Final Exam 2011 Fall Econ 201 With Solutions

ECON 201: Introduction to MacroeconomicsFinal Exam December 5, 2011 NAME: _________________________________ Circle your TA’s name: Agustin Brian Circle your section time: 9 a.m. 3 p.m. Meysam INSTRUCTIONS: 1. The exam lasts 2 hours. 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 is 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 Page 1 of 17 The development of money as a medium of exchange has facilitated the expansion of trade because A) holding money increases people's income. Multiple Choice Questions (45 points) 1. A) more. D) sometimes positively related and other times negatively related. Money is A) backed by gold in Fort Knox. C) r↑ ⇒ I↓ ⇒ AE↓ ⇒ Y↓. C) negatively related. Which of the following sequence of events follows an expansionary monetary policy? A) r↓ ⇒ I↓ ⇒ AE↓ ⇒ Y↓. risen 5. D) anything that is generally accepted as a medium of exchange. D) the Fed buying government securities in the open market. The price of bonds and the interest rate are A) not related. 7. D) holding money increases people's wealth. 4. people hold ________ money instead of bonds because the opportunity cost of holding money has ________. D) r↓ ⇒ I↑ ⇒ AE↑ ⇒ Y↑. fallen B) more. C) the value of all coins and currency in circulation at any time. 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. 2. Page 2 of 17 . B) a reduction in the taxes banks pay on their profits. risen C) less. 3. B) r↑ ⇒ I↑ ⇒ AE↓ ⇒ Y↑. depending on the bond payments. B) no other mediums of exchange are available. C) a decrease in the discount rate.Part A. B) the same as income. As the interest rate falls. fallen D) less. An example of a contractionary monetary policy is A) an increase in the required reserve ratio. B) positively related. C) money eliminates the "double coincidence of wants" problem. D) a decrease in taxes. Refer to Figure 1.8. A) positive. An aggregate demand shift from AD1 to AD0 can be caused by A) an increase in the price level. the price level. A) investment rises as a result of the real wealth effect. demanded D) positive. D) an increase in money supply. B) a decrease in the price level. the price level. the price level. B) consumption increases as a result of the multiplier effect. supplied C) negative. Figure 1 11. demanded B) negative. B) a decrease in the price level. C) investment rises as a result of the multiplier effect. 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. Page 3 of 17 . the interest rate. C) a decrease in government spending. demanded 10. An aggregate demand shift from AD2 to AD0 can be caused by A) an increase in the price level. When the general price level rises. 12. The aggregate demand curve shows a ________ relationship between ________ and aggregate output ________. D) consumption falls as a result of the real wealth effect. C) a decrease in money supply. Refer to Figure 1. Refer to the information provided in Figure 1 below to answer the three questions that follow. Refer to Figure 1. D) the inflation rate increases. Figure 2 15. A) B) C) D) The acronym “ZLB” refers most directly to monetary policy fiscal policy agricultural subsidies environmental pollution Refer to the information provided in Figure 2 below to answer the two questions that follow. 14. C) the price level decreases. 17.13. The money demand curve will shift from A) the level of aggregate output increases. an decrease in government purchases can cause a movement to Point A) E. 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. A) planned investment will increase and aggregate output will increase. C) planned investment will increase and aggregate output will decrease. Refer to Figure 2. 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 Page 4 of 17 . Suppose the economy is at Point A. if 16. B) B. C) C. D) D. B) planned investment will decrease and aggregate output will decrease. Refer to Figure 2. B) the interest rate decreases. to . If the money demand curve shifts from to . D) planned investment will decrease and aggregate output will increase. B) B. B) B. If the economy was originally at Point A. C) C. Suppose the economy is at Point A. Refer to Figure 3. 