Intermediate Macroeconomics Midterm - Spring 2025

1. Real Interest & Money Growth 1.1 Find the real interest rate using Fisher
equation. Nominal 50%, inflation 40%, so real = 50 - 40 = 10% as a rough
estimate.
1.2 Find the exact real interest rate. What does it represent? Explain. 1 + r = (1
+ 0.50) / (1 + 0.40) = 1.50 / 1.40 = 1.0714, so r = 7.14%. This represents the
real gain after inflation, meaning if you lend 100, you get 7.14% more buying
power, not the full 50%.
1.3 Velocity constant, real GDP up 5%. What’s money growth? %M = %P + %Y
= 40 + 5 = 45%.
1.4 Velocity up 5%, real GDP up 5%. What’s money growth? %M = 40 + 5 - 5 =
40%.
2 Keynesian Model

2.1 Given: C = 1000 + 0.8 Yd, I = 250, G = 100, T = 250 (millions) MPC, MPS,
autonomous consumption? MPC = 0.8, MPS = 1 - 0.8 = 0.2, autonomous C =
1000.

2.2 Goods market equilibrium (total output)? Y = C + I + G = (1000 + 0.8 (Y -

250)) + 250 + 100 Y = 1150 + 0.8Y, 0.2Y = 1150, Y = 5750.

2.3 Tax and gov spending multipliers? Gov multiplier = 1 / (1 - 0.8) = 5 Tax
multiplier = -0.8 / 0.2 = -4.

2.4 Private and public saving? Yd = 5750 - 250 = 5500 C = 1000 + 0.8 * 5500 =
5400 Private saving = 5500 - 5400 = 100 Public saving = 250 - 100 = 150.

2.5 Output change if G up by 100? 5 * 100 = 500 up.

2.6 Output change if T up by 100? -4 * 100 = -400 down.

1. Why 0% or Negative Inflation is Problematic Zero or negative inflation
is bad because:
• People delay purchases, slowing the economy.
• Debt becomes harder to pay as real value increases, leading to more
defaults.
• Wages don’t adjust easily, so unemployment rises.
 • Central banks can’t lower interest below 0%, limiting their control. A
little inflation helps, but zero or negative causes issues.

“Inflation is always and everywhere a monetary phenomenon” - Milton

Friedman
He argues inflation comes from too much money growth. Using MV = PY,
where %M + %V = %P + %Y, if V is stable and M grows faster than Y, P rises.
Examples like Zimbabwe and Venezuela show this—too much money, prices
skyrocket.
He’s right because in the long run, extra money just raises prices, and
hyperinflations support this.
But he’s not fully correct because in the short run, money can boost Y, supply
shocks (like oil) raise P, expectations affect behavior, and banks now use
interest rates more than money supply.
Conclusion: He’s accurate for the long run, but short-term factors and other
causes matter. Money is key but not everything.
!
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