld' yo, the definitions of employment' unemplo)rment' and
"]tt'
the labor force?
part (!)' wgu1a.the labor market statistics
(d) Given your new definitions in assuming
differ for Eatln and Eat outa that the food produced by these
economieshastheSalnevaltle,wouldmeasuredGDPintheseeconomics
differ? urd;;y; ,.r.* a.6rrititns, would the experiment in part (b) have
anyeffect".tt"labormarketorGDPstatisticsforEatln?
Explore Further
8. [Jnemplogment spells andlong-termunemploAment
presented .in this chapter, about one out of euery
three
'iiipii"i.d to the data
According
leiues unemplogment each month'
utorkers
(a)Whatistheprobabilitythatanunemployedworkerwillstillbeunemployed
after one *ot tha Two months? Six months?
Notuconsiderthecompositionoftheunemplogmentpool.Wetlliltuseasimple
in" uiemploged ula haue been
etc.teiment to ieterrnine the propirtion tirc
"f numbe, ol unemploged workers is
unemptoged sk-iintii o, *orZ. {"W;t:. -Eactt
month' 1/3 of the
constant and equal to x, tahere *-it "o*. consto,nt'
of preuiouslg emploged utorkers
unemploged find. jobs, and an equiualent number
become unemPloged'
(b)Consid'erthegrorrpofxworkerswhoareunemployedthismonth.Aftera (Hint: lf l/3 of
month, what fiaction of trri"'gr"up*il "til be uiremployed?
fraction of the original x
unemploylJ-*o.t.." find job? "rrlty month,-what
workers did not find
unemptoyeJ jobs in the first month?
88 Ravindra N. Iha
Bliss Point Studies 9811343411
o11-4507622L
(c) After a second month, what fraction of the original x unemplo5rment workers
has been unemployed for at least two months? (Hint : Given your answer to
part (b), what fraction of those unemplo5rment for at least one month do not
hnd jobs in the second month?) After the sixth month, what fraction of the
original x unemployed workers has been unemployed for at least six
*orrth"? This fraCtion applies to the economy at any time (remember that we
started with an arbitrary month). Under our assumptions, the fraction of the
unemployed who have been rrnemployed six months or more is constant.
(d) Using Table B,44 of the Economic Report of the President
(www.access.gpo.go ), look for the proportion of unemployed who have
t.", ..*"pl"y.d six month or more (27 weeks or more). Compute the
average ptopoitlot for the 199Os. Does the number correspond to the
ans*Jt obtained in part (c)? Can 5€ou guess what may cause the difference
between the two? (Hint : Suppose that the probability of eisting
unemplo5rment goes down with how long you have been unemployed.)
9 Go the the Web site maintained by the U.S. Bureau of Labor Statistics at the
address (www.bls.eov) Find the latest "Emplo5rment Situation Summar5/'.
Look under the link "National Emplo5rment"
(a) What are the latest monthly data on the size of the U.S. civilian labor force,
on the number of unemployed and on the unemplo5rment rate?
(b) How many people are employed?
(c) Compute the change in the number of unemployed from the first number in
the table to the most recent month in the table. Do the same for the number
of employed workers. Is the decline in unemployment equal to the increase
in ernployment? Explain in words.

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ChaPter 7 I Blanorchard
Model
Putting All Markets Together: The AS'AD
Questions and Problems

Quick check
l.Usingtheinformationint}rischapter,labeleachofthefollowingstatements
Explain briefly'
true,-fatse, or uncertain'
(a) The aggregate s]rppry relation implies that an increase in output leads
to anlicrease the Price level'
(b)Thenaturallevelofoutputcanbedeterminedbylookingatthe
alone'
aggregate suPPlY relation
down because at a higher price
(c) The aggregate demand relation slopes goods'
t".r"t,-8"**mers wish to purchase fewer
(d)Intheabsenceofchangesinfiscalormonetarjrpolicy,theeconomy
natural level of output'
*il i;;;;ain at thE
effect on the level of output in
(e) Expansionary monetary policy has no
the medium run'
(0Fiscalpolicycannotaffectinvestmentinthemedirrmrunbecatrse
o.rtp't-J*iys returns to its natural level'
output always return to the same
€) In the medium run' Prices and
valtre.
2. Spending shocks and the medium run

(a)UsingtheAS-ADmollrdevelopedinthischapter,showtheeffectsof
show the effects of an increase ln
an rrcrease in consu*.r-Lorrti'aence
consumerconfidence"t,o*theeffectsofanincreaseinconsrrmer
confidence(sothatconsumptionincreasesforanylevelofdisposable
IS' ana lfu culves in the
income) on the position-oilht eo' AS'
mediumrun,Thenstrowtheeffectonoutprrt,theinterestrate,and
thepricelevel'alsointhemedirrmto"]A*"'methatbeforethe
increaseinconsum".'-.o,ria"nce,theeconomywasatthenatural
level of output'
income taxes'
(b) Do the sarlle exercise for an increase in
3. SuPPlY shocks and the medium run

Usingthemodeldevelopedinthischapter-'?h"Ytheeffectsofanincreasein
AS cuwes in the short
,r.*ptoyilrrit"rr"ntr ., th.;;"itioir olthe +D "r,
effects on output in the short
run and in the medirrm rtrrr.-ti"r.-"t"t" thethat before the increase in
run and in the medium rr;--fi;*e
.,nemploym-entberiefits,theeconomywasatthenaturalleveloforrtprrt.
4. The neutralit5r of moneY
9() Ravindra N. Iha

011-45076221
(a) In what sense in money neutral? Way is monetary policy useful if
money is neutral?
(b) Fiscal policy, like monetary policy, cannot change the natura-l level of
output. Why then is moriet-ary policy considered neutral but fiscal
policy is not?
(c) Discuss the statement; "Since neither fiscal nor monetary policy can
effect the natural level of output, it follows that, in the medium run,
the natural level of output is independent of all government policies."
Dig Deeper
5. Suppose that the interest rate has no effect on investment,
(a) Can you think of a situation where this may happen?
(b) What does this imply for the slope of the IS cunre?
(c) What does this imply for the slope of the LM curve?
(d)WhatdoesthisimplyfortheslopeoftheADcurve?
continue to assume that the interest rate has no effect on inuestment Assume that
-suppose
the economg starts at tle natural leuel of output. there is a shack to tle
uqriable z, so tltat the AS cutae shifis up'
(e) what is the short-run effect on the price level and output? Explain in
words.
(0Whathappenstoorrtprrtandthepricelevelovertime?Explainin
words.
Suppose that money demand is flat, as is the case at very 1ow interest
rates'
6.
(See-Problem 6 on the liquidity trap in Chapter 5')
(a) What does this imply for the slope of the LM curve?
(b) What does this imply for the slope of the IS curve?
(c) What does this imply for the slope of the AD curve?
(d) Draw the AD and AS ctlrves, and assume that equilibrium is atthe a
point , rh".. outprrt is below the natural level of output. suppose
central bank increases the money stock. what will be the effects on
outptrt in the short run and in the medium run? Explain in words'
7. Demand shocks and demand management
Assume that the econolny starts at the natural level of output. Now suppose
there is a decline in business confidence so that investment demand
falls for
anY interest rate.
(a)InanAD-ASdiagram,showwhathappenstooutputandt}reprice
level in the short run and the medirrm run'
(b)Whathappenstotheuneirrploymentrateintheshortrun?Inthe
medium run?
srrppose that the Federal Reserve decides to respond irnrnediately totJeat
,tie
decline in business confidence in the short run- In particular, strppose
Bliss Point Studies 91 Ravindra N. lha

011-4507622L 9811343411
theFedwantstopreventtheunemploymentratefromchangingintheshort
run after the decline in business confidence'
(c)WhatshouldtheFeddo?ShowhowtheFed'saction'combinedwith
the AD-AS diagram in the short
decline in business confrdence, affects
and medium run.
(d) Howdotheshort-runoutputandtheshort-runpricelevelcompareto
your answers from Part (a)?
rates compare
(e) How do the short-run and medium-run unemployment
to your answers from Part (b)?
8 Supply shocks and demand management

level of output' Now suppose
Assume that the economy starts at the natural
there is an increase in the price of oil'
(a) In an AD-AS diagram, show medium what happens to output and the price
level in the short run and the run'
In the
(b) What happens to the unemplo5rment rate in the short run?
medium run?
SupposethattheFederalReservedecidestorespondimmediatelytothe Fed wants to
increase in the pti;;;i;il, in partlcular' suppose,that the run, after the
prevent tfr" ,rr.*iiffieni'rate'from changineiin_the short
"of
oil. Assume that tn! f'Ea changes he money supply
increase in the pri."
,o.i,l.""-..ii';il;ly then not
after the increase in the price of oil and does
change to moneY suPPlY again'
What should the Fed do to prevent -the- uSemployment
rate from
(c) action' combined with
changing in-itre strort run? Sho; how the Fed's
diagram in the
the declin, irr-Lr"irress confidence, affects the AD-AS
short and medium run'
(d) Howdooutprrtandthepricelevelint}reshorturnandthemedium
run compar- to your arswers from part
(a)?
(e) How do the short-run and medium -run trnemplo5rment rates

compare to your answers from part (b)?
9 BasedonyouranswerstoProblemsTand8andthematerialfromthe
chapter, comment on the following statement:
TheFederalReservehastheeasiestjobin-theword.Allithastodois
conduct expansiona4r monetarlr poii.y when the unemplo5rment
rate
the unemplo5rment rate
increases and contractionarlr monetar5r policy when
falls.
10. Taxes, oil Prices, and' workers

whether they have a
Anyone in the labor force is concerned with two things:
job,andifsott-reirafter-taxincomefromthejob'i'e''theirafter-taxreal
with the availability
wage. An unemployed worker may also be coricerned that issue aside for
and arnorrrrt or..rr."ip1"y*;;i u"rrlnt", but we will leave
his problem.
92 Ravindra N. Jha
Bliss Point studies 9811343411
011-4507622L
(a) Suppose there is .an increase in oil prices. How will this affect the
unemplo5rment rate in the short run and the medium run? How about
the real wage (W/P)?
(b) suppose there is a reduction in incorne taxes. How will this affect the
unemplo5rment rate in the short run and the medium run? How about
the real wage? For a given worker, how will after-tax income be
affected?
(c) According to our model, what policy tools does the government have
available to increase the real wage?
(d) During 2OO3 and 2OO4; oil prices increased more or less at the same
time that income taxes were reduced. A popular joke at the time was
that people could use their tax refunds to pay for the higher gas
prices. How do yolrr answers to this problem make sense of this joke?
Explore f'urther
Growth and fluctuations: some economic history
when economists think about history, fluctuations often stand out-oil
shocks and stagflation in the 197Os, a recession followed by a long
expansion in the 198os, a recession followed by an extraordinar5r low
unemployment, low inflation boom in the 199os. This question puts these
fluctuations into some perspective.
Go to the website of the Bureau of Economic Analysis (www.bea.doc.gov),
and retrieve the quarterly version of NIPA Table 1.1.6, real GDp in chained
(2OOO) dollars. Get real GDP for the fourth quarter of 1959, 1969, lg7g,
1989 and 1999.
(a) Using the real GDP numbers for 1959 and1969, calculate the decadal
growth rate of real GDP for the 196Os. Do the same for the 197Os,
198Os, and 199Os.
(b) How does growth in the 197os compare to growth in the 198os and
199os? How does growth in the 196os compare to the later decades?
Which decade looks most unusual?
We will learn more about the differences in postwar growth rates over
periods of time, in particular before and after 792A, in Chapters 1O
through 13,
BIiss Point Studies 93 Ravindra N. Jha

sI1-450762?,L 9811343411
UNIT - II : INFLATION, UNEMPLOYMENT AND E)(PECTATIONS
(a) O.Blanchard (2O06) Chs. 8 and 9.
(b) C.L.F. Attfield, D. Demery and N.W. Duck(1991), p.l - p28
(c) Steven Sheffrin, (1996), Ch. 2 (p 25-paOl
(d) R. Froyen (2OO5), ch.lL.2
Chapter 8 / Blanchard
The Natural Rate of Unemployment and the Phillips Cunre
Questioas and Problems
Quick check
1. Using the information in this chapter. La.bel each of the following statements
true, false, or uncertain. Explain briefly.
(a) The original Phillips curve is the negative relation between
unemplo5rment and inflation first observed in ttre U.K.
(b) The original Phillips curve relation has proven to be very stable across
countries and over time.
(c) The aggregate supply relation is consistent with the Philips curve as
observed before the 197Os, but not since.
(d) Policy makers can only orploit the inflation-unemplo5rment trade-off
temporarily.
(e) In the lat 196Os, the economists Milton Freidman and Edmund
phelps said that policy makers could achieve as low a rate of
unemplo5rment as they wanted.
(0 The expectations-arrgmented Phillips cllrve is consistent with workers
and firms adapting their expectatipns after the macroeconomic
experience of the 196Os.
2. Discuss the following statements.
(a) The Phillips curve implies that when unemplo5rment is high, inflation
low and.ric. ve.s". Therefore, we may experience either high inflation
or high unemplo5rment, but we will never experience both together.
(b) As long as we do not mind having high inflation, we can achieve as
low a livel of unemplo5rment as we want. A1l we have to do is increase
the demand for goods and services by using. For example.
Expansionar5r fiscal PolicY.
3. Mutations of the Phillips curve

