E402 Intermediate Macroeconomic Theory

Second Exam

Spring 2000

Dr. Christopher J. Waller

 

  1. Derive the IS curve. Explain the reasoning behind the derivation. Then show and explain how a decrease in government spending affects the IS curve.
  2. Using the indifference curve model of intertemporal consumption, derive the saving curve when the substitution effect dominates the income effect. [Be sure to explain both the substitution and income effects in your answer.]
  3. From the Wall Street Journal Feb 22, 2000 (p. A4)

    4. "The Fed chairman intensified his plea to politicians to let budget surpluses keep running and pay down the national debt rather than boost spending or cut taxes."

    Using the loanable funds model of the interest rate, show and explain how this would affect the economy?

  4. It has been argued that the Fed 'protects' the stock market by cushioning the fall in share prices when the stock market suffers large price decreases but does nothing to prevent large increases in stock markets. Thus, the Fed is providing 'insurance' to stockholders. Using the portfolio allocation model (money & bonds), show and explain how such behavior by the Fed affects individuals portfolio allocations between 'safe' and 'risky' assets.