ECON 201: Introduction to Macroeconomics Final Exam December 13, 2012 NAME:

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1 ECON 201: Introduction to Macroeconomics Final Exam December 13, 2012 NAME: Circle your TA s name: Amy Thiago Samir Circle your section time: 9 a.m. 3 p.m. 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 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 QUESTIONS Answer multiple choice questions in the space provided below. PLEASE USE CAPITAL LETTERS Page 1

2 1. Fiscal policy refers to: A) the control of interest rates. B) the control of government spending and taxation. C) the control of the quantity of money. D) the control of interest rates and of government spending. 2. The trough of the business cycle: A) comes right after the expansion phase. B) comes before the recession phase. C) is a temporary maximum level of real GDP. D) is a temporary minimum level of real GDP. 3. A laptop computer that is purchased by an accounting firm is considered to be: A) consumption spending. B) investment spending. C) private saving. D) a pretax dividend. 4. The main point about the article concerning young adults living at home with their parents was A) When kids move out consumer spending increases B) When kids move out consumer spending decreases C) When kids live at home parents save more money D) When kids live at home parents save less money 5. An intermediate good would be: A) a new boat purchased by a professor to be used on vacation. B) lumber used to build a house. C) payments to military personnel. D) a professor's salary. 6. The Boeing Company buys $3 million worth of steel, $2.5 million worth of computer hardware and software, and $1 million worth of mechanical tools to manufacture a certain model of aircraft. Boeing sells this particular model of aircraft at $10 million. The value added by Boeing is equal to: A) $3.5 million. B) $16.5 million. C) $13 million. D) $15.5 million. 7. Don has built an expansion to his house. The value added by this action will: A) not be included in GDP because it is not produced for the marketplace. B) be included in GDP because Don is a professional builder. C) not be included in GDP because it is an intermediate good. D) be included in GDP because building is Don's hobby. Page 2

3 8. Some people work part-time when they would prefer to have full-time jobs. These people are A) Counted as unemployed and in the labor force B) Counted as unemployed and out of the labor force C) Not counted as unemployed and in the labor force D) Not counted as unemployed and out of the labor force 9. If real GDP rises while nominal GDP falls, then prices on average have: A) risen. B) fallen. C) stayed the same. D) Real GDP cannot rise when nominal GDP falls. 10. Suppose that a country has a progressive income tax code, where taxable income is calculated in nominal terms but the schedule of income tax rates is NOT indexed to inflation. An individual whose income keeps up with inflation will find that over time he or she will pay: A) the alternative minimum tax. B) a lower percentage of income in taxes over time. C) the same percentage of income in taxes over time. D) a higher percentage of income in taxes over time. Use the following graph to answer question 11: Figure: The Labor Market 11. (Figure: The Labor Market) Refer to the accompanying figure on the labor market. What is the unemployment rate at an efficiency wage of $16? A) 10% B) 20% C) 27% D) 73% Page 3

4 12. The long-term unemployed, those out of work a year or more, tend to be particularly common among A) With a high school education or less B) Aged 65 and over C) With a college education D) Aged 25 and under E) A) and B) F) A) and D) 13. If a country has a working-age population of 200 million, 135 million people with jobs, 10 million people who were looking for a job but have given up, and 5 million people unemployed and seeking employment, then the number of unemployed workers is: A) 25 million B) 15 million C) 10 million D) 5 million 14. In a particular labor market, the demand for labor is given by W = 20 (1/100)L and the supply of labor is given by W = 4 + (1/100)L where W is the wage rate, and L is the number of workers. These equations imply the market equilibrium without any government intervention. Suppose the government decides to impose a minimum wage of $15 in this market. What effect will this minimum wage have on the original market equilibrium? A) The minimum wage will have no impact since it is below the equilibrium wage. B) The minimum wage will create a shortage of workers since it is above the equilibrium wage. C) The minimum wage will create surplus of workers since it is above the equilibrium wage. D) The minimum wage will increase the wage only for workers who were employed at the original equilibrium. 15. If output is growing at 5% annually, how many years will it take for output to reach 4 times its original level? A) 14 years B) 10 years C) 20 years D) 28 years 16. Why is Germany cited as a country that avoids the negative effects of long-term unemployment? A) Government-financed health care B) Work sharing C) Government promotion of German exports D) More generous unemployment benefits Page 4

