UNIVERSITY OF EAST ANGLIA
School of Economics
Main Series UG Examination 2015-16
INTERMEDIATE ECONOMICS
ECO-5001Y
Time allowed: 3 hours
Answer FOUR questions: TWO questions from SECTION A and TWO questions
from SECTION B. All questions carry equal weight.
Answer EACH SECTION in a SEPARATE answer booklet.
Notes are not permitted in this examination.
Do not turn over until you are told to do so by the Invigilator.
ECO-5001Y
Module Contact: Dr Duncan Watson, ECO
Copyright of the University of East Anglia
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SECTION A: MACROECONOMICS
1
Explain the money multiplier concept and the quantity theory of money. What
do these theories predict for a country that engages in Quantitative Easing? Have
the predictions of these models been correct during the Great Recession?
[25 marks]
2
A country has the following production function,
𝑌 = 𝐹(𝐾, 𝐿) = 𝐾 0.7 𝐿0.3
a) Does this production function have constant returns to scale? Explain.
[3 marks]
b) Derive the per-worker production function, 𝑦 = 𝑓(𝑘).
[5 marks]
c) Assume that the country has no population growth or technological progress
and that 7 per cent of capital depreciates each year. Assume further that the
rate of saving is 10 per cent of output per year. Using your answer from part
(b) and the steady-state condition that investment equals depreciation, find
the steady-state level of capital per worker.
[12 marks]
d) Find the steady-state levels of income per worker and consumption per
worker.
[5 marks]
3
Consider the AD-AS model for a small open economy with perfect capital
mobility.
a) Explain clearly the fundamentally different reasons for a downward sloping AD
curve under (i) fixed exchange rates and (ii) flexible exchange rates.
[10 marks]
b) Starting from equilibrium, analyse the effect of a fiscal expansion under fixed
exchange rates. In this model why is a fiscal expansion under flexible
exchange rates completely ineffective?
[15 marks]
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4
Answer the following:
a) Describe the IS-TR model.
[10 marks]
b) Explain how the slope of the Taylor-Rule curve affects the central bank’s
response to deviations of output from its long-run trend.
[5 marks]
c) Now assume an exogenous negative shock to demand takes place, which
leads the central bank to believe that the natural interest rate for the economy
has fallen. Explain how an appropriate change to the Taylor Rule allows the
economy to transition back to trend GDP.
[10 marks]
SECTION B: MICROECONOMICS
5
Answer both parts:
a) The market for turkeys is made up of two firms, Suffwik and Norwick. Suffwik
enters the market first and decides how many turkeys it will produce. Later
Norwick enters the market and makes its output decision after observing
Suffwik’s level of output. The market demand is represented by 𝑃 = 12 − 𝑄
(with 𝑄 = 𝑄𝑆 + 𝑄𝑁 ) and the total costs of the two firms are 𝑇𝐶𝑆 = 2𝑄𝑆 + 12
and 𝑇𝐶𝑁 = 4𝑄𝑁 + 1. Calculate how many turkeys each firm will produce.
[13 marks]
b) “We cannot understand the consequences of oligopoly without referring to
Galbraith’s technostructure”. By comparing the different approaches to
oligopoly, assess the validity of this statement.
[12 marks]
6
“Work should be the surest way out of poverty. A high minimum wage is good
for people and for business”. Using appropriate microeconomic theoretical concepts,
critically evaluate the impact of a minimum wage on the labour market.
[25 marks]
7
“Social losses may be reflected in damages to human health; they may find
their expression in the destruction or deterioration in property values and the
premature depletion of natural wealth”. Critically evaluate how heterodox approaches
can widen the microeconomic analysis into market failure.
[25 marks]
TURN OVER
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8
“Conventional, static, microeconomic theory, as represented in contemporary
textbooks, exaggerates the economic inefficiency of monopoly in market
economies”. Discuss.
[25 marks]
END OF PAPER
ECO-5001Y
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