PRIFYSGOL ABERYSTWYTH UNIVERSITY
DEGREE EXAMINATIONS – May / June 2009
ARHOLIADAU GRADD – Mai / Mehefin 2009
SEMESTER 2
EC30810
TOPICS IN MACROECONOMICS II
Time Allowed: ONE AND A HALF Hours
Answer TWO Questions
ONE from Section A and ONE from Section B
SECTION A
Question 1.
Why do overall price levels in advanced countries tend to be higher compared to those in
less developed countries when aggregate baskets of traded and non-traded goods are
converted into a common currency such as the U.S. dollar? Discuss how the Balassa-
Samuelson model explains this phenomenon.
Question 2.
Discuss the underlying assumptions of three different models of exchange rate
determination: sticky-price model, flexible-price model, and the real interest rate
differential model. Critically evaluate their similarities and differences.
Question 3.
Suppose the monetary authorities unexpectedly increase the money supply by 20 percent.
Using Dornbusch’s sticky-price model of exchange rate determination, give a detailed
explanation of the process by which the exchange rate ‘overshoots’ its long-run
equilibrium value. Use appropriate diagrams to support your arguments.
SECTION B
Question 4.
What are the key features of real business cycle models? Can these adequately explain
the actual movement of macroeconomic variables in an economy?
Question 5.
Assess the central assumption of menu cost models that it is costly to change prices. Can
the existence of such costs explain fluctuations in output?
Question 6.
Discuss the insider-outsider theory of unemployment. Critically assess the view that
excessive insider power (trade unions) explains the poor unemployment performance of
many European economies.
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