5 17. Real GDP per capita, growing at a constant rate over a 35-year period, doubles in size at the end of that period. What must the annual growth rate of real GDP per capita be for this economy? A) 1% B) 2% C) 4% D) 15% 18. According to the rule of 70, if a country's real GDP per capita grows at an annual rate of 2% instead of 3%, it will take for that country to double its level of real GDP per capita. A) 35 additional years B) additional years C) 23.3 additional years D) 30 additional years Use the following graph to answer question 19: Figure: Technological Progress and Productivity Growth 19. (Figure: Technological Progress and Productivity Growth) Which of the following changes in real GDP would be most likely to result over time from the deterioration of the nation's infrastructure? A) A to B B) B to C C) C to B D) B to A Page 5

6 20. A crucial difference in the historical development of the United States as compared to Argentina is A) More immigration in the U. S. than in Argentina B) More immigration in Argentina than in the U. S. C) Land holdings were larger in the U. S. than in Argentina D) Land holdings were larger in Argentina than in the U. S. 21. If in an open economy, a country imports more than it exports and the government budget deficit increases: A) interest rates will increase and the amount of borrowing will increase. B) interest rates will decrease and the amount of borrowing will increase. C) interest rates will increase, but the change in borrowing is ambiguous. D) the change in interest rates is ambiguous, but the amount of borrowing will increase. 22. In a closed economy government spending was $30 billion, consumption was $70 billion, taxes were $20 billion, and GDP was $110 billion this year. There were no transfers. Investment spending was $10 billion. As a result: A) private savings were equal to $10 billion. B) the government's budget balance was equal to a surplus of $10 billion. C) net savings were equal to $0. D) private savings were equal to $20 billion. 23. A shift away from taxing asset income and toward taxing consumption would lead to: A) a larger demand for loanable funds, a higher interest rate, and slower economic growth. B) a larger supply of loanable funds, a lower interest rate, and faster economic growth. C) a larger government budget deficit and slower economic growth. D) a smaller supply of loanable funds, a higher interest rate, and faster economic growth. Use the following table to answer question 24: Table: Investment Projects Page 6

7 24. (Table: Investment Projects) If the market interest rate declines from 15% to 11%, then the amount of investment demanded will increase by: A) $200. B) $1,000. C) $2,000. D) $2, Autonomous consumption depends positively on A) Household assets B) Household liabilities C) Interest rates D) Optimism of business firms Use the following graph to answer question 26: Figure: The Market for Loanable Funds 26. The diagram above represents the market for loanable funds when the government is running a budget balance of zero. The economy is closed. When the government decides to increase defense spending by $200 billion and then finances the spending by selling bonds, the equilibrium interest rate will: A) fall to 12%. B) rise to 16.5%. C) rise to 18%. D) rise to 21%. Page 7

8 27. Suppose that the marginal propensity to consume is 0.8, and investment spending increases by $100 billion. The increase in aggregate demand is: A) $500 billion, the same amount as investment spending. B) $125 billion, composed of $100 billion in investment spending and $25 billion in consumption. C) $80 billion, composed of $100 billion in investment spending and a decrease in consumption of $20 billion. D) $500 billion, composed of $100 billion in investment spending and $400 billion in consumption. 28. When Julie Ann's disposable income is $10,000, she spends $10,000, and when her disposable income is $15,000, her spending is $12,500. Julie Ann's autonomous consumption is and her. A) $5,000; MPC = 0.5 B) $10,000; MPS = 0.5 C) $0; MPC = 0.5 D) $0; MPS = The fiscal cliff most closely resembles A) Infrastructure spending in China B) The Obama stimulus C) Austerity in Europe D) Tax holiday for repatriating foreign earnings Use the following graph to answer question 30: 30. (Figure: Aggregate Expenditures Curve) Suppose that the consumption function shifts upward by $100. The result would be an increase in the equilibrium level of real GDP of: A) $100. B) $400. C) $800. D) $3,200. Page 8

