ECON 201: Introduction to Macroeconomics Final Exam December 5, 2011 NAME: _________________________________

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ECON 201: Introduction to Macroeconomics

Final Exam

December 5, 2011


NAME:

_________________________________

Circle your TA’s name:


Agustin

Brian


Meysam

Circle your section time:


9 a.m.


3 p.m.

INSTRUCTIONS:

1.

The exam lasts

2

hour
s
.

2.

The exam is worth
120

points in total:
45

points for the multiple choice questions

(Part A),

and

75

points for the
six

analytical problems

(Part B)
.

3.

Write your answers for part A (the multiple choice section) in the blanks

below
.

You won’t
get credit for circled answers in the multiple choice section. There is no penalty to guessing, so
be sure to answer all of them.

4.

Place all of your answers for part B in the space provided
.

5.

You must show your work for part B questions. There i
s no need to explain your answers for the
multiple choice questions.

6.

Calculators are permitted. Books, notes, reference materials, etc. are prohibited.

7.

Good luck!


PART A
: Multiple Choice Problems
.

Answer

multiple choice questions in the space provided
below.

PLEASE USE CAPITAL LETTERS.


1

11

21

31

41

2

12

22

32

42

3

13

23

33

43

4

14

24

34

44

5

15

25

35

45

6

16

26

36


7

17

27

37


8

18

28

38


9

19

29

39


10

20

30

40



MC

Q1

Q2

Q3

Q4

Q5

Q6

Total









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Part A.
Multiple Choice
Questions
(
45

points)


1.
Money is


A) backed by gold in Fort Knox.

B) the same as income.

C) the value of all coins and currency in circulation at any time.

D) anything that is generally accepted as a medium of exchange.


2
.
The development of money as a medium of exchange has facilitated the expansion of trade because


A) holding money increases people's income.

B) no other mediums of exchange are available.

C) money eliminates the "double coincidence of wants" problem.

D) holding money increases people's wealth.


3
.
The price of bonds and the interest rate are


A) not related.

B) positively related.

C) negatively related.

D) sometimes positively related and other times negatively related, depending on the bond payments.


4
.
As the interest rate falls, people hold ________ money instead of bonds because the opportunity cost of
holding money has ________.


A) more; fallen


B) more; risen


C) less; fallen


D) less; risen


5
. The lecture and readings explain the recent rise
in food prices by

A) Subsidies to ethanol

B) Economic growth in China

C) Economic growth in the US

D) Quotas on corn imports

E) A) and B)

F) A) and D)


6
.
An example of a contractionary monetary policy is


A) an increase in the required reserve rati
o.

B) a reduction in the taxes banks pay on their profits.

C) a decrease in the discount rate.

D) the Fed buying government securities in the open market.


7
.
Which of the following sequence of events follows an expansionary monetary policy?


A)
r




I




AE




Y

.


B)
r




I




AE




Y

.

C)
r




I




AE




Y

.


D)
r




I









Y

.



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3

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8
. A major source of economic growth discussed in the course packet readings but not in the textbook is

A) Ignoring the effects of environmental pollution

B) Saving
instead of consuming

C) Accumulating human capital

D) Rural
-
urban migration


9
.
The aggregate demand curve shows a ________ relationship between ________ and aggregate output
________.

A) positive; the price level; demanded

B) negative; the price level;
supplied

C) negative; the price level; demanded


D) positive; the interest rate; demanded


10
.
When the general price level rises,


A) investment rises as a result of the real wealth effect.

B) consumption increases as a result of the multiplier effect.

C)

investment rises as a result of the multiplier effect.

D) consumption falls as a result of the real wealth effect.



Refer to the information provided in Figure 1 below to answer the three questions that follow.





Figure 1



11
.
Refer to Figure 1. An aggregate demand shift from
AD
2

to
AD
0

can be caused by


A) an increase in the price level.


B) a decrease in the price level.

C) a decrease in money supply.


D) a decrease in taxes.


12
.
Refer to Figure 1. An aggregate demand shift f
rom
AD
1

to
AD
0

can be caused by


A) an increase in the price level.


B) a decrease in the price level.

C) a decrease in government spending.


D) an increase in money supply.


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4

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13
.
Refer to Figure 1. Suppose the economy is at Point
A
, an decrease in governme
nt purchases can cause
a movement to Point


A)
E
.