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 the 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 three questions that follow. D) D. D) D.18. this would have caused a movement to Point A) E. Refer to Figure 3. an increase in the price level moves the economy to Point A) E. Figure 3 20. many firms in the United States were investing in new capital. C) C. Page 5 of 17 . The Economist article the “secret sauce” discusses a concept called “Total Factor Productivity” As explained in lecture. 22. this is the same as the textbook’s concept of A) Productivity B) Embodied technical change C) Disembodied technical change D) Human capital 19. 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. During the 1990s. Refer to Figure 3. Suppose the economy is currently at Point A producing potential output Y0. D C) C. C) on the very flat part of the short-run aggregate supply curve.23. 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. If the government increases spending. B) on the very flat part of the short-run aggregate demand curve. the economy moves to Point ________ in the short-run and to Point ________ in the long-run. Refer to Figure 4. Figure 4 25. 25. then the U. E B) B. D) on the very steep part of the short-run aggregate supply curve. economy must have been A) on the very steep part of the short-run aggregate demand curve. C Page 6 of 17 . 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 an economy like China’s has growth in real per-capita real GDP of 10% per year. B D) B. A) D.S. 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. C) the government must implement an expansionary monetary policy. If the government decides to counter the effects of higher oil prices by increasing government spending. Higher oil prices shift the aggregate supply curve to AS2. An increase in inflationary expectations that causes firms to increase their prices A) moves the economy to Point C on aggregate supply curve AS1. Assume the economy is currently at Point A on aggregate supply curve AS1. High D) Low. C) shifts the aggregate supply curve to AS2. B) the government must implement an expansionary fiscal policy. 30. Refer to Figure 4. greater 31. greater D) less. less C) greater. B) the economy moves from Point A to Point B on aggregate supply curve AS1. C) the aggregate supply curve shifts from AS1 to AS2. less B) less. Page 7 of 17 . S. D) the economy moves from Point A to Point C on the aggregate supply curve AS1. B) moves the economy to Point B on aggregate supply curve AS1. Low B) Low. Refer to Figure 5. High C) High. D) shifts the aggregate supply curve to AS0. A) High. Assume the economy is at Point A. Refer to Figure 5. 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 _____________. then the price level will be ________ than P2 and output will be ________ than Y2. For this economy to produce Y1 and sustain it without inflation A) potential output must increase. Refer to Figure 5. D) the price of oil must increase. Low Refer to the information provided in Figure 5 below to answer the three questions that follow. Figure 5 29. A) greater. 28.27. Cost-push inflation occurs if A) the aggregate supply curve shifts from AS1 to AS0. The large government deficit experienced by the U. 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. B) the time that is necessary to put the desired policy into effect.32. A rightward shift in the aggregate demand curve generates a ________ inflation and ________ output. higher B) cost-push. response C) recognition. higher 33. C) the time needed for the Federal Reserve Board to meet. implementation B) implementation. 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. fiscal policy has a longer ________ lag than monetary policy but shorter ________ lag. 34. D) taxes rising in an expansion. 