Time: 2 hours

Section A

Each question is worth 3 marks.

Provide a definition for each of the following:

  1. Inflation
  2. Exchange rate
  3. Unemployment rate
  4. Employment level
  5. Total factor productivity
  6. Government multiplier
  7. Quantitative easing
  8. Money illusion
  9. Consumption
  10. Investment

Section B

Each question is worth 35 marks

Choose one question

  1. Growth and Total Factor Productivity:
    1. What is total factor productivity (TFP) and how does it affect economic growth? [15]
    2. What is the Golden Rule, and does it seem plausible? [10]
    3. “TFP is just a residual and hence should be ignored.” Do you agree with this statement? [10]
  2. Consumption and investment:
    1. What is consumption, and how is it determined? [15]
    2. What is investment, and how is it determined? [10]
    3. Derive the IS curve; how does it link consumption and investment? [10]
  3. Business Cycles:
    1. What is the business cycle? Can we measure it? [15]
    2. Outline the Real Business Cycle Theory, and Keynesian models of business cycles. Which seem more plausible and why? [10]
    3. “The little boat gently drifted across the pond exactly the way a bowling ball wouldn’t.” How does this analogy help when thinking about economic shocks, propagation mechanisms and business cycles? [10]

Section C

This question is worth 35 marks

  1. Exchange rates:
    1. What are the theories of covered and uncovered interest rate parity? What is the carry trade? [15]
    2. How well have these theories fared when explaining real-world nominal exchange rate movements? [10]
    3. “Nobody really thinks that macroeconomic fundamentals matter for short-run exchange rate determination”. Evaluate this statement. [10]