Suppose that the Phillips cltrve is given by ttr=fii+O'l-2rt,
(a) What is the natural rate of unemplo5rment? Assume
tl :0r'-'

ott -4507622L 9811343411
to it" natural rate h: \-ea: : --:-:
Andsupposethat0isinitiallyeguallozelo.Supposel.iia..-.::=..=.:-.
unemplolrment is ;"ilit
egual to 3:: --:
authoiities decide i"-uirtg
tr'" t""*p1"yment rate dos-n
hold it there forever' t + 5'
in years t' t =1' t + 2' and
(b) Determine the rate of inflation (Hint: ThLnx
believe the answer grv9n in (b)? why or w!V- 1ot?
(c) Do vou form tJp"ttaiiot's of inflation')
about how people "['rilt"rvio
O to 1' Suppose that
suppose that in year 1 + 5 0 -increases from forever:
Now to keep u at' 3o/o
the government t" ""riilt"imined
this waY?
(d) Why might 0 increase in +6' arrd t +7?
be in years 1 + 5't
(e) What will the inflation rate
believe tkre answer given
in (e)? why or why not?
(0 Do yorr
+ Oil shocks, inflation' and unemplo5rment

curve is given by
Suppose that the Phillips
nr-ni=0'08 +O'IP-2u' is initially equal
of prices over wages. Suppose. !"t ,
where p is t,.e markup ,*tf" oil prices' 1u increases to
to 2Oo/o,but that "" l-r""rft
of
" "t ".p-i*t
4Oo/o inyear t and
after:
prices result in an increase
in trt?
(a) Why would an increase in oil on the naflrral rate of
of the increase in lt
(b) What is the effect
words'
in
unemPlo5rment? ExPlain
Dig DeePer
5.Themacroeconomiceffectsof^theindexationofwagesSupposethattlre
o'-n"'=0'1-2u'
Phillips curve is given by
-r'
Where fil=ntr-,
vear t' t}re authorities decide to
srrppo-se.h".i*:H:;i,::Ll ;:^'i,x3{,2;.In
t +1' t + 2' and t + 3'
ff' 'T*TI:I;;" '"* or inflation for vears t'
that half the workers have
indexed labor contracts'
Now suppose
for the Phillips curye?
(b) What is the new equation
to part (a)'
(c) Recompute your answer and'
effect of wage indexation on ttre relation between zr
(d) What is ttre
u?
substantially in the 199Os'
!, The price of oil declined in this ctrapter) on
(presented
(a) Can this help explai" !1:. "t'id"ttt"
in the 199Os'
inflation *Jlt"*plo5rment
95 Ravindra N. lha
011-45076221
(b)Whatwasthelikelyeffectonthenaturalrateofrrnemplo5rment?
Supply shocks and wage flexibility suppose that the Phillips ctlrve is
given
7
by
u -.'tJ+z
frt-Tt-t=
a )
Recall that this Phillips cllrve was derived in this chapter under
the
assumption that the wa.ge bargaining equation took the form
W = P"F(u, ,z)=l-Gu'tt+z
We can think of a as a measure of age flexibility-the higlrer
is a, the greater
is the response of the wage to a change in the unemplo5rment rate, u, '
(a) Suppose p= O'03 and O'O3' What is the natural rate of

unemplo5rment if a= l? Tf a:2? What is the relation between
a and
the natural rate of unemployment Interpret your answer'
(b)Supposethatasaresultofanoilpriceincrease,pincreasestoo.o6.
what is the new natural rate of unemploJrment if a,= l? If a= 2? What
doyouconclrrdeabouttheinfluenceofaontheeconomy,sresponse
to suPPlY shocks?
Explore Futther
yoll
8. Estimating the natural rate of unemplo5rment To answer this question'since
will need date on the annual U.S. unemployment and inflation rates
lg7o, which can be obtained from the web site of the Bureau of Labor
Statistics: www..bls. gov/
select .,Get Detailed Statistics" and then "overall Most Requestedrate' This
BLS
is a
Statistics." Retrieve the date for the civilian unemplo]rment rate'
unemployment
-date average for that
monthly series, so use the year's year's
In additiorr, ,.t i..r" the for the consllmer price index, all urban
consumers, Define the inflation rate in year t as the percentage change of
in
the CpI between year t and year t - L. Once you have computed the rate
inflation for eacti year, comprrte also the change in the inflation rate from
one Year to the next.
(a)Constructascatterdiagramfor-all.theyearssincelgTo,withthe
ct ange in inflation on the vertical axis and the rate
of unemplo5rment
on tt". ho/rzontal axis. Print out the graph. Is your graph similar to
Figure 8.5/
(b) Using a ruler, d'raw the line that appears to fit best the cloud of points
in th? figure. Approximately wha[ is the slope of youq line? What is
the interiept? write down the corresponding equation.
(c) Accordingtoyorrranalysisin(b)hasbeenthenaturalrateof
unemplo5rrnent since l97O?
g. Changes in the natrrral rate of unemployment

011-45076221 9811343411
Repeat Problem B(a), now drawing separate graphs for the periodlgTo-199o
and 1990 on. Do you find that the relation between inflation and
unemplo5rment is different in the two subperiods? If so, what does this imply
for the natural rate of unemplo5rment?
Bliss Point Studies 97 Ravindra N. Jh.a

011-4507622L 981134341 1
ChaPter 9 / Blanchard
Inflation, Activity, and Nomlnal Money Growth
Question and Problem

Quick Check
statements
1. using the information in tl.is chapter, label each of the following
true,-false, or uncertain' Explain briefly'
(a)TheU.Sunemplo5rmentratewillremainconstantaslongastheris
Positive outPut growth'
(b) Many firms prefer to -keep workers around when demand is low
(rattrerthanlaythemoff)eveniftheworkersareunderutnized.
is
(c) The behavior of okun's law across countries and across decades
. corr"iri"rrt without krrowledge of firms behavior and labor market
regulations.
There is a reliable negative relation between the rate of inflation
and
(d)
the growth rate of outPrrt.
(e) In the medium run. The rate of inflation is equal to the rate of
nominal money growth.
(0 AccordingtothePhillipsclll-verelation,thesacrificeratiois
independlnt of the speed of disinflation'
(g) If Lucas and Sargent were right, and monetary policy was firlly
credible, there Jodd be no relation betweerr inflation and
unemplo5rment - no Phillips ctln/e relation'
of
(h) country to the traditional Philips clll-ve analysis. Taylor',s analysis to
staggerld wage contracts makes the case for a slow approach
disinflation
(1) Ball's analysis of disinflation episodes provides soPg- support for both
it. effects of Lucal and Sargent and the wage-contract
"r"aiUility
effects of Fischer and TaYlor.
As shown by equatior: (9.2), the estimated okun's law for the united
States
2
is given by
u,-u,-r = -0.4(gr, 4%)
(a) what growth rate of output leads to an increase in therate
unemplo5rment
increase even
rate oI lyo per year? How can the unemplo5rment
though the growth rate of output is positive?
(b) What yearly rate of growth of output do point we need if we want to
decrease unemplo5rm.it Uy two per-entage over the next four
years?

otL-4507622L 9811343411
(c) Suppose that we experience a second UapV !o-om.. How do you exlrect
Okun,s law to chanle if the rate of growth of the labor force increases
by two Percentage Points?
3 suppose that the economy can be described by tl:e following three

equations.
ut -ut-r =-o'4(gr, 4%) okun's law
t,-T,-t: -(u, -5%) PhilliPs cu.l've
Eyt = Eor,-T1
Aggregate demand
(a) What is the natural rate of rrnemplo5rment for this economy?

(b) suppose that the unemployment rate is equal to the natural rate, arrd
rate of output? What
ttraf ttre inflation rate iJ S%. What is the growth
is the growth rate of the money supply?
(c) suppose that conditions are as in (b), when, in year t, the auttrorities
policy to reduce the inflation rate to 4o/o in year t and
use monetary -Cir"r,
keep lt therJ. this inflation rate and using the Phillips,cure'
what must happen to the unemplo5rment -rate and rate in years t'-t + 1' -t +
2,-..? Given trrd unemplo5rment using okun's Law,_what
f must happen to the rati oi growth of output in year t, t + 1, t + 2, ...-?
Given the rate of growth oioutput and ,sing the aggregate demand
S equation, what must be the rate of nominal money growth in years t' t
+1,t+2,,..?
+ suppose that you are advising a government that wants to redtrce the
inflation rate. It is considering two optiot *t a gradual reduction over several
years or an irnmediate reduction-
(a) Lay out the arguments for and against each option'
(b) considering only the sacrifice ration, which option is preferable? why
might you iantio consider criteria other than the sacrifice ratio?
(c) What particular features of the economy would you want to look at
before gving Your advice?
c Markups, unemplo5rment, and irrllation

Suppose that the Phillips clllve is given by
T,. - fr t-t: -(u, - 5%)+ o.lp
:nt Where p is the markuP.

ren
Suppose that unemplo5rment is initially at its natural rate. Suppose now-that
an oil shock irrcrea"'es-p , but that ths monetary authorit5z contimres to keep
to
our the unemplo5rment rate at its previous value'
(a) What will haPPen to inflition?
(b) What should the monetary authorit5r do instead?
Dug Deeper
-Jha Bliss Point Studies 99 Ravindra N. Jha

411 011-4507622L 9811343411
_------4
6 Credibility and disinflation
Suppose that the Philips curve is given by Tr-Ti:-(u, -5%) and expected
inflation is given by rl : nr-,
(a) What is the sacrifice ratio in this economy?
Suppose that unemplo5rment is initially equal to the natural rate and
r=l2Yo. The central bank decides t}:at l2o/o inflation is too high and that,
starting in year t, it will maintain the unemplo5rment rate one percentage
point above the natural rate of unemplo5rment unit the inflation rate has
decreased to 2o/o.
(b) Compute the rate of inflation for years t, t + 1, t + 2,...
(c) For how many years must the central bank keep the unemplo5rment
rate above the natural rate of unemplo5rment? Is the implied sacrifice
ratio consistent with your answer to (a)?
Now suppose that people know that the central bank wants to lower inflation
to 2o/o, but they are not sure of the central bank's willingness to accept an
unemplo5rment rate above the natural rate of unemplo5rment So, their
expectation of inflation is a weighted average of the target of 2o/o and last
year's inflation., i.e.,
ni = ).2o% +(l- ).\tE,-l
Where ,t is the weight ttrey put on the central bank's target of 2o/o.
(d) I-et 1= -25. How long will it take before the inflation rate is equal to
2o/o? Wl:at is the sacrifrce ratio? Why is it different from the answer in
(c)?
(e) Suppose that after the policy has been in effect for one year, people
believe that the central bank is indeed committed to reducing inflation
to 2o/o. So, they no set their expectations according to ni = 2yo
From what year onward can the central bank let the unemplo5rment
rate return to the natural rate? Hat is the sacrifice ratio now?
(0 What advice would you give to a central bank that wants to lower the
rate of inflation by increasing tJ:e rate of unemplo5rment as litfle and
for as short a time period as possible?
7 The effects of a permanent decrease in the rate of nominal money growth
Suppose tlat the economy can be described by the following three
eqrrations:
ut -ut-r :-o-4(gr,
-3%) okru's 1aw
nt-Tt-r: -(u, -5%) phillips cnrue
Eyt=E*t-T: Aggregate demand

(a) Reduce the three eqrrations to two by substituting gy, from the
aggregate demand equation into Okun's law.
Bliss Point Studies 1()() Ravindra N. Jha

o11-45076221, 9811343411
Assume initially that u.:ut-r:5oh,8^r=13%o a11d 1Tt:ljyo. Now suppose
that money growth is permanently reduced from 13 to 3oh, starting in year t.
(b) Compute (using a calculator or a spreadsheet prograrn)
unemployment and inflation in year t, t + 1,..., t + 10.
(c) Does inflation decline smoothly from 1O to 3o/o? Why or why not?
(d) Compute the values of the unemplo5rment rate and the inflation rate
in the medium run.
Explore Futther
8 Go to the Bureau of Economic Analysis website (www.bea.doc.eov) and
retrieve quarterly date on real chained gross domestic product for 2OO2 and
2OO3. Go to the Buream of Labor Statistics website (www.bls.eov) and
retrieve date on monthly unemplo5rment rates and monthly emplo5rment
levels for 2OO2 and 2OO3
(a) Was output growth positive throughout 2OO2 and 2OO3?
(b) What happened to the unemplo5rment rate over the period Januar5r
2OO2 to June 2OO3?
(c) How do you reconcile your answer to parts (a) and (b)?
(d) Now consider the emplo5rment level. Compare the monttrly
emplo5rment levels from September 2OO2 and December 2AO2. What
happened to employment over the last quarter of 2OO2?
(e) Was output growth positive in the last quarter of 2OO2?
(0 How do you reconcile your answers to parts (d) and (e)?
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011-4507622t 9811343411
III : OPEN ECONOMY MODTLS
UNIT -
Chs' 6 and20 {2O'L and20'21
(a) Rudiger Dornbusch and Stanley Fischer llgg4l'
(including appendix and
Ch' 14(14'1 - L4'6Dand appendix)' Ch' 15
(b) D. Salvatore(2OO8),
ch.20.5
ChaPter 6/ DORNBUSCH
International Linkages
PROBLTMS
l.Thisproblemformalizessomeofthequestionsaboutincomeandtrade
in Jit"*tt;;;;y (Before doing it' read the
balance determination -tt'"' as a simplification' that the interest
tt";;i;-;;;pier') We
appendix
t" ""i11*t' also that the real exchange rate is
i;,-;d
rate is given and equal
spending by domestic residents is
constant. we assume aggregate
A =A+cY-bi
bY
and net exPorts, NX, are given
NX=X-Q
Import sPending is given
q = Q+mY
Exports are given and are equal
Where Q is autonomotls import spending'
to
X=X goods? The balance of trade?
(a) What is the total demand for domestic
income?
(b) What is the equilibrium level of
What is the balance of trade at
that equilibrium level of income?
(c)
(d) W?ratisttreeffectofanincreaseinexportsontheequilibriumlevelof
ir."*.a What is tl.e multiPlier?
on ttre trade balance?
(e) what is the effect of increased exports
2 SupPose that, in Problem 1'
X=25O
A=400 c=o.8 b=3o io=5 (percent) Q=O rn=o'2
of income'
(a) Calculate the equilibrirrm leve1
(b) Calculate the balance of trade'
that is, _the effect of an
(c) calcurate the open economy multiplier, (To answer this question' you
increase in A on equilibrium.oYlp1rt'
il;;;;;io,*" thl''pp'naix to this chapter')
Lo.2 Ravindra N. Iha

