Session:                 2020/2021

Faculty:                   Business & Law          


Level:                      5

Module Title and Code: Intermediate Macroeconomics – ECON2542

Date:                       4 June 2021

Duration:                3 Hours                  

The examination window is from 8am-6pm UK time

For the duration of the examination see ‘duration’.  Your time starts when you begin the examination.

You are reminded that the examination must be completed and submitted by 6pm UK time

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Examination Rubric: Instructions to and information for candidates


Answer all 3 questions




Question 1: Answer the following parts in this question. (30 marks)

  1. Compare two economies, which differ only in their share of credit-constrained households but are identical otherwise. In which economy is the multiplier larger? Illustrate your answer using a diagram. (10 marks)
  2. Based on your comparison of the two economies, would you expect the multiplier in an economy to vary over its business cycle? (10 marks)
  • Some economists estimated the size of the multiplier in the Great Depression to be equal to 1.8. Explain how the following characteristics of the US economy during the Great Depression could have affected its value: (10 marks)
    • the size of government (see Figure 1)
    • no unemployment benefits
    • the share of imports was small.


Figure 1 Fluctuations in output and the size of government in the US (1870–2015).


Question 2: Answer all parts of this question. (30 marks)


Suppose the economy is initially at labour market equilibrium with stable prices (inflation is zero). At the beginning of year 1, investment increases and the economy grows with lower unemployment.

  1. Explain why a positive bargaining gap arises. (7.5 marks)
  2. Assume the positive bargaining gap is 1%. Draw a diagram with years on the horizontal axis and the price level on the vertical axis. Starting from a price index of 100, sketch the price level’s path for the 5 years that follow, assuming the bargaining gap remains at 1%. (15 marks)
  • Who are the winners and losers in this economy? (7.5 marks)





























Question 3: Answer 4 parts out of 8 parts in this question. if you answer more than 4 parts, the first 4 parts will be considered for marking. (40 marks)


  1. Explain the commercial bank’s business model: how does it make profits, and how does it ‘create money’? (10 marks)
  2. What is the difference between base and bank money? Which kind of money do banks create? What is the relative importance of each type of money in a modern economy? (10 marks)
  3. Provide an example of circumstances under which households distinguish between base and bank money. (10 marks)
  4. Suppose the central bank wishes to restrict the level of economic activity in the economy because it is afraid that inflation will increase. How does it implement its decision? What role do households, firms and banks in the home country and abroad play in this process? (10 marks)
  5. Draw the shape of CB indifference curve for the Central bank’s monetary policy maker if the economy full of old people and the central bank considered to be inflation averse. (10 marks)
  6. What would be the impact of reducing the interest rate by Central Bank on assets prices and exchange rate? (10 marks)
  7. Assume that the central bank has an inflation target of 2% per year, but inflation is currently running at 4%. The nominal policy (interest) rate is currently 5%. The central bank needs to create a negative bargaining gap and estimates that the real policy rate required to achieve this is 3%. What would be the targeted nominal policy rate? (10 marks)
  8. Why the unemployment rate does not shrink continuously in a world with continuous technological progress.? (10 marks)