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Berkeley Exam Questions

Berkeley. Graduate Macro, final exam. Akerlof, 1992 and 1993

 

While the internet archive “The Wayback Machine” is truly a treasure chest filled with e-artifacts, without a pirate’s map to locate the buried treasure it is not for impatient, casual users. So from time to time, I dig around to share links to  economics from the recent past. For example course materials from…

Principles of Macroeconomics at M.I.T. from 1995-2006

Principles of Microeconomics at M.I.T. from 1994-2005

The following post takes us to late twentieth century Berkeley where and back when George Akerlof regularly taught a core macro course to graduate students. I have transcribed .pdf copies of his final exams from 1992 and 1993 (links to the original files provided below), trying to provide the look-and-feel of the original exams as much as possible.

For those who might not have come across George Akerlof’s autobiographical essay at the Nobel Prize website, I have just provided the Wayback Machine link to an archived copy.

_______________________

Department of Economics
University of California
Spring Semester 1992
Professor George A. Akerlof

ECONOMICS 202A
FINAL EXAMINATION

PLEASE READ THESE INSTRUCTIONS BEFORE BEGINNING.

  1. The exam is in three parts. Each part has equal weight in grading.
  2. You have three hours for the entire exam, so spend about 1 hour on each part.
  3. Answer all the questions using a separate Bluebook for each part.
  4. Be sure to write your name on the cover of all of your Bluebooks.

Grades will reflect the precision, clarity and completeness of your answers as well as their correctness.

 

PART A (Please use a Separate Blue Book)

State whether the following are True, False, or Uncertain. Explain why in each case.

  1. Suppose U.S. GNP is difference stationary. Suppose the 1992-1993 growth rate is expected to be .5 percent but in fact turns out to be 1.2 percent. Future expected growth rates should be adjusted upward by .7 percent.
  2. In long-run equilibrium in Summers’ model, with a constant rate of growth of the labor supply, q is either less than or equal to one.
  3. A country with staggered contracts commits itself to have zero growth of its money supply. It will have lower inflation and higher welfare than if it failed to make such a commitment.
  4. Real rigidities, such as efficiency wages, fail to explain deviations of unemployment from the natural rate.
  5. If Blanchard and Summers’ model is modified so that unions foresee shocks in demand, employment and wages will be constant over time.
  6. According to Bulow and Rogoff the marginal value of debt in amount D is (1-F(D)), where F(D) is the probability of default with D dollars’ worth of debt.

 

PART B (Please Use a Separate Blue Book)

State whether the following are True, False, or Uncertain. Explain why in each case.

  1. Consider a Shapiro-Stiglitz model where the production function is \varepsilon f(k), with the variation in \varepsilon due to productivity shocks. Unemployment will be invariant with changes in \varepsilon because workers never shirk in the Shapiro-Stiglitz model.
  2. Professor Charles E. Bucket found a significant correlation between the predicted component of the money supply and changes in GNP. His results are inconsistent with Taylor’s model because they imply that people do not have rational expectations.
  3. According to Murphy, Vishny and Shleifer, if the state sector has an elastic demand for lumber and the private sector has an inelastic demand for lumber, Perestroika will result in a welfare loss, even if the state sector initially is given priority for the output of the lumber industry.
  4. Summers’ model contradicts the observed correlation between investment and the rate of interest since in his model investment only depends on the value of q.
  5. Workers’ beliefs about what they should be paid will have no effect on unemployment since wages are set equal to marginal products. Unemployment develops because firms must pay wages so high that workers will not shirk.
  6. The observed variance of stock prices relative to the observed variance of the present discounted value of actual dividends is biased downwards in finite samples. Thus Shiller’s evidence is not inconsistent with efficient markets.

 

PART C (Please Use a Separate Blue Book)

Consider the following system motivated by Taylor

  1. yt= mt– pt (aggregate demand)
  2. yt= a(pt– wt) (aggregate supply)
  3. wt= pt-1 (wage determination)
  4. mt= mt-1+ \varepsilon t (money supply rule)

Find the impulse response function of a unit change in \varepsilon t on yt and pt.

Note: The impulse response function is the effect of a current unit shock on future values of the respective variables.

 

***END OF FINAL***

Source: The Wayback Machine internet archive.  PDF file of the Spring 1992 Final Exam of Economics 202A.