011-45076221
(d) Assume there is a reduction in export demand of lX:1 (billion)' By
how much does income change? By how much does the trade balance
worsen?
(e) How much does a one percentage point increase in the interest rate
(from 5 percent to 6 percent) improve the trade balance? Explain why
the trade balance improves when the interest rate rises.
(0 What policies can the country pursue to offset the impact of reduced
exports on domestic income and employment as well as the trade
balance?
3 It is sometimes said that a central bank is a necessary condition for a

balance of pa5rments deficit. What is the explanation for this argument?
4 Consider a country that is in a position of full employment and balanced
trade. The exchange rate is fixed and capital is not mobile. Which of the
following types of disturbance can be remedied with standard aggregate
demand tools of stabilization? In each case the impact on external and
internal balance as well as the appropriate policy response.
(a) A loss of export markets
(b) A reduction in saving and a corresponding increase in demand for
domestic goods
(c) An increase in government spending
(d) A shift in demand from imports to domestic goods
(e) A reduction in imports with a corresponding increase in saving.
(a) Use the formula 7 /(rn + s) for the foreign trade multiplier (see the
appendix) to discuss the impact on the trade balance of an increase in
anttonomous domestic spending.
(b) Comment on the proposition that the more open the economy, the
smaller the domestic income expansion.
This question is concerned with the repercussion effects of a domestic
rf expansion once we recognize that, as a consequence, orrtput abroad will
expand. Suppose that at home there is an increase in amtonomous spending
ZE ttat falls entirely on domestic goods. (Assume constant interest rates
throrrghout this problern.)
(a) What is the resrrlting effect on income, disregarding repercussion
effects? what is the impact on our imports? Denote the increase in
imports by lQ .
(b) using the result for the increase in imports, we now ask what
happens abroad. Our increase in imports appears to foreign countries
an as an increase in their exports and therefore as an increase in
ou demand for their goods. In response, their orrtput expands. Assuming
the foreign marginal propensit5r to save is s* and the foreign
propensit5r to import is m*, by how mrrch will a foreign count5r's
income expand as a result of an increase in its exports?
- Ravindra N. fha
lha Bliss Point Studies 1()3
r11 011-45076221 9811343411
(c) Now combine the pieces by writing the familiar equation for
equilibrium in the domestic goods market: change in.supply, /I ,
equafs the total change in demand , lA + lX - tL/Y + (t -5)Z f' or
7Y =/T+/x
s+m
Notingthatourincreaseinexports,/X,isequaltoforeigners,
increaseinimports,wecanreplace/Xwit}J-'theanswerto6bto
obtain g".r..dl expression for the multiplier with repercussions.
"
(d) substitute your answer to 6b in the formula for the change in orrr
exports, lX = rra*lY *-
(e) calculate tJ:e complete change in our income, including repercussion
effects. Now compare your result with the case in which repercussion
effects are omitt6d. what difference do repercussion effects make? Is
our income expansion larger or smaller with repercrrssion effects?
(0 consider the trade balance effect of a domestic expansion with and
without repercussion effects. Is tl..e trade deficit larger or smaller once
repercussion effects are taken into account?
7 Assume that capital is perfectly mobile, the price level is fixed', and the
exchange rate is flexibll. Now let the government_ increase purchases'
Explairifirst why the equilibrirrm levels of output and the interest rate are
un-ajfected. Then show whether the current accorrnt improves or worsens as
a resrrlt of the increased government purchases o goods and services.
8 Assume that there is perfect mobility of capital. How does the imposition of a
tariff affect the exchairge rate, oqtput, and the current account? (Hint: Given
the exchange rate, the iariff reduces our demand for imports')
9 Explain how and why monetary policy retains its effectiveness when there is
perfect mobilitY of caPital.
10. show graphically how fiscal policy works with capital mobility and fixed
exchange rates.
11 was u.s. policy from 1980 to 1985 consistent with a beggar-thy-neighbor

approach to trade PolicY?
t2. In 1990-1992 Finland into serious difficuities. The collapse of exports to the
Soviet Union and a dramatic fall in the prices of pulp and paper- an
important export item-led to both a recession and a current accorrnt deficit,'
What adjustment policies would you recommend for srrch a case?
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011-45076221 9811343411
Chapter - 2Ol DORNBUSCH
International Adjustment and Interdependence
PROBLEMS
1 It is sometimes said that a central bank is a necessaqr condition for a

balance of paSrments deficit. "What is the explanation for this argument?
2 Use the central bank balance sheet to show how a balance of pa5rments
deficit affects the stock of high-powered money under fixed exchange rates,
Show, too, how sterilization operations are reflected in the central bank's
balance sheet.
3. Consider a country that is in a position of firll employment and balanced
trade. Which of the following t5pes of disturbance can be remedied with
standard aggregate demand tools of stabilization? Indicate in each case the
impact on external and internal balance as well as the appropriate policy
response.
(a) A loss of export markets
(b) A reduction in saving and a corresponding increase in demand for
domestic goods
(c) An increase in government spending
(d) A shift in demand from imports to domestic goods
1
(e) A reduction in imports with a corresponding increase in saving
1
+ Suppose in year I we have price levels P: 1OO and Pr:100. Suppose next
that in year 2 the respective price levels are &:180 and Pzr:130. Let the
S exchange rate initially be $2 per pound and assume the balance of pa5rments
is in equilibrium.
d
(a) If there were no real disturbances between year 1 and year 2, w}eat
would be the equilibrium exchange rate in year 2?
(b) If the real exchange rate, ePr : P, had deteriorated between years 1
)r and years 2, by 5O percent, what would the exchange rate be in year
2?
1e
Discuss the rnanner in which income, price adjustments, and money supply
m adjustments interact in leading the economy ultimately to full emplo5rment
t..
and external balance. Choose as an example the case in which a country
experiences a pernanent increase in exports.
Explain the purchasing power parity theory of the long-run behavior of the
exchange rate. Indicate whether there are any circumstances under which
you would not expect the PPP relationship to hold.
In relation to external imbalance, a distinction is frequently made between
imbalances that should be "adjusted" and those that should be "financed."
- tsliss Point Studies 1()5 Ravindra N. lha

ha
11
lLL-4507622L 9811343411
Give examples of disturbances that give rise, respectively, to imbalances
that
require adj-ustment and those that should more appropriately be financed'
8 consider a world with some capital mobility: the home country's capital rate of
account improves as domestic interest rates rise relative to the worlds (Draw
irrt"r."t Initially, the home country is in internal and external balance'
theIS,LM,andBBschedules')Assumenowanincreaseintherateof
interest abroad.
(a) Show the effect of the foreign interest rate increase on the BB
schedule.
(b) *What policy response would immediately restore internal and
external balance?
(c) the adjustment
If the authorities took no action, what would be approach
\-' by the "monetar5/ to the
process d";; the lines described
balance of fayments"? (You may refer here to your answer to
problemS.)
9 Explain why an expansionary fiscal policy reduces foreign income less than
direct unsterilizeay'interventitn by tlie central bank in the foreign exchange'
markets to depreciate the exchange rate'
of a
10 Assume that there is perfect mobility of capital. How does the imposition
tariff affect the exchange rate, output and the current account? (Hint: Given
the exchange rate, the aariff reduces or'rr demand for imports')
l" 1. consult the wall Street Journal or some other newspaper that lists loleign
exchange rates on its financial pages. For some countries, such as Britain
an4 Germany, you should find iuiures price listed. That is the price to be
paid today tJ receive one gnit of the foreign currency in the future' A 3o-day
iutures piice for the pound sterling, say, is the price paid today to receive 1
p"urra dO a^y" from now. Explain why the fi:tures prices are not generally
whether you can explain the differe.r.. b.t*.en the relationship of spot and
futures p-.i""* for thl pound and derrtsche mark, respectively.
72 Assume you expect the pound to depreciate by 6 percent over the next year'
Assume that the U.S. iriterest rate iS 4 percent. What interest rate would be
needed on pound securities- such as government bonds-for you to be willing
to buy those securities with your dollars today and the sell them in a year
in
exchinge for dollars? Can yo'u relate your answer to this qrrestion to problem
11?
13 Should countries intervene stabilize exchange rate?
Bliss Point Studies 1()5 Ravindra N. Iha

011-4507622L 9811343411
Chapter 15/ SALVATORT
Exchange Rate Deterrrinatlon
Questions for Review

1. Which are the mod.ern and the traditional exchange rate theories? What
distinguishes them? What is the relevance of each? What is the relationship
between them?
2. What is the purchasing-power parity theory? What are its uses? Wtrat is the
absolute purchasing*power parity theory? why is this not acceptable?
3. What is the relative purchasing-power parity theory? Do empirical tests
confirm or reject the relative purchasing-power parity theory?
4. What is demand. for money according to the monetar5r approach to tlre
balance of pa5rments? What is the supply of money of the nation? W?rat is
meant by the monetar5z base of the nations? The money multiplier?
5. How does a deficit or a srrrplus in the nation's balance of payments arise
according to the monetar5r approach? Why do nations lose control over their
money supply in the long run under fixed exchange rates?
6. How does the monetarJr approach explain the process by which a balance-of
-payments disequilibrium is corrected under a flexible exchange rate
system? How does this differ from the case of fixed exchange rates?
7. What determines the value of the exchange rate and its change under a
flexible exchange rate system according to the monetary approach? How
does a managed floating exchange rate system compare with a flexible and
fixed exchangL rate system from the point of view of the monetar5r approactr?
8. What is the role of expectations and uncovered interest arbitrage in ttre
monetar5r approach to the balance of pa5rments?
g. What is meant by the asset market or portfolio balance approach? In wtrat
ways does it differ from the monetar5r approach?
10. What is the relative importance of stock a{irrstments in financial assets as
compared with adjustments in trade flows for exchange rate change in tlee
short run and in the long run according to the portfolio approach?
11. What is the role of expectations and the risk premium in the asset market or
portfolio balance approach? Why was there no risk premium in the monetar5r
approach?
L2. How do the monetary and the asset market or portfolio balance approaches
explain the overshooting in exchange rates that is often observed in foreign
exchange markets today?
B\rss Qsirrr\S\rd\qs \s'r Rav\sdra \\- ftra

98a4343441
ott.-45076221
13. Do empirical tests support or reject the monetary and asset market or
portfolio approaches?
14. What additional theoretical and empirical work needs to be done? What is
likely to be the outcome of this additional work in the foreseeable future?
Problems
1 ln 7973 the GDP deflator was 15.6 in the United Kingdom and 34.3 in the
United States. (with 1995 = 1OO). In 2OO1, it was 116.1 in the United
Kingdom and 112.1 in the United States. The exchange rate was eO.4O78 to
the dollar in 1973 and SO.6944 to t}:e dollar in 1998.
(a) Calculate the rate of inflation in the United Kingdom mimrs the rate of
inflation in the United States from 1973 to 2OO1 and compare it with
the rate of depreciation of the British pound with respect to the U.S
dollar over the sarne time period.
(b) Did the relative purchasing-power parity (PPP) theory hold between
the United Kingdom and the United States between 1973 and 2OO1?
whv?
2 ln 1973, the GDP deflator was 45.O in Switzerland and 34.3 in the United
States (with 1995 = lOO). In 2OO1, itwas 1,o3.2 in Switzerlandand 112.1in
the United States. The exchange rate of the Swiss franc was SFr3. 1648 per
dollar in 1973 and 1.6876 in 2OO1. Did the relative PPP theory hold between
Switzerland and the United States between 1973 and 2OOL? Why?
3 Suppose that the velocit5r of circulation of money is V = 5 and the nominal
GDP of the nation is $ZOO billion.
(a) What is the quantity of money demanded by the nation?
(b) By how much will the quantity of money demanded rise if the nation's
nominal GDP rises to $22O billion?
(c) What happens to the nation's demand for money if its nominal GDP
increases by 10 percent eachyear?
4 Suppose that the domestic credit created by the nation's monetar5r
authorities is $8 billion and ttre nation's international reserves are $Z billlon,
and that the legal reserve requirement for the nation's commercial banking
system is 25 percent.
(a) How much is the monetar5r base of the nation?
(b) What is the value of the money multiplier?
(c) What is the value of the total supply of money of the nation?
5 Assuming fixed exchange rates, find the size of the deficit or surplus in the
balance of pa5rments of the nation described in
(a) Problems 3a and 4.
(b) Problems 3b and 4.
(c) Problems 3c and 4.

