EC201-5-SP
1



UNIVERSITY OF ESSEX
SECOND YEAR EXAMINATIONS 2021

MACROECONOMICS (INTERMEDIATE)

Time allowed: 3 hours. Please see your exam timetable or check on FASER for the deadline to
upload your answer.
The time allocated for this assessment includes time for you to download this question paper and
to upload your answers to FASER. Allow at least 30 minutes at the end of your exam time to
upload your work.
The times shown on your timetable are in British Summer Time (BST), which is the same as GMT+1.
Please check online for a conversion to your local time if you will be undertaking your assessment
outside the United Kingdom.
Candidates are permitted to use:
Calculator, Textbook(s), Lecture materials
The paper consists of 4 questions.
Candidates must answer 2 questions.
All questions carry equal weight.
Write your Student Registration Number at the top of each page of your answer papers. All
answers must be written in the document(s) uploaded to FASER.
If you write your answers by hand please use a black pen and make sure the photos and/or scans
in your uploaded document are comfortably readable and arranged in sequential order.
If you think there is an error in the wording of any question or the instructions are not clear,
contact the module lecturer immediately via email: Lukas.Mayr@essex.ac.uk A response will
be sent to your Essex Email Account (click!).
If you have a technical problem with FASER, please go to the Exams Website (click!) to find contact
details of the technical teams that can help you.
If you type your answers on a computer please save your work throughout the exam to avoid
losing your work.
It is forbidden to communicate with any other candidate in any way during this assessment. Your
response must be your own work. Procedures are in place to detect plagiarism and collusion.
EC201-5-SP
2

You must answer TWO questions.
1. Answer all parts (a)-(c) of this question.
(a) [5 marks] Define the trade balance for an open economy and explain the relationship between
the trade balance and the real exchange rate.
(b) [8 marks] Consider a small open economy with perfect capital mobility. Describe the main
features of the Mundell-Fleming model for such an economy and provide a graphical
representation of its equilibrium.
(c) [12 marks] Using diagrams to illustrate your answer analyse the effectiveness of monetary
and fiscal policy in the Mundell-Fleming model.

2. Answer all parts (a) and (b) of this question.
(a) [17 marks] Explain the Solow growth model, making clear its assumptions. Demonstrate that
the following holds in steady state:
(i) The capital-output ratio is constant;
(ii) The real wage rate grows at the rate of technological change;
(iii) Labour share of income is constant;
(b) [8 marks] Suppose that an economy is hit by an epidemic that reduces the growth rate of
population. In the context of the Solow growth model explain what will happen to the steady
state level of capital.

3. Answer all parts (a)-(c) of this question.
(a) [10 marks] In the context of search theory explain the main determinants of the natural
unemployment rate. Use a diagram to illustrate your answer.
(b) [7 marks] One important difference between the US and European countries in terms of their
labour market performance is the average duration of unemployment. Some economists have
argued that laws restricting the ability to lay off workers are responsible for the longer
average duration of unemployment in Europe as compared to the US. Discuss this statement
in the context of the search theory you explained in (a).
(c) [8 marks] Outline the basic features of the efficiency wage theory and discuss how this theory
can explain structural unemployment.

4. Answer all parts (a)-(c) of this question.
(a) [8 marks] Illustrate the main features of the Ricardian view of government deficit. Critically
assess the validity of the Ricardian equivalence result by compare it with the traditional view
of the government deficit.
(b) [8 marks] Many people associate high budget deficits with high real interest rates and rising
prices. Critically assess that statement in the case where a proportional tax system is in use in
the economy. Use a diagram to illustrate your answer.
(c) [9 marks] If the debt-to-gdp ratio of an economy is too high then the government should use
austerity policies to avoid that ratio exploding over time. Critically assess that statement. Use
a diagram to illustrate your answer.

(END OF PAPER)