B)
B
.


C)
C
.


D)
D
.


14
. The acronym “ZLB” refers most directly to

A) monetary policy

B) fiscal policy

C) agricultural subsidies

D) environmental pollution



Refer to the information provided in
Figure 2 below to answer the two questions that follow.




Figure 2


15
.
Refer to Figure 2. The money demand curve will shift from




to



, if


A) the level of aggregate output increases.


B) the interest rate decreases.

C) the price level decrease
s.


D) the inflation rate increases.


16
.
Refer to Figure 2. If the money demand curve shifts from




to




,


A) planned investment will increase and aggregate output will increase.

B) planned investment will decrease and aggregate output will decre
ase.

C) planned investment will increase and aggregate output will decrease.

D) planned investment will decrease and aggregate output will increase.


17
. Which of the following is
not

attacked by the
Economist
article as a “myth” about the Great
Depression?

A) The Great Depression started with the stock market crash of October, 1929

B) The New Deal raised wages and prices in 1933
-
35

C
) Policymakers were passive and did nothing in 1929
-
33

D) The New Deal
was responsible for the recovery


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5

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18
. The
Economist
article the “secret sauce” discusses a concept called “Total Factor Productivity” As
explained in lecture, this is the same as the textbook’s concept of

A) Productivity

B) Embodied technical change

C) Disembodied technical change

D) Human capital


19
. A course packet article about business cycles concludes that

A) Households should not worry about saving because the government will spend

B) Households should not worry about saving because th
e government should spend

C) The government should not worry about spending because households will spend

D) The government should not worry about saving because households will spend



Refer to the information provided in Figure 3 below to answer the th
ree questions that follow.




Figure 3


20
.
Refer to Figure 3. Which of the following causes the economy to move from Point
A

to Point
E
?


A) technological progress

B) an increase in the price level

C) an oil embargo that increases the price of oil

D) an

influx of immigrants


21
.
Refer to Figure 3. Suppose the economy is at Point
A
, an increase in the price level moves the economy
to Point

A)
E
.


B)
B
.


C)
C
.


D)
D
.


22
.
Refer to Figure 3. During the 1990s, many firms in the United States were investing i
n new capital. If
the economy was originally at Point
A
, this would have caused a movement to Point


A)
E
.


B)
B
.


C)
C
.


D)
D
.


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6

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17


23
. Which of the following are
not
examples of a fiscal policy stimulus cutting unemployment by half or
more

A) Germany 1933
-
37

B) US 2001
-
06

C) US 1940
-
42

D) US 2008
-
11

E) A) and B)

F) B) and D)


24
.
If a decrease in net taxes in the United States resulted in a very large increase in aggregate output and
a very small increase in the price level, then the U.S. economy
must have been


A) on the very steep part of the short
-
run aggregate demand curve.

B) on the very flat part of the short
-
run aggregate demand curve.

C) on the very flat part of the short
-
run aggregate supply curve.

D) on the very steep part of the short
-
ru
n aggregate supply curve.


25
. If an economy like China’s has growth in real per
-
capita real GDP of 10% per year, the level of its
per
-
capita GDP will triple in __ years

A) 7

B) 9

C) 11

D) 13


Refer to the information provided in Figure 4 below to
answer the three questions that follow.





Figure 4



25
.
Refer to Figure 4. Suppose the economy is currently at Point
A

producing potential output
Y
0
. If the
government increases spending, the economy moves to Point ________ in the short
-
run and to
Point
________ in the long
-
run.


A)
D
;
E


B)
B
;
D


C)
C
;
B


D)
B
;
C


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7

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17


27
.
Refer to Figure 4. For this economy to produce
Y
1

and sustain it without inflation


A) potential output must increase.

B) the government must implement an expansionary fiscal policy.

C) the government must implement an expansionary monetary policy.

D) the price of oil must increase.


28
. The large government deficit experienced by the U. S. during 2010
-
11 was due to the ratio of
government spending to GDP being unusually ____________
and the ratio of government revenues to
GDP being unusually _____________.

A) High, Low

B) Low, High

C) High, High

D) Low, Low


Refer to the information provided in Figure 5 below to answer the three questions that follow.


Figure 5


29
.
Refer to
Figure 5. Cost
-
push inflation occurs if

A) the aggregate supply curve shifts from
AS
1

to
AS
0
.