o11-4507622L 9811343411
6. Explain how the balance-or-paJrments disequilibrium is correcred. if
monetary authorities do not change the domestic component of the natron's
monetar5r base:
(a) In Problem 5b.
(b) In Problem 5c.
(c) What happens if monetarJr authorities completely sterilizc. or
neutralize, the balance-of-pa5rments disequilibrium with a change il
the domestic component of the nation's monetarS/ base? How long can
this go on?
7 Suppose that a nation's nominal GDP = 1OO, V :4, and M"=30. Explain
why this nation has a deficit in its balance of pa5rments.
8 Under the law of one price, the price of an internationally traded commodity
in one nation in a two-nation world is equal to the exchange rate times the
price of the same commodit5r in the other nation. Assuming that such a law
holds, explain why, if the first nation would otherwise face no inflation at
home, it will not be able to maintain in the long run both constant prices
and a constant exchange rate in the face of inflation in the other nation.
9 Suppose that the interest rate is i = lOo/o in New York and i* = 6%o kt
Frankfi:rt, the spot rate is SR:1/€1 today and is expected to be $1.O1/€1 in
three months.
(a) Indicate why the condition for uncovered interest paridr (UIp) is
satisfied.
(b) Explain what would happen if there was a change in expectations so
that the spot rate in three months become $1.o2/e and the interest
rate differential remained unchanged.
10. (a) what is the difference between the expected change in the exchange
rate and the forward discount or forward premir.rm on the foreign
currency?
(b) When would the expected change in the exchange rate equal to
forward discount of forward premium on the foreign currency?
1 Suppose that individuals and firms in a nation are holding the desired
proportion of their wealth in foreign bonds to begin with. Suppose that there
is then a once-and-for-all decrease in the exchange rate (i.e., the domestic
currency appreciates and. the foreign currency depreciates;. wfrat is the
adjustment that the simple asset market or portfolio balance model
presented in Section 15.4e postulates?
-) Discuss the portfolio adjustment for an increase in expected domestic
inflation under flexible exchange rates using the extended asset market or
portfolio balance model presented in Section 15.4s.
Using the extended asset market or portfolio balance model presented in
Section 15.4e examine the portfolio adjustment resulting from an increase in
Bliss Point Studies 1()9 Ravindra N. Iha

011-4507622r 9811343411
government budget
the supply of the foreign bond because of the foreign
deficit
t4. Explaintheexckrangera]ed5rnamicsofthedollarresultingfroman
EMU central bank'
unanticipated increasi in the money supply by the
Ravindra N. rha
Bliss Point Studies 11()
9811343411
011-4507622L
fntermediate Macroeconomics
B.A. (HONS.' ECONOrurcs
SEMESTER - III
DEC-2018
Duration: O Hours
fnstructions: Maximum Marks: 75
Attempt any two parts from
each question.
Each part carries Z.S marks.
All the notations have their
standard interpretation
1 (a) (4 consider the goods market
closed economv, s+re_fn:l;a: equilibrium condition in a
standard *...ri.rg"f, (Notations have their
the classical case y*-+r"-.[uation to explain why, in
".'"."i-.*ili"io., same
crowding out. Explain musc read to full
happens to the economy ";ld'-,il equation, what
*h., there
employment. (In Uotn clses'""""r*.
_
is llss than full
monetary accommodation). that there is no
(ii) Discuss
l!1ror1 0fbthe
money demand),
parameters h (interest sensitivity
(inierest sensitivity--o?l.rrr."tment), of
(income sensitivitv
a.-".rai i., ",t. k
mechanism, linking"i;;;:y ,.".r"mission
.., i.r.rease in jorr....*.nt spending
to the resurting changei;-i.r.o*.,
the fiscal policy muftilfi.. using the expression of
in the IS_LM model.
(b) (i) consider two alternative
one is the removar of an contractionary
investment
economic policies.
a rise in income tr, ."t.". -; "Lu"ia]r: the other is
-iilJ.?or*"t
schedules rs_LM
.to discuss thJ impa.,
policies on income, alternative
interesf rates and "r^-irr."e
investment.
(ii) Distinguish between strict
monetaris=.. what rj.p; ; ioH?*:,,y"f*ifl#
,
support
T"ffI il,l
L'J.Lrt:";:iffi:#1a.. or rerute the major
(c) Suppose the government
undertakes a balanced budget
ilT'ffi:.,"lr"ir"l-g. Govern;;;; spending .i". r.orn G to G,
ttre iniiiairJrj'or"ttompanying increase in-tax r"t." so that at,
output the budget remains
U"f".t.a.
Bliss point Studies

: 11-4507622,- llt Ravindra N. Jha
9811343411
AD schedule
(1) Strow the effect on the
on output
balanced budget policy
(ii) Discuss the effect of the case'
.:^Jptl""s in the KeYnesian
and prices in the classical
(iii) Discuss the effect on orrtput
case.
there is onlv an increase
in the tax
(iv)
i.l.:Tr1f*"flJlii
the economy starts at the natural lewel of output
2 (a) Assume that in gtvernment expenditure'
and there i= u. aeciine
I:S-LM diagram'
what happens
(1) Using the AD-AS and i"tt"J]tltt-and"'h9* irrvestment in the
to outprrt, price levef run'
strort run and medium
to the unemPloYmen t rate in the strort nrn
(i1) What haPPens
;;d i, the medium run?
get d3."I the 'signal extraction'
(b) (r) How does an individual of this piourem on the
labor
problem? wh€t iJH;ff;;i
supPlY curvet'
of rational expectations?
(o What are the properties
what circumstances' according to the Ke5mesim
would
Under
(c) (1)
IS-LM model, got:ttfJ"li*p"t'diture
itt-private spending
"r'angt "t
not be t."""""t i?"?n9"t -I'"t11iJtt=
reyne=ili'sl ir'i" is an unlikely
it"
. why, according't"
scenario?
model inconsistency problem exists in
(ii) Explain why the
adi.Ptive exPectations'
for countr5r X is given by :
3 (a) Suppose the Okun's low
u, -u,-t = -O'4(g, -3%)
in the
output leads to an increase
What growth rate ofoil-i't::tlji,* point o"t'I:1:'
et'en though'"*
(1)
unemplovment titt" the
can the unemployrnt"t '^,t-:--it'ci"''"t
i."*tt rate of outPut is Posrtrver
Ravindra N. lha
LL2
011-4507622L
(ii) What yearly rate of growth of output do we need if we
want to decrease unemployment by two percentage points
over the next four years?
(iii) Suppose that the country experiences a second baby

boom. How do you expect Okun's low to change if the rate
of growth of the labor force increases by two percentage
point? Explain.
(b) Suppose the Phillips clrrve is given by n,:ft: +O]-2u, where

nf =9n,-r. Assume 0 is equalto zero. Suppose that the rate of
unemployment is initially equal to the natural rate. In year I the
authorities decide to bring the unemployment rate down lo 3o/o
and hold it forever,
(i) What is the natural rate of unemployment?
(i0 Determine the rate of inflation in years t, t +1, t +2.
(iii) Is the assumption 6=0 justified? Explain. Answer the
same for 0 =L
(c) Suppose that the Phillips curve is given by
n,-nf =-(u,-5%) and the expected inflation is given by rf :r,_,

(i) What is the sacrifice ratio of the economy?
Suppose that unemployment is initially equal to the
natural rate and r =l2Yu The central bank decides that
L2o/o inflation is too high and that starting in year l, it will
maintain the unemployment rate one percentage point
above the natural rate of unemployment until the inflation
rate is decreased to 2%o.
(i0 Compute the rate of inflation for years t, t +I, t +2
(iii) What advice should you given to a central bank if it wants

to achieve the same results quickly?
(a) (i) Consider an economy characterrzed by fixed exchange
rate, flexible domestic price level and fixed foreign price
level. Suppose the economy was initially at fuU
employment and trade balance. However, a fall in exports
resulted in unemployment and trade defrcit. Using the
AD-AS framework explain how the problems can be
overcome amtomatically.

r 11-4507622L 9811343411
(ii) What is the shortcoming of this process?
of bonds
(ii1) What is the impact of an open market purchase
on the adjustment Process?
(b)
supply under fixed exchange
A nation roses control over money-rrroUii'rty (at_ co.nstant prices),
rate regime *itt'^p.rialt L.pit"f
thusmakingmonetarypolicycompletel5rineffectiveinchanging
-p.ii.y is rufly eifective in this case'. Do
o,tput. However;;;;l
you agree? ExPlain'
(1) How does domestic
- money supply vis-6'-vis the foreign
-exchange
(c) rate in the
money ".;;1y attt'mit't the rate determination?
monetary to exchange
"-f,pi""trt
How does a BOP deficit arise according to
the Monetar5r
(iil
\--' regime?
Approach under a fixed exchange rate
Explain the difference between absolute and relative PPP'

5 (a) (r) undervalued
Discuss *tty ttfa'ti"e PPP tends to predict
exchange raie for developing countries'
(ii) Discuss the J clrrve'
(b) Assumingtrncovered.interestparitycondition.ande>rpectedexplain why

appreciation of fotlig" currency to bl zero initially'
run equilibrium in
the exchange rate overshoots initsdomestic money supply'
long
response to une*lltted increase
(il Briefly explain how foreign exchange risk leads
to an
(c) \-'
oppoiturrity of hedging and speculation'
(CIAM) when
(ii) Find the Covered Interest Arbitrage Margin
and India are 8Yo
the annual rate of interest in the US 1/$t and the
and 6% ;;;;ti".rv. Ttre spot rate- i-s. t:
one y..t-iJ*ard rate is Rs' 0'96l $r' Explain the
relevance sing and the absolute value of GIAM.
"i-trr"
(India: home US : foreign country)'
"ountry
Lt4 Ravindra N' Jha

oLL-4507622L
Previous year euestions _ 2OL7
Attempt any two parts from each question.

Each part carries Z.S. marks.
1' (a) Given. Ernêconomy with prices, discuss the impact of tree
-fixed
following factors on the effectiveiress of Fiscar policy and Monetar5r
policy:
(i) degree of sensitivi.t5r of money demand to rate of interest {h)
vr 'rruervE
(ii) marginal propensit5r to consrlme (ci---
F.sr
' (b) (il The government of a countr5z wants to change the
composition
o{.,outnut- away from consuhption and in favour of
without altering aggregate oufout, Discuss investment
which can be used for_ihe objeitive. (Assume"ny "i-e"l.icy_mix
(ii) using AS - AD and.IS - LM fi;=;; fixed.)
diagrams, explain the concept of
supply side crowding e><plain lhe conclpt of supply side
crowding out. ---'
14+B.s;
(c) Let there be an economy where investment is not responsive
rate of interest: to the
(i) what would be the shape of AD curve in s,ch an economy?
Explain.
(iil In this situation, let- t.Le government grant investment subsidy
in order to increase invesrrnent and output. with the
and AD diagrams, show the effect of tLis p"li"y ;; help of AS
output in the short-run and trre medium-rul. a"*",rr"Jihatfri". ,oa
ecôno-rnJu starts at naturar level 0f output
the
- --r-- in the medium run
"'"*'12*s.s;
Per: Pr-r.
2. (a) (i) brrsilgs-s anal5rtics company advertises, saying. ,.\Me
,A
best paid jobs in the industrjr.,, Brt wf.y'strouti offer the
want to pay more than the minimum wages require-d .o*p"rry
"rry to retain
the employees?
(iil There is a consensus among the opEC
production and end the currenf globar glut in countries to cut
setting and price setting (WS jpS u". tt. ;i*'J
"ii. io-Jo*
)tiagram",
impact of ttris orr. urremplo5rment rate ant ,.j *g.". tfr.
show with the help of aiagram, how the AS curve Also,
affected' wo,ld be
(2's+sl
(b) fhe gove-rnment passes labour reforms making unionization more
difficult. using ps
the wS - AS - ADl;gr€uns, trace the impact of
these reforms on output and3nd.
prices in the siort-run and med.ium-run.
(Assume that the ecbnomy is_ olisinaly
with output at the natural r&er and i" medium-run-.qr,iuirro
expectations about prices are adaptive)
arso assume that the
(Z.Sl
3, ss Point Studies 115

:l *" -,507622L Ravindra N. Jha
9811343411
guotes "The Central Bank's decision
(c) Consider the following imaginary is tf'J-m"it factor behind the decline
to allow for higher ""-"V g?"wtf run"; and "Higher money growth will
in interest t"te it''i"f'"-'*fioit ani f igt";it't1er9sj' rates"' Can the
eventually lead to higher inflation
b" ,""orril.Ii p--"iae full explanation for
two statements giveriabove (7.s!
your answer.
You are given the following

information for an economy:
3. (a)
AD:Mt+Vt1Pt+Yt
AS:Y6 =Yp * P(Pt - Pe)
MoneY suPPlY rule: M6 = oYt-r

* at
in natural logs and all terms ' lrave standard'

(Al1 quantities are suctt that E(e6 I l'-r) = 0') '
interpretatiorr". "r'i" ;;;;;ariiutt
equilibrium vahres of pricepolicv
and
(1) Derive an expression for the what is the
output
""ff#;;
sigiificance of these";tqlÊ"J;ffi;ns'
resultst'
result diagrammffillSi
(ii) Use AS AD Curves to show the above
-
to redrrce the- inflation rate 2O
(b) The government of some countr5r-wants gradual reduction of
o/o to 4v". lt .an'aiiri"r.1m- ;rtrt"rTti";;t; year'
inflationover 1o;;;;;; Jrastic reduction in next 1
two cases be different according
(4 Would the sacrifice ratio i-n the
disinflation? Explain'
to the traditional approach to
approach to disinflation
(ii) Discuss the criticism of the traditional
and raylor on the ot:her'
given by L;;;, "L-tt"td; tg.s+41
Phillips curve to answer tJee following

