Midterm Spring 2021 Macro I

You have TWO hours to complete the exam. You must answer in your paper sheets. Do not forget to write down your name and family name at the top of your exam sheet

1. Germany is one of the most advanced nations in the world, and one of the nations in Europe that has been severely affected by the Covid-19 pandemic. It has approved relief packages to ease the economic hardship. Now, that the population is getting vaccinated economic analysts are forecasting an increase in income taxes for the 2022 fiscal exercise if the economy rebounds.

a. Can you explain the economic consequences of increasing the income tax? Explain effects on consumption, and use the AD model (Keynesian cross) to explain the impact of this measure on national income. Use models and graphs. Explain

b. How does this measure affect the loanable funds model? Explain and use the model to support your answer, draw graphs, use the math. Describe effects on National Savings, investment, interest rate. Explain in deep. Why do you think the policymakers might implement this measure?

2. Lets suppose that a new training program is introduced to help workers gain more and better skills to adapt to a challenging labor market. The execution of the program is planned to increase total factor productivity (A) through firm innovation. Explain how it might affect overall production, productivity of labor and capital. Use graphs and the models. Explain

3. Political turbulences and the pandemic affected Hong-Kongs consumer confidence significantly in 2020. Now, that the pandemic is under control in Hong Kong, marginal propensity to consume has increased from 0.5 to 0.7.

a. Use the consumption model to assess the effects of an increase in MPC on overall consumption. Use the model (math) and the graphs. Explain. b. How it will affect overall aggregate demand? Use the Keynesian cross (model, graph and

explanation)

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