1
Intermediate Macroeconomics 311 (Professor Gordon)
Final
Examination Fall, 2007
YOUR NAME:
INSTRUCTIONS
1.
The exam lasts 2 hour
s
.
2.
The exam
is worth 120 points in total: 35
points fo
r the multiple choice questions,
55
points for
the analytical questions, and 30 points for the essays.
3.
Write your answers to Part A (the multiple choice section) in the blanks on page 1.
You won’t get credit for circled answers in the multiple choice section.
4.
Place all of your answers for part B in t
h
e space
provided
5.
You must s
how your work for part B questions
6.
Write your essays with a pen. Write clearly!
7.
Good Luck and Happy Holiday
s
!
PART A
Choose the
ONE
alternative that
BEST
completes the statement or answers the question.
Your answers must be
in
the space provided below.
USE CAPITAL LETTERS.
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2
1.
A neutral policy maintains
_________ constant.
(a)
inflation rate
(b)
log

output ratio
(c)
nominal GDP growth
(d)
real GDP growth
2.
T
he “trilemma problem” implies that countries that opt for
(a)
fixed exchange rates lose control of domestic monetary policy.
(b)
flexible exchange rates lose control of domestic monetary policy.
(c)
fixed exchange rates may experience exchange rates that “
overshoot” when there
are large capital inflows.
(d)
flexible exchange rates may experience exchange rates that “overshoot” when
there are large capital inflows.
3.
The AD curve will shift to the
(a)
right if the price level falls and the quantity of mone
y is held constant.
(b)
right if the price level rises and the quantity of money is held constant.
(c)
right if the price level is held constant and the quantity of money rises.
(d)
right if the price level is held constant and the quantity of money falls
4.
In the formula for calculating the growth rate of multifactor productivity, the growth
rate of labor productivity is represented by
(a)
y
–
n
(b)
b(k
–
n)
(c)
bk/n
(d)
b
–
n
5.
Successful activist stabilization policy presumes that
(a)
the timing of p
olicy impact on nominal GNP is
known.
(b
)
the magnitude and
size of impact
are known.
(c)
the timing and magnitude of the impact of AD disturbances are known, forecasted
with precision.
(d)
All of the above
6.
If inflation is greater in Mexico by 10% than
it is in the rest of the world then the
purchasing power parity theory predicts that the
(a)
Mexican peso would appreciate.
(b)
Mexican peso would depreciate.
(c)
Mexican peso would remain stable.
(d)
U.S. dollar would weaken.
7.
Which of the following f
actors will NOT cause the AD curve to shift?
(a)
tax rates.
(b)
autonomous exports.
(c)
changes in the marginal product of labor.
(d)
consumer confidence.
3
8.
The inflation differential is
(a)
always zero.
(b)
foreign inflation plus
domestic inflation
(c)
domestic inflation minus foreign inflation
(
d)
never
negative.
9.
Probably the best measure of a country’s economic growth is the growth of
(a)
real domestic investment.
(b)
real GDP.
(c)
real GDP per person.
(d)
real consumption expenditures
1
0.
The Phi
llips Curve was first discovered in the
(a)
1930s
(b)
1950s
(c) 1970s
(d)
1990s
1
1.
The economic consensus was to favor ___________ policy in the decade of the
_________ and favor _____________ policy in the decade of the ___________.
(a)
monetary
; 1930s; fiscal; 1990s
(b)
fiscal; 1930s; monetary; 1960s
(c)
fiscal; 1960s; monetary; 1930s
(d)
monetary; 1990s; fiscal; 1960s
12
.
In the late 1960s, the Friedman

Phelps “natural rate hypothesis” predicted from the
microeconomic structure of the labor ma
rket that the long

run Phillips curve is
__________, while macroeconomic events caused a very ________ acceptance of this
change in aggregate supply theory.
(a)
horizontal, rapid
(b)
horizontal, gradual
(c)
vertical, rapid
(d)
vertical, gradual
13
.
The ag
gregate demand curve may be derived from the IS