(c) Use ttre following equation of
qrrestions:
* lt
Th - nt-t -' -(u, - 5o/o)
(A11 symbols have rrsrral interpretations')

Derive-an expression.for the
natural rate of unemplo5rment in
(1) why is it called NAIRU'
term ot p' In this context expfain
(ii)Usethe;b;equationt"-J"iiJii'"p"""iulereasonsforthe
original il;ili;;;e'relation'
(4+3'51
breakdown of the
tion about an economY where
4. (a) You are given the following informaare fixed and exchange rate is
capital is PerfectlY mobile, Prices
decides to increase the outPut
through fiscal
flexible. The government
116 Ravindra N.Iha

oLL-45fD7622L
expansion. Explain how such a policy would impact the exchange
rate, trade balance and output. Also, explain what happens to the rate
of interest and the composition of output. (7.5)
(b) Assume an economy where capital is not mobile, but price are flexible
and exchange rate is fixed. Let there be an exogenous decline in
exports. Assuming that the economy was initially in internal and
external balance, how would the external and internal balance be
affected by this change? Suggest one policy which can correct bottr
the imbalances simultaneously. Explain any one reason why the
policy suggested by you may not be effective in restoring external
balance. (7.5)
(c) Show that, following a monetary expansion, exchange rate, in the

short-run, overshoots its new medium-run equilibrium value. It is
said that overshooting of exchange rate results from the difference in
the speed of adjustment in the financial assets as opposed to
adjustments in trade flows in response to monetar5r expansion. Do
you agree? Explain (7.5)
1
s. (a) (0 Explain using monetar5l approach to the Balance of pa5rment,

that under a fixed exchange rate system, an economy has no
control over its money supply.
(i0 Suppose a country has real GDP of 2 billion, Price level is 4OO,
Velocit5r of money is 4, and Value of money multiplier is 5. Now,
suppose that the real GDP increases to 2.5 billion. Also, at the
rf s€une time, the monetar5r authorities undertake an open market
purchase of government securities worth 5 billion. What will
happen to international component of monetar5r base according
c to monetary approach? (Assume that exchange rate is fixed).
(4+O.S)
n (b) Derive and explain that concept of covered interest arbitrage parity.
What does a positive Covered Interest Arbitrage Margin (CIAM)
[) indicate about the direction of capital flows? With the help of a
diagram, explain the tendencies, which lead the CIAM to diminish
rg overtime. (7.5)
(c) You are given the following information about an economy:
Spot Rate (Rupee per dollar)=6o. The dollar is at a forward prernirm of

per €rnnum.
5o/o
tn
(i) Explain the foreign exchange risk faced by an importer who has
:IE to pay 1OOO dollars in three months. Calculate the cost
s) incurred by the importer if he hedges the risk with the help of
the aforementioned forward contract, but the actuaL spot rate
re three month turns out to be 59.25. In this context, discuss a
is better method which can be used for hedging the risk?
)a-1
-
ha Bliss Point Studies LL7 Ravindra N. Jha
11 011-45076221 9811343411
who expects to receive 2OOO
(i1) Instead, if there was an exportera situation wtrere he/she may
dollars in three *";t#;Jifi* in order to hedge foreign
rurwqs
want to enter th"';;;;tlontract (5+2'5)
exchange risk.
118 Ravindra N. Jha

011-4507 622L
Previous Year Questions - 2O16

Each part carries Z.S. marks.
1 (a) Given an economy with fixed prices, discuss the impacts of the
following factors on the effectiveness of Fiscal ^polic5r and
Monetary Policy:
(i) degree of sensitivit5r of money demand to income (ft) and
(ii) degree of the sensitivit5r of investment to rate of interest
(b). (".st
(b) consider two economies A and B identical in all respects.
starting with medium mn equilibrium, suppose both ttre
economies face a pefinanent decline in the price of oil. In
economy A, governtnent uses monetar5r policy to keep output at
original level in the short-run and aoEs not chanie no^minar
money supply thereafter. In economy B, government takes no
action. Using AS and AD curves show the impact on output and
prices in both economies in short run and medium .,.rrr.. '
(c) Assume the following imaginar5r quotes ..The centrar
decision to allow for higher money growth is the main""lI;?
factor
behind the decline in interest rates in the short-run,,; and
"Higher money growth will eventually lead to higher infiation
and higher interest rates." can the two statements given above
be reconciled? provide full explanation for your answer.
2 (a) use IS-LM and AS-AD diagrams, to show how a reduction tr(e?
rate of income tax will affect output and prices in the short_run
and medium-run. what would be th; impact of this tax
reduction on investment in the medium run? Assume that tlle
economy originally starts in the medium-run at the natura_l
level of output. (Z.Sl
(b) It is said that adaptive expectations allows Lrs to relate
unobservable, expected variabres to the observed values of the
same variable. Do you agree? Explain. It is further said that
adaptive expectations tend to ignore useful information whictr
lead to inefficient expectations. Give two exarnples to jr"ury
this. (".st
(c) Use the following equations of Okun,s la.w, u1 _ ut _r :_ o.4 (r, _
zV.) to answer the following'questions:
(0 Calculate the rate of growth of output that will redgce ttre
unemplo5rment rate by one percentage point in one year.

:Lt-4507622L 9811343411
-l*'Jiff"ttttt
th9 excess growth of output implied
Give tu-toreasons why the decline in the
by your answer ftom
r.rnemPloYment rate'
again in case the
(ii) Calculate the rate of growth of output
Lt" ptttt3l"g". point'
labour productiv"i"ty"i"-'Lat"td bybe if in addition to this'
Further; wtrat *"iiinl;;;;"t by two percentage
labour force gt";;; i" tt=o reduced
point?
(4.5+3f
for an economy:
s. (a) You are given the following information
AD: M,+V, = l*{

AS:Y, =Yp * B(Y,-Y"1
Money suPPlY rule : : M, : a Y* a
terms have standard

(A11 quantities are in natural logs and all
interpretation,e,i"tttt'aomvariablesuchthatE(e'11'-t)=0')
(1) Derive an expressign f3r.ihe equilibrium vahres of price
What is the
and outp*i "-""'*ing Rational bxpectations'
6*, "ii,tint"ttce of ttrese results?
Use AS-AD curves to slrow above
result diagrammatically'
(ii)
(5+2.5)
(b) Suppose that the Phillips cllrve in an economy is given by the

equation:
fr, -fri =O'18-3u'

wtrere
ft"=0\t
t t-l
the unemplo5rment rate is equal

Frrrther suppose that in period t - 1rate is zero:
io the natrrral rate and the inflation
this economy?
(i) What is the natural rate of unemplo5rment in
bring the
(iD Suppose that beginning in period I the authorities
120 Ravindra N. Iha

Btiss Point Studies 9811343411
011-4507622r-
unemployrnent rate down to soh and keep it there indefiniterr-.
Determine the inflation rate in period r, r + 1 and r + 2 *,heie
0=0.
(iii) Repeat the same exercise for e' :l
(iv) with the same information and e' =1, if half of the workers sign
indexed labour contracts. calculate again the inflation rates in period
t, t+landt+2.
(v) comparing answer in part (ii), (iii) and (lv) above, explain the effect
of d and indexing on the impact of maintaining
unemployment rate below the natural rate.
(7.s)
(c)
Ef"rfi '.F,s,*"p"Xtgll.?-:r.jt',"fi
Yrr^soLti.,r?fi
real wages: "gfrf8**,,ff itB"a-t3
(i) Labour reforms making unionization more difficult.
(ii) Rise in market power of firms following large scale Merger
and Acquisition activities.
(iii) An increase in the world,s production of oil.
Do your answer refer to the short
-run or the medium run?
4. 12+2+2+1.51
(a) consider an economy where capitar is perfecfly mobile, price are fixei
and exchange rate is flexible. The government decides to increase ttre
output by giving direct cash transfers the public. Explain how such a
qtglicv would impact the exchange rate, irade balance and o,tpr:t.
Also explain what happens to the rate of inter'est and the composition
of output. (".S,
(b) Assume a' economy where capital is not mobile, but prices are
flexible and exchange rate is fixed. Let there be an exogenous rise in
exports. Assuming that the economy was initially in- internat and
externar barance, how would the external and iniernal barance be
aJfected by this change? suggest one policy which can correct both
the imbalances simultaneously. Explain any one reason why the
policy suggested by you may not bL effective in restoring edernal
balance. (Z.Sl
(c) You are given the following information about an econo*y.
The Rupee-Dollar Exchange Rate (Rupees per Dollar) in the

three months forward market is 6O.
Bliss Point Studies t2t Ravindra N. Jha

:Lt-4507622L
9877343477
galns if he/she expects the
(1) How can a speculator make
:r# r.u't". to o'o'zs in three months?
How should he/she behave
if the spot rate is expected to
(ii)
be 59.25?
to
would' happen if the speculator expected the rate to be
(ii1) What spot rate turns or'rt
become sg-2sb;il;;tty-trre (7'5)
6l.75in the three monthsf
fixed
perfect capitai mobilitY' flexible exchange rate and
s. (a) (1) Assume of
i'"i"""" ii rateand trade
interest
prices. Let there.tt "" exogenous o'tpt'i' rate
abroad. Ho* *ot"iir'i" i*pt"t """hange
balance? how
approach to exchange rate of
(i1) Under extended asset market impact the value
does increased i";';ru;;td'Pt;; io T9t9is1'- tlti"t"yz (consider
only
domestic
the initial ".r,""ty?r"ti"
impactll ;"ffi;';il [i""r"th;; i*;"'i the Expected
r';i; ;;E;Y ly;;'c tn"t th' expected
Appreciation or markei
and Risk
exchange rate tn;i;$"i "*Jtt"'""changed) (4+3.5)
Premium?
USA is 6%
Srrnpose that the rate of
interest in India is 37o' that'in
(b) Rs. 6Ol$ in the spot
ruoii on annual il"Li^,t;."*"h"n_g.'i"t"-i"
tht"" months forward market'
market and Rs' 57'N;;tn"
(i)CalculatethevalueofCove-redlnterestArbitrageMargin(CIAM)
flowt may ignore the
and state the direction of ""p'iiJ '(You
differential)'
weighting f"J"t-;; the interest
(ii) i3i[.,]*,,*:]; si?$#fr"'Tsy."x:'ffi. iiJ:li:::'"H5
Premium -'on the foreign
Forward Discount or fgyal of this
46e f""a" to elimination
currency' Explain how arbitrlg" ------ (7'5)
CIAM over time'
-funt:b$*X:
(c) show that, rollowing a monetary. -:1'ff;t:"1,;ff:1ffi .
:*f- #H'JH;: ,l::, ";:'h*'t:l"Ti'

"'*ri
J .*.h",, g. rate i
: an
(7'5)
of neutrality of money to open economy?
extension
L22 Ravindra N. Iha

011-4507622L
Ptevious Year Qqesliqns - 2()15
f, Each part carries 7.5. marks.
1. (a) (0 In goods market equilibrium in a closed economy,
S+TA-TR= I+ G (S = saving, TA = taxes, I: investuent,
) G = government expenditure). Use this equation to erqrlain
e undeiwhat condition a fiscal expansion leads to full cromaing
out. 12'51
(ii) Explain how an increase in the price of oil leads to stagflation
:d in the economy. (51
rest
le (b) what is the impact of tl.e following factors on the Aggregate Demand
Curve? Give clear logic for your answers'
r'w, (i) A rise in sensitivity of money demand to rate of interest-
of (ii) A rise in sensitivit5r of investment spending to rate of interest-
Lly
(m) A reduction in the rate of income tax' (2'5=3=7'51
ed (c) Explain how an increase in the rate of growth of, money supply
sk impacts the nominal and real rates of interest in the short run and in
s) the medium run. (7'51
tok 2. (a) (i) Lucas argued that one essential ingredient of painless
rot disinflation was credibility of monetar5r poliry. critically discrrss
his argument. (4l
.\4)
(ii) According to Arthur Okun, output growth 1%o above the normal
rhe
rate only leads to a O.4o/o reduction in the unemplo5rment rate.
Explain-why this kind of relationship exists between growth
ratL of output and the unemplo5rment rate. (3'51
hip
rnd (b) Show using the Aggregate Demand equation and the Lucas supply
,ign function that any piedictable part of the money supply has no effect
:his on outpqt, emplo5rment or any other real variable in the economy.
.s) What is ttre effect of tfre same on prices? (5+2'51
(c) Suppose that the Phillips curve is given by: T, - Ti = 0'1 -2ut
the
ain. Where fil = Tr=r
an Suppose that inflation in year t-1 is zero. lt:- year t the amthorities
'.5) decide to keep the unemplo5rment rate at 4o/o fotevet'
(0 Compute the rate of inflation for years t, t+1, t+2'
(31
(i0 Now suppose that half of the workers have indexed labour
contracts. what is the new eqrration for the Philips c\rnre?
what is the effect of wage indexation on the relation between
the rates of inflation and unemplo5rment? Explain.
(1.s + 3l
3. (a) (1) Show tJrat Adaptive Expectations H5pothesis_ allows ys to relat.e
unobservable expected variables to observable actual variabfes.
(2.sl
-. lha Bliss Point Studies L23 Ravindra N. lha

t411 011-4507622L 9811343411
(ii)B*fl:Jii:il:1ilff fi:lti,?-1!."""1*':S.H:.f*:":1*zeto
- (2.5+2.61
and
(b) (1) According to Friedrnan' the trad'e-off between inflation
;;;;;i";.ent exists only in short run' Explain'
(3-51
(ii)DiscrrssanytwoSor'lrcesofbusinesscyclessugsestedJcY
Lucas.
(c) the medium run and
Assume that an economy is i-n equilib5rul in in this economy such
about paceJ ror*La adaptively
"*p""i.tiorrs "r.
thatPi:P,-,'Nowthegovernmentdecidestoincreasethebudget
deficit.Usirrgep-ASandIS-LMdiagrams,showtheimpactonoutput,
the medium run'
prices and Interest rates in the s[ort run and inmedium run?
What t to the composition of output in the
"pp"t" (7.51
rate and fixed prices'
4. (a) Assume perfecl capital mobilit5r' fixed exch3nge expansion on the
Using IS-LM diagrams, ;h;; ih"
-c"*prte impact of a fiscal
output in the short ,orr. this with the impact on output in
is not mobile. (4+3.5)
ttre same economy when "6*;
(b)Assrrmeaneconomywithflexiblepricesandfixedexchangeratesand
Suppose there is an
situated at full emptoymlnt and irade balance. goods. Discuss how
reductio-n i'Il 6; world demand for its
"*og"rro.r*
thiseconomycarrovercomeitscurrentaccountdeficitthrough
(1) Automatic adjustment and
(ii) Explicit policy changes' (4+g.S)
(c) (1) 3iIHl.'l'.*?*Tiffi1J:11ilH:5::'?,:i'e,T"JllXT*"'"."

