Macroeconomics

Final Exam

Dear Students,

It would be an understatement to say that this semester has not gone according to plan. What's worse is that two months later, we the American people still do not have a plan.

This final exam reflects that catastrophic level of disorganization. The first problem asks you how the social distancing measures required to contain the virus will affect the economy in the short-run. So the remaining problems should have asked about the response that the government adopted. Instead the remaining problems ask about what the government's response might be.

It's two months later and we're still wondering what the government's response will be. All we know is that BMCC has informed its professors that they will not be reappointed next semester.

Under such circumstances, I cannot give a normal exam. All I can do is encourage you to think about your future.

Below are a set of questions that I designed to help you explore the effects that the Coronavirus pandemic will have on the US economy in the short-run. Please combine your answers to these questions with your answers to the midterm exam to prepare a document that explores the short-run and long-run effects of the Coronavirus pandemic.

Please prepare a document that will help you professionally. It's important to get a good grade in the course, but what's most important is to get an "A in life." So please focus on that.

And please let me know what I can do to help you get an "A in life."

Sincerely,
- Eryk Wdowiak

Problem 1

Suppose that the social distancing measures required to contain the virus reduce household consumption. For simplicity, use the Keynesian consumption function and assume that its autonomous component falls.

1. How will the decrease in household consumption affect planned aggregate expenditure?
2. How will that change in planned aggregate expenditure affect equilibrium aggregate output?

Problem 2

Now suppose that federal, state and local governments all respond to the economic impact of the pandemic by increasing their purchases. Suppose further that those governments keep taxes unchanged. To finance the new purchases, governments sell bonds.

1. How would an increase in government purchases affect planned aggregate expenditure?
2. How would that change in planned aggregate expenditure affect equilibrium aggregate output?

Problem 3

Next suppose that the US Federal Reserve (i.e. the central bank in the US) responds to the economic impact of the pandemic by conducting open market purchases of government bonds.

1. How would those purchases affect the price of bonds? How would those purchases affect the rate of return on bonds?
2. How would that change in bond yields affect interest rates throughout the economy? And how would those interest rate movements affect planned investment?
3. How would that change in planned investment affect planned aggregate expenditure?
4. How would that change in planned aggregate expenditure affect equilibrium aggregate output?

Problem 4

Finally, consider the relationship between output and employment.

1. If social distancing reduces household consumption, what effect will the reduced household consumption have on equilibrium aggregate output and employment?
2. How can fiscal and monetary stimulus affect those levels of equilibrium aggregate output and employment?