9 Use the following graph to answer question 31: Figure: AD AS Model 31. (Figure: AD AS Model) If the economy is at point X, which of the following describes the likely adjustment to long-run equilibrium? A) Nominal wages fall, and the aggregate demand curve shifts left until the economy reaches long-run equilibrium. B) Nominal wages rise, and the aggregate demand curve shifts right until the economy reaches long-run equilibrium. C) Nominal wages fall, and the short-run aggregate supply curve shifts right until the economy reaches long-run equilibrium. D) Nominal wages fall, and the short-run aggregate supply curve shifts left until the economy reaches long-run equilibrium. 32. A key blunder on the way to the crisis was A) An increase in leverage from 12 to 33 B) A decrease in leverage from 33 to 12 C) An increase in the required reserve ratio from 10 to 20 D) A decrease in the required reserve ratio from 20 to 10 Page 9

10 Use the following to answer questions 33-34: Figure: Policy Alternatives 33. (Figure: Policy Alternatives) In panel (b), the economy is initially in short-run equilibrium at real GDP level Y1 and price level P2. If the government decides to intervene, it would most likely: A) increase taxes. B) decrease the quantity of money available. C) increase the level of government purchases of goods and services. D) decrease the level of government purchases of goods and services. 34. (Figure: Policy Alternatives) If the economy is in equilibrium at Y1 in panel (a), it is experiencing A) a recessionary gap B) an inflationary gap. C) long-run equilibrium but not short-run equilibrium. D) full employment. 35. Suppose the government increases spending more than is necessary to close a recessionary gap. Which of the following is likely to result? A) The economy will experience inflation. B) The price level will decline. C) The economy will experience a stagflation. D) The equilibrium real GDP will fall short of potential GDP. 36. If the marginal propensity to consume is 0.9, then the tax multiplier will be: A) impossible to determine. B) greater than 10. C) less than 10. D) zero, because there is no multiplier effect from taxes. Page 10

11 37. Which of the following is a key ingredient in a bubble A) Household assets rise faster than household liabilities B) Household liabilities rise faster than household assets C) Skeptics are in the minority D) Skeptics are in the majority 38. Suppose an economy is producing real GDP of $300 billion. The potential output is equal to $400 billion, and the MPC is equal to Then the government should follow a policy of: A) raising taxes by $25 billion to bring the economy to potential output. B) cutting taxes by $33.33 billion to bring the economy to potential output. C) raising taxes by $33.33 billion to bring the economy to potential output. D) cutting taxes by $25 billion to bring the economy to potential output. 39. If a bank has assets equal to $100 million dollars, according to practice, its liabilities should NOT exceed: A) $7 million. B) $70million. C) $93 million. D) $107 million. 40. Suppose Ronny decides to withdraw all of the cash out of his checking account and open a single time deposit account at the same bank. As a result of this transaction: A) M2 falls but M1 remains unchanged. B) M1 and M2 both fall. C) M1 and M2 both remain unchanged. D) M1 falls but M2 remains unchanged. 41. Suppose you find a $50 bill that you put in a coat pocket last winter. If you deposit it in your checking account: A) M1 increases by $50. B) M2 increases by $50. C) M1 and M2 both increase by $50. D) there is no change in M1 or M When troubled financial institutions are forced to sell assets quickly at a deep discount, this is a(n): A) debt overhang. B) vicious cycle of deleveraging. C) maturity transformation. D) asset bubble. 43. A sudden and widespread disruption of financial markets that occurs when people lose faith in the liquidity of financial institutions and markets is a(n): A) asset bubble. B) maturity transformation. C) financial panic. D) debt overhang. Page 11

12 44. When shadow banks engage in maturity transformation, they raise funds by and invest in. A) issuing stock; stock of other companies B) selling bonds; Treasury bills C) borrowing in short-term credit markets; longer-term speculative investments D) borrowing in long-term credit markets; short-term speculative investments 45. Which of the following is not cited as a reason that monetary policy has failed to produce a robust recovery? A) Many households are under water with their mortgages B) Business firms won t invest because of weak consumer demand C) Banks lack sufficient excess reserves to make loans D) Business uncertainty about new medical care and financial reform legislation Page 12

13 Answer Key 1. B, 2. D 3. B 4. A 5. B 6. A 7. A 8. C 9. B 10. D 11. C 12. E 13. D 14. C 15. D 16. B 17. B 18. B 19. D 20. D 21. D 22. D 23. B 24. D 25. A 26. C 27. D 28. A 29. C 30. B 31. C 32. A 33. C 34. A 35. A 36. C 37. C 38. D 39. C 40. D 41. D 42. B 43. C 44. C 45. C Page 13