and perfect capital mobility'
"y-*t.* (41
(i0Itissuggestedthatintheabovecasetheshort-runimpactmay
be more ttrrrr tfrl long-run impact. Do you agree? Give
economic reasons for your arrswer. (g.S)
5.(a)Distinguishbetweenthefollowingexchangeratesystems-Adjustable (7'5)
Pegs, Crawling Pegs fvr"tt"g"f, Floating'
"ttJ
(b)BrieflyExplainhowforeignexchlyrs3riskleadstoaneed/opportunit5r
of frJaging and specui"-tion. pinE tne Covered Interest Arbitrage
MarginwhentheannualrateofinterestintheUSis8Toandthe i1 INR 1/1$ and
annrral rate of interestltt ftai" is 6%6. The spot rate an annual
the three month ror*ard rate on dollar is INR 0.99/1$ 9n
home to"'tty' US: foreign country' INR: Indian Rupee)'
ba"is.linaia: (5+2.51
(c)(1)Assrrmeperfectcapitalmobilit5r,flexibleexchangerateand rate of
' fixed prices. Let tfrere be an exogenous increase in theand the
interest abroad. io* *"rfd thiJ impact the output,
L24 Ravindra N. Iha

011-45076221
exchange rate of the domestic economy?
(s)
(i0 Under Extended Asset Market Model of exchalge
does increased risk of foreign bonds impact the" rares. horr
domestic currency? (onry -the immediate effect r,arue of rhe
considered).
needs to be
(2.s)
tsliss Point Studies t2s

:1 1-4507622,. Ravindra N. Jha
9811343411
- 2014
Previous Year Questions
Answer anY Two Parts:

1
by automatic stabilizef'
(a) (1) What do you understand
ExPlain' surplus'
frrll emplo5rment budget
(O Explain the concept of interest rate'
money *'ppfy is positively related to
(u1) Suppose
the LM crrrve?
How would ttris affect 12.sr 2.5,2.51
*
(b) (1) r*rlitll?fJ,?.""j.",$#lsH#ffirii:'8fi:i"ffifl
(i, i,i-i#ii#r*
US increast s.?iff%.*df,-l:t',:i,r;:fi:i'-?&!#
l.*.'i'g of interest rates,
declined ." ".t'.i""."j"
i";:6.-;;;;";i"
USecono*v.-i.udeeper.i',t5,"I*,.IJr;"qY-:gthisperiod.
aectinilft'iptt and interest rate'
Explain this'pattern of I:ll-
IS-LM model'
following information:
Srrppose you are
given an economy with the
(c)
C =e+ cYD
I=I
G:G
TR =TR_bY
D-isposablelncome' r-
investment'
:;: Q= consumption' YD= TR= Transfer payment f = Lump
G= GovernmentlXd;'
tT"*e expenditure multiplier.
exPression for amtonomolls
oI standard multiplier?
(i0 Why is it smaller than related to
in abgye- information is -negatively
(fl If consumption #;;;iJ in. rs curve be affected
inter.". ,r#"t (2.s, 2.s, z.sl
2 Answer 61Y two Parts:

(a) (1) yfHilT#),,*,;-,:X'h#iif:iHJfffi"Tf'*:l.;ifn ''
run'
shgrt- run and msdium- (5'5' 2l
(ii) Explain efficiency wage
theory'
eqrration: W = P' (1-u)'
(b) You are given wage setting
Ravindra N. Iha
L26
Btiss Point Studies 9811343411
011-45076221
where W is nominal wages, P" is expected price level and u is
unemployment rate. Also given is that the firms charge a mark-up of
1O7o over the wages.
(i) Calculate the real wage implied by the price setting relation.
(ii) Determine the natural rate of unemplo5rment.
(iii) If mark-up increases to 2oo/o, show the impact on rea1 wages
and natural rate of unemplo5rment. 12, 2, 3.Sl
(c) How is AD curve impacted by each of the following:
(i) Interest sensitivity of investment demand is equal to zero
(ii) An increase in sensitivity of money demand to income
(iii) A reduction in income tax rate 12.5,2.5,2.51
)
J. Answer any T\mo parts:
(a) (i) How is expectations- augmented Ptrillips Currze different from
the original Phillips Curve?
(ii) You are given the following information:
Okun's law : ut -ut-r = - 0.4 (en-SN)
Phillip's Curve ; ltt-ltir= -(u-5%)
Rate of growth of nominal money supply in the medium run
:7%o. Derive the values of unemplo5rment rate, growth rate of
output and inllation rate in the medium run. (4.5, 3,
(b) (i) Assumption of rational expectations renders monetar5r poliry
ineffective with respect to national output even in the short
run. Explain with the help of Lucas supply cun/e.
(i0 Do you agree that rational expectation rules out the possibility
of making systematic errors ? Explain your €r.nswer. (4.5, 3l
(c) (i) What do you understand by sacrifice ratio in the traditional
Phillips Curve approach ?
(ii) Explain the basis of claim by Fischer and Taylor that even with
rational expectations, disinflation may not be painless.
(3' 4'51
Answer any Trno parts,
ra) (i) Consider two alternate poliry actions for fiscal expansion in
short-run; one is Slving investment subsidy and the other is
reduction of income tax rate. What worrld be the impact of
these alternate potcy actions on interest rate, income and
investment?
(ii) What do you und.erstand by accommodating monetar5r
policy?
(iiu Suppose you are given the following information.
!
I Blltss Point Studies t27 Ravindra N. rha

I ri: -45076221 9811343411
Autonomous spending mrrltiplier, d' :2,
Income sensitivit5r of money demand, k = 0'4
Price level, P =2,
Let government spending G increase by Rs' 1OO crores'
By how much should nominal money supply be increased in
order to keep interest rate constant? 14' l' 6' 21
(b) Suppose the government announces an anti-monopoly legislation' in
flrti":t impact.,i"rfa it have on national orrtprrt and price level both
short-rui and medium-run a (7'5)
(c) (1) Distinguish betweqn demand side and supply side crowding
out.
(ii) Discrrss the circumstances under which fiscal policy
multiplier is equal to zero- {5,2.5)
5 Answer anY two Parts:
(a) Assrrme that capital is perfectly mobile,-the price level is fixed' and
the exchange raie is flexible' Answer the following :
(i) How does an increase in money supply lead to indrrced
dePreciation ?
(ii)Showthatanincreaseingovernmentexpenditurecanleadto (4' 3'5f
an increase in current account deficit'
(b) An economy is suffering from Balance of Pa5rments deficit. Explain
how the deficit can be corrected through the following mechanisms'
Assume fixed exchange rates and flexible prices'
(i) An automatic adjustment process
(ii) Policy action i.e., devaluation (4' 3'51
(c)(i)Srrpposetheresidentsofaneconomyholddiversifiedassetsin
their portfolio which also include foreign bonds. In this case
explaiir the role of expected change in exctrange rate and risk
prernirrm in determination of exchange rate'
(ii)..Anexpected.changeinexchangerateleadstoanimmediate
actuJ ^ change in lxchange ra-te by an equal percentage."
Explain. (4'5' 31
Bliss Point Studies t2a Ravindra N. Jha

011-4507622L 9811343411
PRE'IOUS YEAR QUESTIONS
1. (a) what do you understand by crowding out? Explain how tlre fonming
affect the extent of crowding out:
(i) the responsiveness of money demand to rate of interest
(ii) tfe responsiveness of money demand to income
(iii) the responsiveness of investment demand to rate of interest
(b) Derive the equation of the aggregate supply curye from t-he waae
setting and the price setting relations. Explain clearly how this curr e
is affected by a decline in each of the following :
(0 oil price,
(i1) unemplo5rment benefits and
(iii) expected price level
(c) consider an economy in its medium run equilibrium. Now suppose
that the government passes a stricter law against the exercise of
market power leading to decline in markup over wages. Explain using
IS-LM and AD-AS curves how it will affect price level, interest rate and
output in the short run and in the medium run.
(a) Suppose, there is a rise in money demand for every level of income
and interest rate. How will this affect the LM and the aggregate
demand crtrve, if at all? Explain.
(b) what is the Adaptive Expectations H5rpothesis? why are adaptive
expectations inefficient? show how it allows you to substitute a
function of observable variables for unobservable expectations.
(c) suppose the proportion of wage contracts that are indexed rises.
Explain how and why it will affect the response of inflation to a given
deviation of the rate of unemplo5rment from the natural rate.
(a) (i) Why does a one percent change in growth rate of output not
lead to a one percent change in unemplo5rment rate?-Explain.
(ii) calculate the medium run equilibrium values of inflation,
growth rate of output and unemplo5rment rate for the economy
described by the following relations :
Okun's 1aw : u, -ut_r - -6.4gvt +1.2o/o
Phillip's Curve : t:r-Tl. =-r\+Syo

Aggregate demand : gy, = g-, - r, and
Growth rate of nominal money supply = 5Zo
According to the policy ineffectiveness proposition, anticipated
monetar5r policy changes are neutral with respect to output levCl but
_tot with respect to price level.
prove for an economy described by the
following equations:
S,rrrss Point Studies t29 Ravindra N. Jha

ill; -a5,976221 9811343411
Money supPlY rule : M, = GrY,-r +e, where E(e, lI,-,)= o
As relation : Yt : Yp *P(P,-.-,P,")
AD relation : Mr+Y=P,+Y,
(c) Accordingtothetraditionalapproach,disinflationinevitablyinvolves
Lucas this is not
some rise in unemplo5rment' However according to It is said
necessarily trre cas! il agents have rational expectations.
thatthisdifferencgofo"pinionisessentiallyduetothedifference
you agree? Explain'
about the way expectatioris are formed' Do
4. (a) Whatdoyouunderstandbyforwardpremirrmintheforeignexchange
forward premium is
market? Explain ,;;;;"";ples how the value of
affected by covered interest arbitrage'
rate always
(b) Why is it that following a monetary. expansion' exchange
overshoots its new long run equilibrium level? Explain'
(c) WhatdoyouunderstandbytheJ-curveeffect?Explainthereasons
for this effect.
Suppose that a nation's nominal GDP = 1OO' V = 4 and
Ms =30' Does
s. (a)
of payment?
this nation have a surplus or deficit in thein balance
a fixed exchange rate
i_pi-, why. Explain how it will be corrected
to balance of pa5rments'
;;"-;*, according to the monetar5l approach
(b) Consideraneconomywithperfectlymobilecapital,.fixedpricelevel
-Explain
and flexible exchangl rate. how an expansionary monetar5r
policy will affect olriirt. why is this type of policy called a beggar-thy-
neighbor policY?
Bliss Point Studies 13() Ravindra N. Jha

o11-4507622L 9811343411
Practice Test PaPer -I
1. (a) Explain transmission mechanism. How it works under follming
conditions :
(1) Responsiveness of money demand to interest rate is infinite'

(ii) Responsiveness of investment to interest rate is zero'
(b) Derive the equation of the aggregate supply frorn the waAe
setting and the price setting relations. Explain clearly how this curee
is affected by a decline in each of the following :
(il oil price,

(i0 unemplo5rment benefits and
(iil) expected price level
(c) Under classical supply assumption, neither fiscal policy nor monetar5r
policy will affect output. Explain by using IS-LM & AD-AS model'
2. (a) Calculate the medium run equilibrium values of inflation, growth rate
of output and unemplo5rment rate for the economy described by the
following relations :
Okun's law u, -u,-r - -Q.4Evr+1.2o/o
Phillip's Curve Tr- Ti : -vt + 5o/o
Aggregate demand I gy, E^,-r, anrd
Growth rate of nominal money supply = 5%o

