Final Examination                                                        Summer 2005 
Macroeconomics                                                       Page Total = 16 

I. Short Essay Questions (20 points each) 

DIRECTIONS: Answer one (1) of the following question. 

1. Graphically derive our short­run ``Keynesian'' LM curve. (Be sure to give a
detailed discussion and a graphical derivation.) Intutively, why does this LM
curve slope upward? What does Keynesian IS­LM theory predict as effect of
an increase in the money supply? Explain in detail. 

2. Describe the simple Classical (quantity) theory of price determination
verbally and algebraically. In what sense does the quantity theory provide an
``aggregate demand'' curve for the classical theory. Intutively, why does this
aggregate demand curve, according to the quantity theory, slope downward?
According to the quantity theory, what is the predicted relationship between
the money supply and the inflation rate? (Show this algebraically.)
Empirically, how well is this prediction realized? (You may restrict your
discussion of this to the US economy.) 

3. What are the key determinants of growth in the neoclassical growth model?
What are the predicted short­run and long­run effects of an increase in the
saving rate in this model? (Illustrate graphically and discuss.) Does
endogenous growth theory offer a different prediction for the effects of an
increase in the saving rate? (Illustrate graphically and discuss.) Comment:
every graph deserves a full and detailed explanation. 

II. Multiple Choice Questions (1 point each) 

DIRECTIONS: Answer all multiple choice questions. Pick a single answer for each
question: there is one best answer. 

1. In the Classical Model, doubling the money supply will 
(a) double the price level. 
(b) double nominal income. 
(c) increase real income 
(d) lower the interest rate. 
(e) a. and b. 

2. Keynesian reasoning suggests that the LM curve slopes up because 
(a) Y must rise to clear the goods market given a fall in i. 
(b) i must rise to clear the goods market given a rise in Y. 
(c) i must rise to clear the money market given a rise in Y. 
(d) Y must rise to clear the money market given a fall in i. 

3. A decrease in the ex ante real interest rate will 
(a) reduce desired investment. 
(b) lower desired expenditure. 
(c) lower equilibrium income. 
(d) shift the IS curve right. 
(e) none of the above. 

Final Examination---Page 1 of 16