35. Page 8 of 17 . lower C) demand-pull. B) the Fed lowers taxes as the economy slows. In general. A) positive demand shocks B) tax cuts C) automatic stabilizers D) implementation lags 39. C) the Fed increases money growth as the economy slows. B) government spending falling during a recession. lower D) cost-push. recognition 36. An example of automatic stabilizers is A) government spending rising during an expansion. C) deficit targeting. The economic impact of ________ during expansionary periods is to moderate growth. The Federal Reserve's policy to "lean against the wind" means that A) the Fed slows money growth as the economy slows. response D) implementation. A) response. D) the Fed raises required reserves as the economy slows. 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. D) the time that it takes for policy makers to recognize a change in the economy. A) demand-pull. labor productivity eventually decreases.40. D) as labor increases output always increases. its output increases by 300 units. output decreases. 3 C) increases. A company uses 100 workers and 30 units of capital to produce 500 units of output. as a result. If this company increases its capital to 50 units and. 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. 42. the example of the Netherlands was introduced in relation to which topic? A) Agriculture B) Economic growth C) Unemployment D) Monetary policy Page 9 of 17 . 4 43. A) increases. B) as output increases. 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. and its growth rate from 1960 until now on the vertical axis. labor increases. C) as labor increases. 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. 8 D) decreases. 1 B) increases. In Econ 201 during Fall 2011. the productivity of labor ________ to ________ units per worker. Diminishing returns to a factor implies that with capital fixed A) as labor increases. Which of the following is NOT an investment in human capital? 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. 85 11.43% Page 10 of 17 . including percentages. 38.200 8. 20. What is the inflation rate according to the chain-weighted GDP deflator? _______________ -0.45% 15. 38.800 3.300 2.87%.91% 14. 112 125mm Railguns Quafe 113 Price Quantity Price Quantity 7900 2 8700 4 50 450 44 250 Percentage Change (LN formula) Nominal GDP 1. That is. 17.10% Real GDP in 2010 prices 7. Round all values to the nearest two decimal places. 37. 3. 45.800 9.78% GDP Deflator with base year 2009 GDP Deflator with base year 2010 100 12. 14.300 5. answers should look like 13.72 or 29. 45.80% 10. 103. -2. 44.300. 102.96 100 13.100 6. What is the percentage growth rate in chain-weighted GDP? _______________ 17.88% Real GDP in 2009 prices 4.Part B: Short Answer Questions (75 points) PROBLEM 1: (15 points): 1 point per blank Complete the blanks using the following table. (1 point) At the given growth rates. Real GDP per capita Annual growth rate Amarr 1100 1. (1 point) At what annual growth rate must Amarr grow to ensure Dodixie never catches up? _______________ 2.PROBLEM 2: (8 points): point value specified Answer the following questions using the following table.80 2.3%. how many years will it take for Amarr’s real GDP per capita to quintuple (increase fivefold)? _______________ 123.3% Dodixie 900 2.1% 5.83 Page 11 of 17 . (2 points) At what annual growth rate must Dodixie grow in order to catch-up with Amarr in exactly 20 years? _______________ 2.08 3. (2 points) At the given growth rates. how many years will it take for Dodixie to match Amarr’s real GDP per capita? _______________ 25.1% 1. (2 points) Suppose Dodixie can bomb Amarr and cause it to suffer two years of zero growth before resuming normal growth of 1.30% 4. How many years will it take for Dodixie to match Amarr’s real GDP if Amarr is bombed? _______________ 21. 5 points) Total Subsidy Cost 255 (1. complete the following table: (1 point) Equilibrium Quantity 14 (1 point) Equilibrium Price 48 (1.5 points) Producer Surplus 196 2. (15 points) Complete the following blanks.5 points) Price Received (by producers) 54 (1.5 (1. Suppose demand is given by P = 90 – 3Qd.5 Page 12 of 17 . Suppose the government provides a subsidy of $15 per unit.5 points) Deadweight Loss 22. Suppose supply is given by P = 20 + 2Qs. 1.5 points) Consumer Surplus 294 (1.5 points) Price Paid (by consumers) 39 (1.5 points) Consumer Surplus 433. For this closed free market.5 points) Producer Surplus 289 (1. Complete the following table: (1 points) Quantity 17 (1.PROBLEM 3. for the remaining of problem 3. Let be the imports-to-income ratio of this economy. as a function of Multiplier and . a.PROBLEM 4. (2 points) Show the Multiplier of Utopia. (1 points) Assume. (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: TA = 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. the following: What is the numerical value of the Multiplier of this economy? Multiplier 𝟏 𝟏 𝟐𝟒 𝟏−𝟎 𝟖 𝟏− +𝟎 𝟏 𝟑 Page 13 of 17 . 