(b) what is rational expectation theory? How it overcomes problem of
adaptive expectation h5pothesis.
(c) Why is it that iollowing a monetar5r expansion, exchange rate always
overshoots its new long run equilibrium level? Explain.
(a) Consider an economy with perfectly mobile capital, fixed price level
and flexible exchange rate. Explain how an expansionar5r monetar5r
poliry will affect output. why is this type of policy called a beggar-ttry-
neighbor policy?
(b) According to the policy ineffectiveness proposition, anticipated
monetary policy changes are neutral with respect to output level but
not with-respect to price level. Prove for an economy described by the
following equations:
Money supply rule : M, = d,1r.-1 +e, where E(e , lI,-,):0
As relation Y, = Yn +P(P,-,-,P;)
AD relation M,+Y:P,+Y,
8,, iss Point Studies 131 Ravindra N. Jha

::^"::-.!507622L 98,,I,3434,.1
(c) Oil shocks, inflation, and unemplo5rment
Suppose that the Phitlips curve is given by
Tr-T7:0.08+0.11-2ut
Where pis the markup of prices over wages. Suppose that p is
initially equal to 2Oo/o, but tJ:at as a result of a sharp increase in oil
prices, p increases to 4Oo/o in year t and after:
(c) Why would an increase in oil prices result in an increase in p?
(d) What is the effect of the increase in p on the natural rate of
unempl.o5rment? Explain in words.
+. (a) Suppose the government reduces the personal income tax rate from t
to t'.
(1) What is the effect on the AD schedule?
(i4 What is the effect on the equilibrium interest rate?
(iil) What happens to investment?
(b) What is PPP (Purchasing Power Parity) theory of exchange rate
determination? What are the factors that affect exchange rate,
according to monetar5r approach?
(c) Explain relation between output growth and change in
unemplo5rment.
5. (a) Explain effect of nominal money growth on output growth, un-

emplo5rment rate and inflation rate in start-run and medium run.
(b) What are the factors that determine natural rate of un-emplo5rment?
(c) What is meant by asset market model or portfolio balance approach?
In what ways does it differ from monetar5r approach?
*****
Studies
Bliss Point ts2 Ravindra N. Jha
o11-4sO7622L 9811343411
PRACTICE TEST PAPER . II
All Questions are compulsory. Attempt any T*o parts i-u ereh qo,c*icr
1. (a) What do you understand by crowding out? Explain hsqr
alfect the extent of crowding out: =: :-,-,rs:1g
(i) the responsiveness of money demand to rate of ilteresr
(ii) the responsiveness of money demand to income
(iii) the responsiveness of investment demand to rate of interest
(b) Derive the equation of the aggregate supply curve from the wage
setting and the price setting relations. Explain clearly how this curye
is a-ffected by a decline in each of the following :
(i) oil price,
(ii) unemplo5rment benefits and
(iii) expected price level
(c) Under classical supply assumption, neither fiscal policy nor monetar5r
policy will affect output. Explain by using IS-LM & AD-AS model.
2- (a) You are given wage setting equation: W = p" (t-u)

where W is nominal wages, P" is expected price level and u is
unemplo5rment rate. Also given is that the firms charge a mark-up of
1O7o over the wages.
(i) Calculate the real wage implied by the price setting relation.
(i1) Determine the natural rate of unemplo5rment.
(iii) If mark-up increases to 2oo/o, show the impact on real wages
and natural rate of unemplo5rment.
(b) Explain effect of nominal money growth on output growth, un-
emplo5rment rate and inflation rate in short-run and medium run.
(c) (i) How is expectations- augmented Phillips Cunre different from
the original Phillips Curve?
(i0 You are given the following information:
Okun's law : ut -ut-r : - 0.4 Gn-Zrlr)
Phillip's Curve i lct-ltrt_r= -(u-5%)
Rate of growth of nominal money supply in the medium
run = 7%o. Derive the values of unemplo5rment rate, growth rate
of output and inflation rate in the medium run.
(a) What is the Adaptive Expectations H5pothesis? Why are adaptive
expectations inefficient? Do you agree that rational expectations rules
out the possibility of making systematic errors? Explain your answer.
S,iliss Point Studies 133 Ravindra N. Jha

\:i-45076221 9att3434Lt
(b) Srrppose the proportion of wage contracts that
are indexed rises'
how and il; ii will affe-ct the response of inflation to a given
;6i;; rate'
deviation of the rate 6f unemployment from the natural
(c) Accordingtothepolicyineffectivenessproposition'anticipated
;;;a;.y policy .hJ;;";re neutral with reipect to output levei but
prove for an economy described by the
not with respect a" pri? level.
following eqrrations:
Money suPPlY rule M, : dr],-, +e, where E(e, lIr-r): o
As relation : yt = yp *B(P,-,-,P|)
AD relation : M,+Y:P,+Y,
deficit' Explain
4. (a) An economy is suffering from Balance of Pa5rmelts following rnechanisms'
how the deficit ..rr-tJ.otrected through the
e*",r*" fixed exchange rates and flexible prices'
(1) An automatic adjustment process
(ii) Change in Government PolicY'
Why is it that following a monetar5r. expans!9n' exchange rate always
(b) p,fplain'
oveishoots its new lon{run equilibrium level?
(c)
perfectry mobile capitar,.fixed price level
consider an economy with -Explain
and flexibt" .*.t "rgl rate' how an expansiolary monetarJr
policy will affect *t,. is this type of policy called a beggar-thy-
neighbor PolicY? "riirt.
s. (a) (il
\-' What is meant by asset market modelor portfolio balance
approach? In what ways d'oes it differ from monetar5r
aPProach?
(i0 Suppose that a nation's nominal GDP = 1OO' V =
4 and
Ms = 30. Does this nation have a surplus or
in the
deficit
how it will be
balance of payment? Explain why' Explainaccording
corrected in a fixed exchange rati system, to the
monetar5r approach to balance of pa5rments'
(b) What is PPP (Purchasing Power Parity) theory of exchange rate
determination? wrr"t tn. factors that affect exchange rate,
"rJ
according to monetar5r aPProach?
(c) Whatdoyouunderstandbyforwgrdpremiumintheforeignexchange
of forward premium is
market? Explain ;*i;;;-;ples how the value
affected by covered interest arbitrage'
****r**r***
Ravindra N. Jha
Bliss Point Studies L3,4
9811343411
o11-45076;22L
o
ffiffiffi ffiffip *%nffiffiM

Result Dec - 2Ois
NAM E COLLEGE N/\ML COLLT_GE
SAHIBANARANG GGS TOPPER HIMANIAGGARWAL LAXMI BAI 77.600/o
KHUSHBOOJAIN SGTB KHALSA TOPPER JYOTI MALHOTRA DYAL SINGH 77.6A"/0
AMITTHAKUR ARYABHATTA TOPPER HIMANI GUPTA LAXMT BAt 77.2oyo
AKASH SATYAWATI TOPPER NIKITA HTNDU 77.200/.
TUBA KAMAL BHIM RAO II KANIKA SACHDEVA MATA SUNDART 76.50%
PALAK KOHLI HINDU II KOMAL CHAUHAN RAO
BH|M 76.25yo
DIKSHA BHAGAT SINGH III SIMRAN GULATI RAJDHANT 760/O
rsHA tp 93.60% KANIKA DUA RAJDHANI 760/o
SUSMITA KALYANI SATYAWATI 86,40% PALLAVI lP 760/o
MANISHA KAPOOR LAXMI BAI 85,80% SAKSHI SATYAWATI 760/.
ANUBHAJAIN SATYAWATI 85OA AYUSH KHANDELWAL SHYAM LAL (E) 75.80o/o
CHARU TAYAL GARGI 84.75Y, SHUBHITA DYAL SINGH 75.8OO/O
ISHITA KMC B4.4Oyo ABHISHEK MALIK SATYAWATI 75.69'/0
MANVI GUPTA DYAL SINGH 82.40% NIKETA SGTB KHALSA 75.40'/.
SAUMYA BHARDWAJ LAXM] BAl 82,4OOh ANURAG SHYAM LAL 75Oh
MANOJSHARMA RAMJAS 82YO KANISHKA GUPTA BHARTI 75Y.
RAKSHIT RAMJAS B2o/o PRABHAT DIXIT SHYAM LAL 74,40O/O
SMRITI SINGHAL DYAL SINGH 82YO KOMAL JAIN LAXM] BAI 74.25%
TRtpfl tp Bzyo NEHAL JAIN SATYAWATI 74O/O
SAHIL SHANDILYA RAJDHANI 81,50O/O PARUL SATYAWATI 74%
'/ATSA DCAC 81.25y. GUNJAN JAIN JDMC 73.40./0
ANUSHKA S]NGH BHAGAT SINGH 81% AARZOO PAWA KALINDI 73%
SHREYA SOFAT MAITREYI 81'/O ADITYA DYAL SINGH 71,30O/O
SANA ALI KMC B1o/o AARUSHI GOEL BHIM RAO 71.250/o
.,]PASNA SHARMA SATYAWATI 80,75O/O
DIKSHA GUPTA SHYAM LAL(M) 71%
AARUSHI RISHIRAJ MATA SUNDARI 80% MEGHA GUPTA DYAL SINGH 71%
UANSHA KMc go% SAMEER DESHBANDHU 71O/O
SHIVAM RAWAL SRCC 8OO/O SHUBAM DESHBANDHU 7OO/O
SHREYA GANDHI IP SOYO VRIDHI DYAL SINGH 7OO/O
}COJA POPLI DYAL SINGH 79,40O/O SUBHAM SATYAWATI 69.40%
-AXMAN CVS 79o/o MEHTA SHRADHANAND 69%
J'r'USHI JAIN SHIVAJI 78.2OYO JAIN SHYAM LAL 65.50%
GARG LAXMI BAI 65VO
,r./r* il. H
Rmwffimdre E
%-.
v strRfi"
Result Dec. - 2fJ14
NAME C0LLEGE RanldMarks NAME G0ttEGE Rank/Marks
SHIVANG VERMA SATYAWATT(E) ToPPER i LALTTA KALINDI 77Yo
POORVAARORA MAITRAYI TOPPER I ownanusnt KALINDI 76%
ANNSHIKA BHAGATSINGH TOPPER I xnurrn cRovER SHYAIU LAL 76%
(E) TOPPER SHYAIV LAL 76Yo

PREETI AGGARWAL SHYAM LAL
I H,rnvnr,rx MAHAJAN HANSRAJ
MEGHNA CHRANIA KALINDI TOPPER I IVANVI SINGH 76Yo
CVS SATYAWATI
SANIYA KHHANA IIND
I t*uo*o 75Yo
SHRUTI BHARDWAJ SATYAWATI IIND I eutxtrn SATYAWATI(E) 74Yo
SHYAIU LAL KALINDI

SURABHI SOI\,,IYA IIND
i xer'lrn rnrnn SHYAM LAL
74olo
SHYAM LAL (E) 73YO

MEGHA RASTOGI llND
I SHRUTT
REETIKA MEHANTI SATYAWATT(E) lllRD
I rncnrt SATYAWATI 72YO
ISHITAVERMA SGGSC IIIRD I urrrrnut ARSD 720/o
SRISHTIBASU KALINDI IIIRD

! o*rr*, orrro ARSD 72Yo
AIYAAGGARWAL RAMJAS 82%

I sHrvnr'rrGRovER DESHBANDHU 72YO
HOUSE MAITRAYI
! AKSHARA
MIRANDA 82YO 71TO
PRACHI MADAN
HEMANT SULTANIA GURU GOVIND SINGH 81% IASHTMAPUNAANI JANKI DEVI 71YO
LAL SATYAWATI
I rusHnn
SAGAR GUNDHI SHYAM 81% 70%
PRIYATOMAR SHYAM LAL BIYO

I NISHA SHYAM LAL 70Yo
SHEKHER VASHIST SHYAM LAL 80% I RRorrvn SATYAWATI 69%
SHYAIVI LAL
I ro*rr* .HANDA DESHBANDHU
DEEPANSH 80% 69%
LAXMI BAI DESHBANDHU 69%

MEHAKAGGARWAL 79YO
I PARUL SHARMA
SURBHI RAWAT KIRORIMAL TBYo i DEEPSHIKHA GUPTA SHYAIU LAL 69%
SANYANA RAWAT KIRORIMAL TBYo I vnnsHn DAULATRAM 68%
SHWETA SRCC 78olo

I t*0, DAULATRAM 68%
SIMARAN DURAN MAITRAYI 78Yo II orrprsn DESHBANDHU 67%
RAJAT SHYAM LAL 77YO i .AAKASH GARG SATYAWATI 66%
and mang mort ...
"",/"*
t
RawBmdra Kumar
ffiffi@ ffiffi$ @ffiffi SEM"
Result June - 2Cr14
NAME C0LLEGE RanldMarks NAME C0LLEGE RanldMarks
AAKASH SATYAWATI TOPPER SHUBHAM DHINGRA RAMJAS 2ND