LM analysis by shifting
(a)
the IS curve as the price changes.
(b)
the real money supply and thus LM curve for each new price level.
(c)
both the LM and IS curves since the real money supply and real expendit
ures
change w
hen
P changes.
(d)
the LM rightward when P increases to define Y.
4
14
.
After a period of sustained unexpected inflation, it is likely that the renegotiation of
nominal wages will
(a)
shift the SAS curve downward thereby increasing output.
(b)
shift the SAS curve upward thereby increasing output.
(c)
shift the SAS curve upward thereby decreasing output.
(d)
shift the AD curve downward thereby increasing output.
15
.
If the inflation rate is 10% and nominal GDP growth is 8% then real GDP mus
t have
(a)
increased by 2%.
(b)
decreased by 18%.
(c)
decreased by 2%.
(d)
increased by 18%.
16
.
The output

capital ratio (Y/K) depends on the following four determinants. Which
determinant of these four is most likely to be affected by government growth
policy?
(a)
the nature of the production function
(b)
the depreciation rate
(c)
the growth rate of labor input
(d)
the growth of capital per person
17
.
Suppose that the nominal exchange rate between the dollar and the English pound
was 1 pound per $2 and
that the English price level was twice that of the U.S., then the
real exchange rate is
(a)
1 pound/$1.
(b)
2 pounds/$1.
(c)
1 pound/$2.
(d)
1 pound/$4.
18
.
The theory of economic growth divides the causes of growth into
(a)
elements affecting the output
ratio and factors affecting population growth.
(b)
elements affecting the output ratio and factors affecting inflation.
(c)
elements affecting the amount of factor inputs available and the productivity
of those inputs
.
(d)
None of the above
19
.
Let the
government increase
autonomous
taxes. The aggregate demand curve will
(a)
shift leftward and the IS curve will shift leftward.
(b)
shift rightward and the IS curve will shift rightward.
(c)
remain unaffected but the IS curve will shift leftward.
(d)
becom
e positively sloped but the IS curve will remain negatively sloped.
20
.
Unanticipated inflation will hurt _______ and help _______.
(a)
pensioners; borrowers
(b)
borrowers; pensioners
(c)
the government; tax payers
(d)
homeowners; banks
5
21
.
An accelerati
on of nominal GDP growth from, say 4% to 6% will
(a)
permanently raise the rate of inflation.
(b)
temporarily lower the rate of inflation.
(c)
leave real GDP unaffected in the long run.
(d)
Both (a) and (c).
22
.
Which of the following events will tend t
o increase net exports of the U.S.?
(a)
a fall in the real interest rate in several western European countries
(b)
an increase in the U.S. real interest rate
(c)
a depreciation
of the dollar
(d)
none of the above
23
. The Taylor Rule suggests tha
t
(a)
Interest rates were too high during 2001

04
(b)
Interest rates were too low during 2001

04
(c)
Weights changed over the 1980

2004 period
(d)
(a) and (c)
(e)
(b) and (c)
24
. During ____ productivity growth grew ______ and during _____ productivity
growth grew ______
(a)
late 1990s; slower; early 2000s; faster
(b)
late 1990s; faster; early 2000s; slower
(c)
2005

2007; slower; early 2000s; faster
(d)
2005

2007; faster; early 2000s; slower
25
.
If the productivity of labor were suddenly to increase,
we would expect to observe
(a)
a short

run rise in output and fall in prices.
(b)
an increase in the natural level of real GDP.
(c)
a downward shift in the aggregate supply curve.
(d)
All of the above are correct.
26
.
When the actual inflation rate is eq
ual to the expected inflation rate the economy will
be ____________ and the SP curve will ____________.
(a)
in long

run equilibrium; shift upward
(b)
in disequilibrium, at an output level less than the natural rate of output; shift
upward
(c)
in short

run
equilibrium; shift upward
(d)
in short

and long

run equilibrium; be stable
6
27
. Given that all countries have the same Cobb

Douglas
production function, i.e.
Y/N=
(K/N)
b
, a ten

fold difference in per capita income requires a difference in capital per
ca
pita by a factor of
(a)
10.
(b)
10b.
(c)
10
1/b
.
(d)
b.
28
.
“Okun’s Law” refers to
(a)
the trade