𝟏 𝟏−𝒃 𝟏−𝒕 +𝒎 b. 0. Surplus = T – G = 273. (2 points) Calculate the equilibrium output of Utopia.8 (200) +200+400+100 = 590 Ap = d.b Ta + I +G + EX = 50 – 0. Solution: Y * = Multiplier x Ap = 3 x 590= 1770 Y *= e.8 ((1-1/24)Y) .75 – 400 = -126.25 (2 points) Gov.c. (2 ponts) What is the level of autonomous planned expenditure of Utopia? Solution: Ap = a .25 (2 points) C = a + 0.8 Ta = 1247  S = Y – C – T = 1770 – 1247 – 273. Surplus = S= Page 14 of 17 . and of domestic private savings (S) in this economy? Solution: T = Ta +t Y = 273.75  Gov.75 = 249. (4 points) What is the level of government surplus. for items (g). Surplus )0 + ΔT – ΔG = -126. f. Sir T.25 + (-12. (2 points) By how much will tax revenue change? Solution: ΔT = t ΔY= (1/24) x (-300)= . is considering to reduce the government expenditure to G1=300.25 -300 +230+12. Surplus 1 = IM1 = Page 15 of 17 .5) = 249.5 = 191. Surplus1 = (Gov.230 i. (h).8(-300+12. More. and Imports? Solution:  S1 = S0 + ΔY – ΔC – ΔT = 249.5 ΔT = h.5) = .1 (1770+(-300))= 147 (2 points) Gov.A change in government expenditure policy: For the remaining of problem 3 (that is. ΔC = (6 points) What would be the new levels of Domestic Private Savings. (i) and (j)).75 (2 points)  IM1 = m (Y0+ ΔY) S 1= = 0. (2 points) By how much will consumption change? Solution: ΔC = b x (Δ(Disposable Income)) = b x (ΔY – ΔT) = 0.12. (2 points) By how much will the equilibrium output change? Solution: ΔY = Multiplier x ΔG = 3 x (-100)= -300 ΔY = g. assume what follows: the ruler of Utopia.25 +(-300) – (-230) – (-12.5) – (-100) = -38. Government Surplus.75 (2 points)  Gov. it must keep as reserve 0. (6 points) Now consider the country of Macondo. The Central Bank of Macondo. in how many years? No Problem 6. On average. what is 2011 real GDP? 200 b. and do not keep excess reserves.9 years d. in this economy you can observe a currency-to-deposit ratio of c=0. Will the GDP of Macondo ever equal that of El Dorado? If so. El Dorado. (2 points) Suppose real GDP in Macondo in 2011 is 200 with a growth rate of 2%. (2 points) Suppose the yearly real growth rate is 2%. Page 16 of 17 . Assume that commercial banks do keep the reserves. if 2000 real GDP was 180.05. (1 point) If nominal GDP in 2011 in Macondo is 216 and the GDP deflator is 108. and 2001 real GDP was 188? (1 point) 4. and a neighboring country. a. (1 point) What was the % change (LN) in real GDP between years 2000 and 2001. has a 2011 real GDP of 201 with a growth rate of 2.1 (that is.1).PROBLEM 5. (8 points) The country of Macondo has a monetary base of $500 million. How long until the real GDP of Macondo is three times what it is today? 100*LN(3)/2 = 54. for every unit a bank receives as deposit.5%. requires commercial banks to hold as reserves rr=0.35% c. In Macondo people find useful to keep some cash in their pockets. if the interest rate were 4.Draw in the space provided a diagram that shows the money market demand and supply. (So. Solution: − .15 + 0. ( 3pts) Now assume that in Macondo there is a money demand as follows: Where stands for the interest rate. . ( 2pts) What is the money supply in this republic? M = C + D = c D + D = 0. .What is the interest rate present if the money market is in equilibrium? Hint: you already have the Money supply.05 x 2500 + 2500 = 2625 d. as well as the equilibrium interest rate. Page 17 of 17 .a. (2 points) What is the total value of deposits in the banks of Macondo? D=500/(0. (2 pts) How much is kept as reserves in Macondo? R = rr D = 0.05) = 2500 b.15 x 2500 = 375 c. you would plug 4 to get the demand for money).