B) the economy moves from Point
A

to Point
B

on aggregate supply curve
AS
1
.

C) the aggregate supply curve shifts from
AS
1

to
AS
2
.

D) the

economy moves from Point
A

to Point
C

on the aggregate supply curve
AS
1
.


30
.
Refer to Figure 5. Assume the economy is at Point
A
. Higher oil prices shift the aggregate supply
curve to
AS
2
. If the government decides to counter the effects of higher oil pr
ices by increasing
government spending, then the price level will be ________ than
P
2

and output will be ________ than
Y
2
.


A) greater; less


B) less; less


C) greater; greater


D) less; greater


3
1
.
Refer to Figure 5. Assume the economy is currently at Po
int
A

on aggregate supply curve
AS
1
. An
increase in inflationary expectations that causes firms to increase their prices

A) moves the economy to Point
C

on aggregate supply curve
AS
1
.

B) moves the economy to Point
B

on aggregate supply curve
AS
1
.

C) shifts

the aggregate supply curve to
AS
2
.

D) shifts the aggregate supply curve to
AS
0
.

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8

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32
.
A rightward shift in the aggregate demand curve generates a ________ inflation and ________ output.


A) demand
-
pull; higher

B) cost
-
push; lower

C) demand
-
pull; lower


D)
cost
-
push; higher


33
.
The Federal Reserve's policy to "lean against the wind" means that


A) the Fed slows money growth as the economy slows.

B) the Fed lowers taxes as the economy slows.

C) the Fed increases money growth as the economy slows.

D) the Fed
raises required reserves as the economy slows.


34
.
The recognition lag of stabilization policy represents


A) the time that it takes for the economy to adjust to the new conditions after a new policy is introduced.

B) the time that is necessary to put the

desired policy into effect.

C) the time needed for the Federal Reserve Board to meet.

D) the time that it takes for policy makers to recognize a change in the economy.


35
.

In general, fiscal policy has a longer ________ lag than monetary policy but short
er ________ lag.

A) response; implementation


B) implementation; response

C) recognition; response


D) implementation; recognition


36
. The time interval taken for information to be communicated was reduced by the greatest magnitude
by the invention of:

A)

The telephone

B) The internet

C) The telegraph

D) The personal computer


37
. The lecture diagnosis of the weakness of the 2010
-
11 economic recovery was …

A) Weakness of monetary policy

B) Weakness of fiscal policy

C) The double hangover

D) (
A) and (C)

E) (B) and (C)


38
.

The economic impact of ________ during expansionary periods is to moderate growth.

A) positive demand shocks


B) tax cuts

C) automatic stabilizers


D) implementation lags


39
.

An example of automatic stabilizers is

A) govern
ment spending rising during an expansion.

B) government spending falling during a recession.

C) deficit targeting.

D) taxes rising in an expansion.


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40
. Which of the following concepts discussed in lecture but not in the book explain why many poor
countries remain so poor?

A) Physical capital

B) Political capital

C) Human capital

D) Embodied technical change


41
.

Diminishing returns to a factor implies that with capital fixed

A) as labor increases, labor productivity eventually decreases.

B)
as output increases, labor increases.

C) as labor increases, output decreases.

D) as labor increases output always increases.


42
.

A company uses 100 workers and 30 units of capital to produce 500 units of output. If this company
increases its capital to 5
0 units and, as a result, its output increases by 300 units, the productivity of labor
________ to ________ units per worker.

A) increases; 1


B) increases; 3


C) increases; 8


D) decreases; 4


43
.

Which of the following is NOT an investment in human capit
al?

A) older workers return to school to update their skills

B) the Ferris Advertising Agency replaces its secretaries' typewriters with personal computers

C) the Precision Tool Company teaches all its workers how to repair all the machines in the factory

D) local governments begin providing free hepatitis vaccinations to any resident who wants one


44
. The convergence theory suggests that a diagram plotting the ratio of a country’s level of real GDP per
capita in 1960 on the horizontal axis relative to the

US, and its growth rate from 1960 until now on the
vertical axis, should display the following pattern

A) A negative slope

B) A positive slope

C) A horizontal slope

D) The convergence theory makes no prediction about the slope on that diagram


45
. In Econ 201 during Fall 2011, the example of the Netherlands was introduced in relation to which
topic?