off between inflation and unemployment.
(b)
the relationship between real and nominal output growth.
(c)
minimum wage laws and the impact of price controls.
(d
)
the relationship between the unemployment rate and the ratio of actual to
natural output
.
29
.
If the economy is characterized by diminishing or decreasing returns to scale, then
(a)
a doubling of inputs will lead to a
three

fold increase in
output.
(b
)
a doubling of inputs will lead to a constant output.
(c)
a doubling of inputs will lead to a two

fold increase in output.
(d)
a doubling of inputs will lead to a less than two

fold increase in output.
30
.
In equilibrium, rate of growth of capital in a s
i
mple closed economy (i.e.
NX
=
0) is
determined primarily by
(a)
the growth rate of savings.
(b)
the level of saving less expenditures for replacement capital.
(c)
per capita well being.
(d)
the growth rate of replacement capital.
31
.
Which of the followin
g policies would
NOT
affect the natural unemployment rate?
(a)
a reduction in minimum wages
(b)
an increase in public

service employment
(c)
an increase in subsidized private employment
(
d)
a reduction
in
sale
s
taxes
32
.
Monetarists believe that the major
source of macroeconomic instability lies in
(a)
the private investment sector and the government sector.
(b)
the government sector.
(c)
private corporations and the government sector.
(d)
export and import sector.
33
.
Before the Great Depression, macroec
onomic theory was dominated by the
__________ approach that presumed the essential ________ of the private economy.
(a)
Keynesian, stability
(b)
Keynesian, instability
(c)
old classical, stability
(d)
old classical, instability
7
34. Myths discussed by th
e
Economist
about the Great Depression include that Hoover

era government policy was ___________ and that Roosevelt New Deal policy was
_______
(a)
passive; passive
(b)
perversely active; passive
(c)
passive; perversely active
(d)
perversely active; pe
rversely active
35. The Okun’s Law line in Chapter 8 lies above the actual values for 1995

2004
because
(a)
Supply shocks were beneficial in this period
(b)
The natural rate of unemployment fell
(c)
The natural rate of unemployment rose
(d)
Supply shoc
ks were adverse in this period
8
PART B (55
points)
QUESTION 1
(25
points)
Consider an economy characterized by the following production function
, where
represents physical cap
ital,
is human capital and
is
labor.
Assume that
t
he growth rate of labor
, the de
preciation rate
(both
physical and human capital depreciate at the same r
ate) and
A=1
.
Investment
is the
sum of t
w
o components, in
vestment in physical capital
and investment in human
capital
. The fraction of GDP that goes to physical capital investment is
and
the fraction of GDP that goes to human capital investment is
1) Derive an expression
for
the marginal product of physical capital (
) and
the
marginal product of human capital (
)
(4
points)
and
2) Show that
the share of
physical
capital in output
is 1/3
and the share of
human capital
in output
is 1/6
.
(
Assume that each factor is paid
its marginal product)
(4
points)
The
share of physical capital in output is
Similarly, the share of human capital in output is
3) Convert the production function to a function relating
to both
a
nd
.
Write
down the equations characterizing the steady state physical capital

labor ratio (
) and
the
steady state human capital
–
labor ratio
(
)
.
(5
points)
9
S
teady state physical capital

labor ratio is characterized by
Steady state human capital

labor ratio is characterized by
4) Using the e
quations from
part
3
, f
ind the steady