\4ONIKA DAYAL
DEEN TOPPER SUNIDHIJAIN SATYAWATI 2ND
VANSIJAIN sLc(M) TOPPER WAMIKAJAIN SLC(M) 2ND
AKSHAY GARG RAJDHANI TOPPER AARZOO PAHWA KALINDI 2ND
SHIKHASHARMA BHIM RAO AMBEDKAR TOPPER ARVENDRA PANDEY AURBINDO 2ND
SHIVANSH KAUSHAL sRrAURoBtNDo(E) T0PPER UDHAV GUPTA HINDU 2ND
RISHABH RASTOGI DESHBANDHU TOPPER GAURIKASETHI KALINDI 2ND
{AKASH SATYAWATI TOPPER VIPUL GUPTA PGDAV 2ND
'il0NlKA DDU TOPPER IRA SHARMA JDMC 3RD
.,lANSIJAIN
sLc(M) TOPPER VISHAVDEEP SHARMA RAJDHANI 3RD
{KSHAY GARG RAJDHANI TOPPER SHIKHAJAIN BHAGAT SINGH 3RD
SIIKHA SHARMA Ambedkar TOPPER ISHAAN SENGUPTA sRrAURoBtNDo(E) 3RD
SHIVANSH KAUSHAL AURBINDO TOPPER IRA SHARMA JDMC 3RD
lISHABH RASTOGI DESBANDHU TOPPER VISHAVDEEP SHARMA RAJDHANI 3RD
, GYASASURI JDMC TOPPER SHIKHAJAIN BHAGAT SINGH 3RD
TAVNEET
KAUR KHALSA TOPPER ISHAAN SENGUPTA AURBINDO 3RD
:\IHA PARVATHANENI IP 2ND RAVITTHUKRAL DDU 3RD
BHAGAT SINGH
] EEKSHA CHAWLA 2ND VASHUNDHRA GARGI 92YO
S.IUBHAM DHINGRA RAMJAS 2ND RUMANI LAXMI BAI 89%
)JNIDHIJAIN SATYAWAT|(M) 2ND SHREYAGANDHI lP 87lo
AMIKAJAIN SLC(M) 2ND SAUMAYASINGH KMC 87YO
I.IRZOO PAHWA KALINDI 2ND SAVITRIKAKKAR GARGI 85%
] i/ENDRA PANDEY sRrAURoB|NDo(E) 2ND ASHU CVS MYO
-., HAPARVATHANENI IP 2ND MANISHA PANT ST. STEPHEN'S 83Yo
::=KSHACHAWLA BHAGAT SINGH 2ND
and mang rrre
g
il
fte
"n/p,?
Ravflmdra N Kumman
q,
*S..,e*
ffiWffiffiffi-
ffiffi@ ffiffi$ EI
Result June'2o-14
NAME COLLEGE RanldMarks NAME C0LLEGE Rank/Marks
DEEPTI SHARMA SHIVAJI TOPPER RASHIKAARORA VENKY
MEGHNACHORARIA KALINDI TSPPER DEEPABOLI KARORI MAL
SHYAM [-AL TANV| DUDEJA JESUS MARRY

PREETI AGGARWAL TOPPER
SHYAM LAL ANJALI PARASHAN HINDU
SURABHI SOMYA TOPPER
VIDUS! HINDU TOPPER HEMANT SGGS
SUPREET KAUR KHALSA

CHAHAK SATYAWATI(E) rOPPrn
JIGYASASHARMA RAJDHANi TOPPER AISHWARYAJAIN IP
ANIMESH SHARMA SBSO TOPPER SHERIN KACHROO IVlIRANDA HOUSE
ANSHIKA SBSC TOPPER VANDANA MIRANDA HOUSE
POORVAARORA MAITREYI TgPPER MAHIKA JDMC
RAJAT GOYAT- SHYAM LAL li BHAVYASEHGAL SBSC
SHYAM LAL HARSHITA BANSAL IP

MEGHARUSTOGI Ii
SANIYA KHANNA CVS ll CHIRUTHA KALRA IP
GAURAV SATYAWATI ll HAPPY YADAV HINDU
SHIPRA PARKASH KALINDI ll TANYA SACHDEVA KHALSA
ARUSHI VERMA lPil UDAYANAND SGTB

KHALSA
GAURAV BHARDWAJ SATYAWATI(E) ttt AISHWARYATULI
MANISHA PONEHAL MAITREYI
AYUSHI GAUR MIRANDAHOUSE lll
JHANAK BAHALRA JDMC 86% NANCY KHALSA
ABHINAV KHAN SGGCC 840/0

VIBHUSHA BANSAL PGDAV
AARUSHI KAPOOR JESUS MARRY M% GUNJAN GROVER LAXMIBAI
ISHITAVERMA SGGS 82Yo

KRITIKAPOOR KALINDI
TANVI AHUJA JDMC BZY' AVISHKA DRC
DISHAJAIN lP 82Yo VANDANA MIRANDAHOUSE
BINNY TANGURI lP 82Yo KETIKASETHI JDMC
and mang more .-

ffi
E
t** f/*
ffimwBmdmm Kwmmr
-k
d$#; ;fl'
ffiffi€ffi$ =V[ SEnfl
Result June - 2fJ14
NAME C0LLEGE RanldMarks NAME C0LLEGE Rank/Marks
VAISHALICHAWLA LAXMIBAI TOPPER JAYE AWASTI SHYAM LAL(D) 690/o
SHREE KRISHANA MNC TOPPER GURUDEO SAH ARSD 69%

NISHA NAGAR SHYAM LAL TOPPER PALLAVI GUPTA SPM 68%
ARUSHI THAKUR LAXMIBAI TOPPER SHIVANGIBHATT SHYAM LAL(E) 68%
SALONI GARG DAYAL SINGH il RAJEEV VERMA SHYAM LAL(E) b lYa
NAVEEN SHYAM LAL il SURABHI NAYAR SHYAM LAL 6701rc
PRANAV SHARMA DAYAL SINGH lil ABHINAV DUTT KMC 6701a
ASHISH ZAKIR HUSSAIN ilt SAMPRITI BAID KALINDI il 67Yo
SHARDOOLI MANN MIRANDA HOUSE 85% ANSHUL YADAV HANSRAJ 67o/rc
PANKAJ GUPTA DAYAL SINGH 83% CHESHTA KHANNA SPM 65%

KRITI BAHL CVS 820/0 GAURAV SHARMA RAMJAS 65%
ABHISHEK BAJAJ CVS 81% TAPLEEN KAUR DRC 65%
KHYATI KATURIA SGGSCC 790/o NEHAAHIYA SHYAM LAL(E) 6s%
At\4lT SONl KMC 790/o PARASAGGARWAL SAIYAWATI 65%
JATIN GROVER KIVC 77% HARSHITA BHUSHAN SBSC 65%
SAMAN AFSAN S.G.T.B. KHALSA 760/0 MEENAKSHI LAXMIBAI 640lrc
RITTKAAGGARWAL KALINDI 76Yo PRATEEK SHARMA SHYAM LAL 64010

]RATHMAN JOSHI KMC 75Yo SHIVANJALI SBSC 64010
/ARNIKA GARG CVS 7SYo PRATEEK KUMAR MNC 64Yo

]HETNASIKKA DRC 7SYo SONALIKAVAID DAYAL SINGH 640k
SHREYACHAWLA KALINDI 7SYo AYUSH JAIN DESHBANDHU 04%
SHIVANISEHRAWAT SBSC 74Yo LALITA SPM 63%
-ALITA LAXMIBAI 740/o SUNIL KUMAR KMC 63%

SHRAYAMAHAJAN DAYAL SINGH 73Yo LEENA SHYAM LAL 63%
TURNIMA RAGHUPATHY KALINDI 72Yo KANIKATYAGI KMC 63%
a 40t
',OMIJAIN MNC ttt0 BHASKAR HANSRAJ 63%
1 1C/
SARTHAK GUPTA SBSC I tto ABHAY SINGH HANSRAJ 63%
3AURAV SHARMA KMC 700/o SAUMYA SHYAM LAL 62Yo
SHITA GOPAL MIRANDA HOUSE 7|Yo SMRITIMALHOTRA KALINDI 62Yo

I]YASHARAWAT SPM 70% RAJAT JAIN SATYAWATI 60%
:-KA GURUNG KNC 70% . NITISH SRIVASTAVA SHYAM LAL(E) 60%
t,
and manu more ..
*r/r* f/.
fd'l
RavEmCra G3 Kumnan
1&
'ee.
o
mn ffim*ramffi Resanffi
June - 2o-14
NAME COLLEGE
NAME GOLLEGE
ABHISHEK KUMAR HYDERABAD

DSE
HARISH KUMAR
SWARNA PORAMESWARAM HYDERABAD
DSE
SHIKHASINGH
DSE JYOTIJOLLY HYDERABAD
GURUDEO SAH
SAHILARORA JATVIIA ISLAMIA
DSE
SHEFAILISHARMA
DSE TANYAMALHOTRA JAMIA ISLAMIA
SAKSHI GUPTA
VINAYAK BHARDWAJ NTADRAS
DSE
SANAALVI
JYOTI KALKAL IVIADRAS
DSE
REJJU RANA
DSE NITIN BOYLLA AMBEDKAR
ARZOO SABHARWAL
DSE SAMIKSHAKAPOOR AMBEDKAR
PIYUSH AGARWAL
DSE HARISH KUMAR JNU
GUNJAN SAINI
DSE TANYAMALHOTRA TERI
SAJAL DHALL
UTKARSH KUMAR DSE
MEGHABHARTI DSE
PALLAVI BHARDWAJ GOKHALE
CHIRAG YADAV GOKHALE
AKANKSHASURYAN GOKHALE
TANYAMALHOTRA GOKHALE
and mang more ..-
.:
,-d** f/*
Rav[mdra & Kwmmm
qE
e..€'
Y:. -
IAS I EXAM
Economics optionar
oyffimw€K%#sm ru. Iha

?egular Batch & Iesf Senes
cmn i ntstu ies s
Old Rajendra Nagar

57 ,17 , 1" floor Near HDFC Barrk
BLISS POINT STUDIES
98 11343411 I 98 113434&{
98 11343938 : *
: ... ., -.l i1*11 ill5i,iqq. :miln
Classes by Ravindra N. Jha
ECONOMICS OPTIONAL FOR IAS
rNDrAlQ ECONOMIC SERVICES (lES)
ECONOMICS (HONS.)
lntroductory lMicro
Introductory NIacro
Intermediate [\licro
lntermediate Macro
lndia's Economic Development (lED)
I nternational Econornics
Development Theory & Experience (DTE)
Public Economics
o M.A. (Economics) DSE Entrance
o NORTH CAMPUS o OLD RAIENDRA NAGAR

2453, lst Floor, Hudson Line, Kingsway Camp 571t.7,lst Floor, NearHDFC Bank
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Bliss Point Studies 79 Ravindra N. Jha

Subject : B.A. (Hons) Economics - Third Semester

1 Nidhi GuPta SRCC

curves; interaction of aggregate demand

Readings: (5'1 to 5'3) and 7'

Topic 3. Open Economy Models

Bliss Point Studies 81 Ravindra N. lha

2 Ttre economy is at fuI1 emplo5rment. Now the government wants to change

3 Discuss the role of the parameter Go, h, b and k in the transmission

6 Consider two alternative programs for contraction. One is the removal of an

Bliss Point Studies a2 Ravindra N. Jha

Bliss Point Studies 83 Ravindra N. Jha

Aggregate Demand and Supply : An Introduction

Bliss Point Studies a4 Ravindra N. Jha

Bliss Point Studies 85 Ravindra N. Jha

2. Answer the following questions using the information provided in this

Bliss Point Studies 86 Ravindra N. Jha

7. The informal labor market

Bliss Point Studies a7 Ravindra N. Jha

Bliss Point Studies a9 Ravindra N. Jha

Questions and Problems

2. Spending shocks and the medium run

3. SuPPlY shocks and the medium run

9() Ravindra N. Iha

Bliss Point Studies 91 Ravindra N. lha

8 Supply shocks and demand management

(e) How do the short-run and medium -run trnemplo5rment rates

10. Taxes, oil Prices, and' workers

BIiss Point Studies 93 Ravindra N. Jha

3. Mutations of the Phillips curve

Bliss Point Studies 94 Ravindra N. Jha

+ Oil shocks, inflation' and unemplo5rment

(a) Suppose p= O'03 and O'O3' What is the natural rate of

Bliss Point Studies 96 Ravindra N. Jha

Bliss Point Studies 97 Ravindra N. Jh.a

Question and Problem

Bliss Point Studies 98 Ravindra N. Jha

3 suppose that the economy can be described by tl:e following three

(a) What is the natural rate of rrnemplo5rment for this economy?

c Markups, unemplo5rment, and irrllation

:nt Where p is the markuP.

-Jha Bliss Point Studies 99 Ravindra N. Jha

Eyt=E*t-T: Aggregate demand

Bliss Point Studies 1()() Ravindra N. Jha

Bliss Point Studies 1()1 Ravindra N. Jha

Lo.2 Ravindra N. Iha

3 It is sometimes said that a central bank is a necessary condition for a

11 was u.s. policy from 1980 to 1985 consistent with a beggar-thy-neighbor

Bliss Point Studies 1()4 Ravindra N. Jha

1 It is sometimes said that a central bank is a necessaqr condition for a

- tsliss Point Studies 1()5 Ravindra N. lha

13 Should countries intervene stabilize exchange rate?

Bliss Point Studies 1()5 Ravindra N. Iha

Questions for Review

B\rss Qsirrr\S\rd\qs \s'r Rav\sdra \\- ftra

Bliss Point Studies 108 Ravindra N. Jha

Bliss Point Studies 1()9 Ravindra N. Iha

Bliss point Studies

(iii) Suppose that the country experiences a second baby

(b) Suppose the Phillips clrrve is given by n,:ft: +O]-2u, where

(c) Suppose that the Phillips curve is given by

n,-nf =-(u,-5%) and the expected inflation is given by rf :r,_,

:f- #H'JH;: ,l::, ";:'h't:l"Ti'

(c) (1) 3iIHl.'l'.?Tiffi1J:11ilH:5::'?,:i'e,T"JllXT*"'"."