A) Agriculture

B) Economic growth

C) Unemployment

D) Monetary policy



Page
10

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17


Part B: Short Answer Questions
(
75

points)


PROBLEM 1:

(
15 points):

1 point per blank

Complete the blanks using the following table.
Round all values to the nearest two decimal places,
including percentages. That is, answers should look like 13,300.72 or 29.87%.




112

113

Percentage Change
(LN formula)


Price

Quantity

Price

Quantity

125mm Railguns

7900

2

8700

4


Quafe

50

450

44

250

Nominal GDP

1
.
38,300

2.
45,800

3.
17.88%

Real GDP in 2009 prices

4.
38,300

5.
44,100

6.
14.10%

Real GDP in 2010 prices

7.
37,200

8.
45,800

9.
20.80%

GDP Deflator with base
year 2009

100

10.
103.85

11.
3.78%

GDP Deflator with base
year 2010

12.
102.96

100

13.
-
2.91%



14. What is the percentage growth rate in chain
-
weighted GDP? _______________
17.45%


15. What is the inflation rate according to the chain
-
weighted GDP deflator? _______________

-
0.43%





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PROBLEM 2
:

(
8 points):

point value specified


Answer the following questions using the following table.



Real GDP per capita

Annual growth rate

Amarr

1100

1
.
3
%

Dodixie

900

2
.
1
%


1.
(1 point)

At the given growth rates, how many years will it take for Amarr’s real GDP per

capita
to quintuple (increase fivefold)?
_______________
123.80

2.
(2 points)

At

the given growth rates, how many years will it take for
Dodixie

to match

Amarr’s real
GDP
per capita? _______________
25
.
08

3
.
(2 points)

At what annual growth rate must Dodixie grow in order to catch
-
up with Amarr in

exactly
20 years
? _______________
2.30
%

4.
(1 point)

At what annual growth rate must Amarr grow to ensure Dodixie never catches up?

_______________
2.1%

5.
(2 points)

Suppose Dodixie can bomb Amarr and cause it to suffer two years of zero growth before
resuming normal growth of 1.3%. How

many years will it take for Dodixie to match Amarr’s real GDP if
Amarr is bombed?
_______________
21.83





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12

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PROBLEM
3
.

(
15
points)

Complete the following blanks.

Suppose supply is given by
P = 20 + 2Q
s
.

Suppose demand is given by
P = 90


3Q
d
.


1. For
this closed free market
, complete the following table:

(1 point)
Equilibrium Quantity

14

(1 point)
Equilibrium Price

48

(1.5

points)
Consumer Surplus

294

(1.5

points)
Producer Surplus

196






2. Suppose the government provides a subsidy of $15 per
unit
. Complete the following table:

(1

points)
Quantity

17

(1.5

points)
Price Paid (by consumers)

39

(1.5

points)
Price Received (by producers)

54

(1.5

points)
Consumer Surplus

433.5

(1.5

points)
Producer Surplus

289

(1.5

points)
Total Subsidy Cost

255

(1.5

points)
Deadweight Loss

22.5







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17


PROBLEM 4
.

(
23

points)

The following table summarizes some macroeconomic quantities of a country called
Utopia
:

Planned investment:

I = 200

Government purchases:

G = 400

Exports:

EX

= 100

Imports (as a function of Y):

IM

=


Autonomous taxes:

T
A

= 200

Autonomous consumption:

a

= 50


-

Let


denote the marginal propensity to consume of the country.

-

In Utopia there is an income tax: let


be the income tax ratio.

-

Let



be the imports
-
to
-
income ratio of this economy,


a.

(2 points) Show the
Multiplier

of Utopia, as a function of






and

.




b.

(1 points) Assume, for the remaining of problem 3, the following:



















What is the numerical value of the Multiplier of this economy?






Multiplier




𝒃



𝒕

+
𝒎

Mu汴楰汩敲e






𝟖






+






Page
14

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17


c.

(2

ponts) What is the level of autonomous
planned

expenditure of Utopia?





d.

(2 points) Calculate the equilibrium output of Utopia.









e.

(4 points) What is the level of government surplus, and of domestic private
savings (S) in this
economy?




