Managment Engineering - Macroeconomics of finance

Full exam

Macroeconomics of Finance, 13 July 2020 (Prof. A. Florio) Exercise 1 Suppose the economy is initially at a long -run equilibrium .Then the Fed increases the money supply . Explain the short -run and the long -run effects of this policy on GDP, unemployment, and inflation using these three models :IS-LM, AD -AS, and the Phillips curve, when : a) any resulting inflation is unexpected. b) any resulting inflation is expected. (Provide agraphical analysis for each of the three models in both cases.) Peter Bofinger recently (15 June 2020 )claimed :“The Covid -19 pandemic has led to an enormous slump in economic activity worldwide .At the same time, fortunately ,go vernments and central banks have implemented economic stimulus measures unprecedented in economic history .(…)On the whole, there isa greater risk that the pandemic will lead to deflation in the global economy .” c)Commenting on this sentence, and employing the model you judge more appropriate, tell why the Covid - 19 crisis is expected to be deflationary rather than inflationary. d)Stephen Moore, on 13 of May, titles his article on the Financial Times: “Deflation is the real killer of prosperity”. Do you agree? Explain. Exercise 2 Consider the Bernanke -Blinder (1988 )model .In this model banks hold bonds B, loans Land reserves Ras assets, and have deposits Das liabilities .Reserves are equal to the legal minimum reserve requirement R= τD, where τ=1/3.Furthermore, DD=Y–0.5iB, demand for deposits, with Yreal output, iBthe bond interest rate . LD=Y–0.25 (iL−iB), demand for loans, with iLthe loan interest rate . LS=0.75 (D −R), supply of loans . Y=60 –0.25 (iL+iB), goods market equilibrium . a) Assuming that currency iszero, find the supply of deposits in the money market. b) Write the LM curve. c) Employing the supply of deposits, re-write the supply of loans as afunction only of R. d) Draw, find and explain the loan market equilibrium (find the loan interest rate iLas a function of i B). e) Find, draw and describe the CC curve. f) Find, draw and describe the equilibrium level of output Yand the bond interest rate i Bin the Bernanke -Blinder model when R=10. g) Suppose the central bank increases the level of reserves from R=10 to R’ =12. Compute the new equilibrium. Illustrate the effect graphically and provide an economic explanation. h) What would have happened after the increase in reserves by the central bank ifjust the money view was operating? Comment. lOMoARcPSD|21191654