state
physical
capital

labor rati
o (
)
and
the steady

state human capital

labor ratio (
)
(8 points)
Combining the equations from previous part, we have
Substituting for
an
d
we get:
Solving for
and
we get:
5) Find the steady state output per person
(
)
.
(4 poin
ts)
10
QUESTION 2
(15
points)
Suppose that natural real GDP (
)
equals 1,000, the Fed’s desired real federal funds
rate (
) equals 3% and its desired inflation rate (
) equals
2%. Suppose you are
given the following combinations of actual inflation and real GDP:
Year
Actual inflation
Real GDP
2000
2
%
900
2001
3
%
1,000
2002
3
%
1,100
2003
4
%
1,200
1) For each level of GDP, compute the log output ratio
.
(3 points)
2000:
2001:
2002:
2003:
2) Write down the equation for the Taylor Rule, leaving unspecified the parameters
a
and
b
.
(2 p
oints)
Equation for the Taylor Rule:
or
3) Using the Taylor Rule, calculate the real federal funds rate for the given combinations
of inflation and real GDP when
.
(5 points)
In this
case, Taylor Rule is
Real federal funds rate is:
2000:
2001:
2002:
2003:
4) Using the Taylor rule, calculate the real federal funds
rate for the given combinations
of inflation and real GDP when
the Fed is targeting inflation, that is,
and
.
(5
points)
In this case, Taylor Rule is
Real federal funds rate is:
11
2000:
2001:
2002:
2003:
QUESTION 3
(15
points)
Let the following represent the structure of a
large open
economy with a
fixed
exchange
rate:
C = C
A
+ 0.6(Y

T)
C
A
= 500

5r
T = 1000
(M/P)
D
= 0.2Y

10r
M
S
/P = 1000
I
P
= 1000

20r
G = 1000
NX = 1000

0.1Y

100e
(A) Initially let foreign and domestic interest rates be equal so that r = r
f
and let the
foreign exchange rate e=2. Find the
IS and LM equations.
(5 points)
k = 1
/[(1

0.6)(1

0)+0+0.1] = 2
A
P
= 500

5r

0.6(1000)+1000

20r+1000+800 = 2700

25r
IS: Y=k*A
P
= 2(27
00

25r) = 5400

50r
LM: M
S
/P=(M/P)
D
=> 1000 = 0.2Y

10r => Y = 5000+50r
(B) Find the equilibrium domestic and foreign interest rates and the equilibrium output.
(2 points)
Solve IS and LM simultaneously
r = 4
Y = 5200
(C) Suppose the balance of payments (BOP) is zero if Y and r satisfy: r=

101+0.02*Y
.
Calculate the new level of equilibrium output, the interest rate, and the money supply
after an increase of aut
onomous consumption by 100. (so that now
C
A
= 600

5
r
)
(Hint:
Use the new IS curve and the BOP equation to determine the new level of output and
interest rate. Then determine the money supply that makes the LM curve pass through the
new equilibrium)
(8 poin
ts)
New IS : Y = 5600

50r
BOP : r=

101+0.02Y.
12
Solving for r and Y: Y=5325 and r=5.5
New money supply:
M
S
/P=0.2(5325)

10(5.5)=1010
13
PART C (30 points)
WRITE YOUR NAME AND ID NUMBER ON YOUR BLUE BOOK.
YOU MUST ANSWER
THE ESSAY QUESTIONS
IN PEN NOT
PENC
IL. YOU RECEIVED AN E

MAIL ON DECEMBER 11
REMINDING YOU TO BRING A PEN
, OR BETTER YET, 2 PENS
.
This year there are two 15 minute essay questions. Write answers to BOTH questions 1
and 2 in your blue book.
1.
Write a 15

minute essay on what has happen
ed to the U. S. economy in the period
since the textbook was sent to the printer in March, 2005. Use as sources any reading
items dated after mid

2005 and especially the comments in the lectures and the updated
Powerpoint slides which
in lectures
display
e
d
data through mid

2007. Divide your essay
into two parts.
a
)
How has the DEMAND side of the U. S. economy evolved since early 2005? Can you
explain the major aspects of this evolution by any theory learned in this course, or have
there been unique dev
elopments not covered by any theory?
b
)
How has the SUPPLY side of the U. S. economy evolved since early 2005? Can you
explain the major aspects of this evolution by any theory learned in this course, or have
there been unique developments not covered by
any theory?
2.
A major theme of this course has been the economic interactions between China and
the U. S.
a)
Do imports from China inevitably imply a permanently higher rate of unemployment
in the U. S. Why so or why not?
b)
Trace in a short but wel
l

organized essay the effects of the China

US interaction on the
following macro variables in the US: the current account, the capital account,
productivity growth,
the inflation rate,
the 10

year treasury bond rate, and the trade

weighted exchange rate o
f the dollar (against all currencies, not against the Chinese
currency)
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