Solution
:

A
p


=

a


-

b
T
a

+ I +G + EX

= 50


0.8 (200) +200+400+100 =
590

A
p

=


Solution
:

Y
*
= Multiplier x
A
p


= 3 x 590=
1770

Y
*
=


Solution
:

T = Ta +t Y = 273.75


Gov. Surplus = T


G = 273.75


400 =
-
126.25

(2 points)

C =
a

+ 0.8 ((1
-
1/24)Y)
-

0.8 Ta = 1247


S = Y


C


T = 1770


1247


273.75 =
249.25




(2 points)

Gov. Surplus
=


S =

Page
15

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17


A
change in government expenditure policy:

For the remaining of problem 3 (that is, for items (g), (h), (i) and (j)), assume what follows: the ruler of
Utopia, Sir T. More, is considering to reduce the government expenditure to
G
1
=300
.

f.

(2 points) By how muc
h will the equilibrium output change?


g.

(2 points) By how much will tax revenue change?


h.

(2 points) By how much will consumption change?



i.

(6 points) What would be the new levels of Domestic Private Savings, Government Surplus, and
Imports?


Solution
:

Δ
Y


=

Multiplier x
Δ
G = 3 x
(
-
100)
=
-
300

Δ
Y

=


Solution
:

Δ
T


=

t
Δ
Y= (1/24) x
(
-
300)
=
-

12.5

Δ
T

=


Solution
:

Δ
C

=

b x (
Δ
(Disposable Income))


= b x (
Δ
Y


Δ
T) = 0.8(
-
300+12.5) =
-

230

Δ
C

=


Solution:


S
1
= S
0

+
Δ
Y


Δ
C


Δ
T = 249.25 +(
-
300)


(
-
230)


(
-
12.5)

= 249.25
-
300 +230+12.5 =
191.75



(2 points)


Gov. Surplus
1
= (
Gov. Surplus )
0

+
Δ
T


Δ
G


=
-
126.25

+ (
-
12.5)


(
-
100) =
-
38.75


(2 points)



IM
1

= m (Y
0
+

Δ
Y
)

= 0.1 (
1770
+(
-
300))= 147

(2 points)


S
1
=

Gov. Surplus
1
=


IM
1
=

Page
16

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17



PROBLEM
5
.

(
6

points)

Now

consider the country of
Macondo
.


a.

(1 point)

If nominal GDP in 2011 in
Macondo
is
216

and the GDP deflator is 108, what is 2011
real GDP?


200



b.

(1 point)
What
was

the % change (LN) in real GDP

between years 2000 and 2001, if 2000

real
GDP
was

180
,

and
2001

real GDP
was

188
? (1 point)



4.35
%




c.

(2 points)
Suppose the
yearly real
growth rate is
2
%. How long until the
real
GDP of
Macondo
is
three

times
what it is today?




100*LN(
3
)/
2

=
54.9

years




d.

(2 points)
Suppose real GDP in
Macondo
in
2011

is
200

with a growth rate of
2
%, and a
neighboring country,
El Dorado
, has a 201
1

real GDP of
201

with a growth rate of
2.5
%. Will the
GDP of
Macondo
ever equal that of
El Dorado
? If so, in how many
years?



No



Problem 6
.

(
8

points)

The country of Macondo has a monetary base of $500 million. The Central Bank of Macondo, requires
commercial banks to hold as reserves rr=
0.1 (that is, for every unit a bank receives as deposit, it must
keep as reserve 0.1). Assume that commercial banks do keep the reserves, and do not keep excess
reserves.

In Macondo people find useful to keep some cash in their pockets. On average, in thi
s economy you can
observe a currency
-
to
-
deposit ratio of c=0.05.


Page
17

of
17


a.

(2 points) What is the total value of deposits in the banks of Macondo?

D=500/(0.15 + 0.05) = 2500



b.

(2 pts)
How

much is kept as reserves in Macondo?

R = rr D = 0.15 x 2500 = 375



c.

( 2pts)
What is the money supply in this republic?

M = C + D = c D + D = 0.05 x 2500 + 2500 = 2625



d.

( 3pts) Now assume that in Macondo there is a money demand as follows:










Where


stands for the interest rate.

(So, if the interest rate were 4, you would plug 4 to get the
demand for money).

-

What is the interest rate present if the money market is in equilibrium?
Hint: you already
have the Money supply.

-

Draw in the space provided a diagram that shows the money
market demand and supply, as
well as the equilibrium interest rate.


Solution:















.