Questions and answers of relevance for the exam January 2016
Course: Advanced Macroeconomics

General remark: From what I write below nothing can be inferred about the particular contents of the exam assignments. My answers are written from the perspective of the matter in principle.   

What is important in the sense of being relevant for the exam?

Answer:
The exam is a test of your:
(a) understanding of the basic concepts, models, and methods in the course;
(b) ability to apply these models and related mathematical tools in providing precise answers to economic questions;

(c) knowledge of major empirical regularities underlined in the course.

    The course plan describes the structure of the theoretical stuff and contains many key terms. From Lecture Notes in Macroeconomics only chapters or chapter sections appearing in the course plan are part of syllabus. The exercises you have been through are examples, both in style and contents, of what you can meet at the exam. The exercises have been centred around some of the key issues,  methods, and concepts. On the other hand the exercises do not cover everything of relevance for the exam, but the syllabus does, of course. 

    At the exam there will be analytical problems that involve formal derivation of answers to economic questions, often together with interpretation of the results. In addition there will be some questions that can be answered in a purely verbal way.
 

Questions received and my answers (deadline for questions is Friday 8/1 2016 at 2:00 p.m.):

Question 1. The question is about Case (d), p. 861-62 in Ch. 22 of Lecture Notes. In brief the question is: Aren’t Fig. 22.9 and Fig. 22.10 inconsistent?

Answer: Yes, unfortunately they are. The problem is that Fig. 22.10 contains a misleading feature. It looks as if R immediately after t_0 must equal the new steady-state value. The truth is that we generally only know that R immediately after t_0 must be higher than the old steady-state value but lower than the R immediately after t_0 in Fig. 22.7 (Case (c): unanticipated policy shift).

Concerning Case (d), Fig. 22.9 shows a possible position of the economy immediately after t_0, namely at the point A. Let the associated R be denoted R_A. This value happens to be lower than the new steady-state value and far lower than R_A in Fig. 22.7 (Case (c)). This is an example where the time interval (t_0, t_1) is relatively long and so there is a long time until monetary policy is tightened and the upward jump in r takes place. Hence, to be consistent with Fig. 22.9, Fig. 22.10 should show R immediately after t_0 to be lower than the new steady-state value which it doesn’t.

If instead the time interval (t_0, t_1) is short, the situation is close to Case (c), where the time interval is nil. The upward jump in r takes place soon after t_0 and so the weighted average of the expected future short-term interest rates will be high as seen from immediately after t_0. Thereby R will immediately after t_0 be high and close to its value in Fig. 22.7, i.e., higher than the new steady-state value.