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University of Massachusetts Dartmouth Macroeconomic Questions

University of Massachusetts Dartmouth Macroeconomic Questions

Question Description

  1. Use the graphical money market model to show the effect of a decline in real GDP on the interest rate. Explain your answer (including which curves shift, and why). (5 points)
  2. Suppose the German economy is represented by the following equations: (15 points)





    1. What is the level of GDP? Show your work. (5)
    2. What is the government spending multiplier? Again, show your work (i.e. do not plug numbers into an equation you write down from elsewhere). (5)
    3. The government wants to increase GDP by 500. What change in government spending is required? (2.5)
    4. If the marginal propensity to consume increased from 0.5 to 0.6 would government spending be more or less effective at increasing German GDP? Why? (2.5)
  1. In an open economy, aggregate demand also accounts for exports (X) and imports (IM):


Consider an economy characterized by the following behavioral equations:

C=c0 + c1Yd

IM=m0 + m1Yd

Where Yd is disposable income, and G, I, and X are exogenous. (20 points)

  1. Write an expression for aggregate demand (Z). What are the slope and intercept? (4)
  2. Use the Keynesian cross diagram and the specific equations shown here to show the solution for equilibrium income graphically. Label your graph completely. (4)
  3. Solve algebraically for equilibrium GDP in this economy. (4)
  4. What is the government spending multiplier? (4)
  5. Based on your answer to (d), is fiscal policy more effective in an open or closed economy? Why? (


  1. Why is the government spending multiplier greater than 1? Explain the economic logic (not the mathematical mechanics of the solution).

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