_______________________

Department of Economics
University of California
Spring Semester 1993
Professor George A. Akerlof

Economics 202A
FINAL EXAMINATION

PLEASE READ THESE INSTRUCTIONS BEFORE BEGINNING.

  1. The exam is in 3 parts. Each of the first 12 questions has equal weight in grading.
  2. Some questions are much more difficult than others.
  3. Answer all the questions using a separate Bluebook for each part.
  4. Be sure to write your name on the cover of all of your Bluebooks.
  5. There are 70 total points for the exam.

Grades will reflect the precision, clarity and completeness of your answers as well as their correctness.

 

PART A (Please use a Separate Blue Book)

State whether the following are True, False, or Uncertain. Explain why in each case. Each question is worth 5 points.

1) According to Sargent unemployment is a random walk since the change in unemployment between t and t+1 depends only on an error term which is uncorrelated with prior information.

2) In Summers’ model if the investment equation is of the form:

\frac{I}{K}=a+bQ,

adjustment costs will be of the form:

A=\frac{1}{2a}{{\left( \frac{I}{K}-b \right)}^{2}}K.

3) In the Shapiro-Stiglitz model an increase in the labor supply will leave the unemployment rate constant because the nonshirking boundary depends only on the unemployment rate (which is the ratio of the number of unemployed to the total labor supply). In equilibrium this ratio will be unchanged if there is a shift in the labor supply.

4) In the Barro-Gordon model if the government’s desired level of unemployment is exactly the natural rate, there is no benefit from precommitment to zero increase in the money supply.

5) Every day Mr. and Mrs. Romer have higher income than expenses. They have the following strategy of money holding. When their bank account reaches $2,500 they purchase a $2,000 bond. On May 7, they received an unexpected bill for $1,063 for earthquake insurance. The expected level of their bank account will increase by exactly $1,063.

6) Consider an economy with perfect competitors and constant costs. Suppose the money supply changes by \varepsilon . Some firms keep their prices constant. These firms will suffer losses due to their individual decisions to keep their prices constant which are proportional to \varepsilon (first-order). The change in their profits due to the change in the aggregate equilibrium because many such firms kept their prices sticky, however, is proportional to \varepsilon 2 (second-order).

7) If workers retain their union membership even if unemployed, unemployment will not follow a random walk.

 

PART B (Please Use a Separate Blue Book)

Answer the following questions. Each question is worth 5 points.

8) Graph the effect of a permanent and a temporary (one-period) unexpected change in the money supply in the Taylor model. Explain your graph.

9) Two identical firms A and B have a constant certain payout x. Firm A has all equity. Firm B has debt D. The interest rate is r and the corporate profit tax rate is \tau . Derive the value of firms A and B on the assumptions of efficient markets. What is the difference, if any, between the value of firms A and B?

10) The demand for real balances, when fully adjusted in the long-run, is

{{m}^{*}}=a{{y}_{t}}-b{{r}_{t}}

The adjustment process is given by

{{m}_{t}}-{{m}_{t-1}}=\delta \left( m_{t}^{*}-{{m}_{t-1}} \right)

What are the long-run and short-run income and interest elasticities of the demand for real balances?

(Note: y, r, and m are the logarithms of income, the interest rate and real balances).

11) Given the demand for money is of the form

\frac{M}{p}=a-b\pi

What is the maximum steady-state level of seigniorage?

(Note: \pi is the rate of inflation, M is nominal money balances and p is the price level).

12) Debt-laden poor Country A has debt with New York banks of D dollars. It will pay off x dollars of this debt, where x is a random variable with uniform distribution between 0 and  \bar{X}. Industrial rich Country B kindly offers to buy (and retire) Z dollars worth of A’s debt from New York banks if Country A will leave the probability distribution of its payoffs unchanged. According to the Bulow-Rogoff model, how much must Country B pay to leave Country A with only D-Z dollars of debt? What is the “value” in terms of decreased debt payments to Country A of Country B’s kind offer?

 

PART C (Please Use a Separate Blue Book)

Answer one of the following two questions. Worth 10 points.

 

1) Derive from first principles the non-shirking boundary (in the Shapiro-Stiglitz) model.

— OR —

2) Derive from first principles the AR(1) equation for xt in the Taylor model.

 

*** END OF FINAL ***

Source: The Wayback Machine internet archive.  PDF file of the Spring 1993 Final Exam of Economics 202A.

Image Source: The Wayback Machine internet archive. “George A. Akerlof. Biographical” webpage at the Nobel Prize website.