14 PART B SHORT ANSWER PROBLEM 1: (12 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, or 29.87% Annual Price Quantity Price Quantity Percentage Change Between Guns using Roses the LN formula Nominal GDP % Real GDP in 2011 prices Real GDP in 2012 prices GDP Deflator with base year 2011 GDP Deflator with base year % % What is the growth rate in chain-weighted GDP? 29.12%_ Page 14

15 PROBLEM 2: (14 points) Solve this problem using the LN formulas shown in class. We will not accept solutions that involve other methods. At the beginning of 2012, Jungleland s GDP is It grows at a constant annual rate of 8%. A) (3 points) How long will it take for Jungleland s GDP to increase by 50%? Ln(1.5)=0.08s s=5.07 B) (3 points) At the beginning of 2012, Hogwarts GDP is 800, and it is growing at a constant annual rate of 12%. When will Hogwarts catch up with Jungleland? Ln(1000)+0.08s=ln(800)+0.12s 0.04s=ln(1.25) s=5.58 C) (3 points) Jungleland s population is not happy that, eventually, Hogwarts is going to have higher GDP than their country. They are going to work harder to ensure that Hogwarts will never catch up with Jungleland. If Jungleland s new growth rate is constant every year, what is the minimum growth rate that ensures that Jungleland will always have a higher GDP than Hogwarts? 12% D) (5 points) Sportsland s ambition is to host the Olympic Games. At the beginning of 2012, its GDP was 1,500 and it was growing at 15% a year. Moreover, it will keep this pace until it holds the Olympic Games. In order to host such a big event, Sportsland s GDP must be at least 6,000. After the moment it reaches that GDP level, it will hold the Olympic Games in the beginning of the next year available for the event (remember that the Olympic Games take place every four years, in the years: 2012, 2016, 2020, etc.) During the year that Sportsland hosts the Olympic Games, their GDP will grow at 75%. Then, everything returns to normal, and their GDP will keep growing at 15% a year forever onwards. When will Sportsland s GDP reach 25,000? When will the GDP reach 6000? Ln(1500)+0.15s=ln(6000) after s=9.24 years So, they will host the Games after 12 years. More precisely, they will hold the Games in the beginning of GDP in the beginning of 2024 = 1500*exp(0.15*12)= GDP in the beginning of 2025 = *exp(0.75)= Ln(25000)=ln( )+0.15s s=1.76 So they will reach during the year 2026 Page 15

16 PROBLEM 3: (12 points) Throughout the question, assume that if disposable income in South Korea is 1000, then, aggregate consumption is 1020, and if disposable income is 100, then aggregate consumption is 570. A) (2 points) What is the autonomous consumption and the MPC of South Korea? A = 520 and MPC = 0.5 B) (2 points) In 2007, the additional elements that enable us to calculate the South Korean GDP are: private investment Ip = 400, government expenditure G = 340, exports X = 280, imports IM = 340, taxes are 600 and transfers to households are 200. The GDP is (2000) C) (2 points) In 2008 the United States was hit by a financial crisis. In that year, Americans were so scared that they cut spending on imported goods from South Korea. More precisely, suppose that exports declined by 80 in 2008 in comparison to If the only change from 2007 to 2008 was the change in exports, what is South Korean GDP in 2008? (1840) D) (3 points) The federal government was monitoring the crisis and decided to take initiative to avoid the outcome of the question above. After exports decreased, it decided to decrease interest rates in order to increase investment expenditure. What is the necessary level of such expenditure needed to bring the economy back to the 2007 GDP level? (80) E) (3 points) Suppose that instead of decreasing interest rates, the government decided to increase the transfers to the households. What is the necessary level of such transfers needed to bring the economy back to the 2007 GDP level?.(160) Page 16

17 PROBLEM 4: (8 points, 2 points per part) Following a sudden shakeup at the Fed, an open market sale of securities worth USD 2 billion occurs. The required reserve ratio is always 5 percent and people tend to hold 20 percent of their deposits in the form of currency. A) What is the change in dollar deposits? -8 billion USD B) What is the change in bank reserves? -400 million USD C) Find the money multiplier. 4.8 D) What is the change in money supply? -9.6 billion Page 17

18 PROBLEM 5: (12 points) The below table shows employment statistics on the population of Sherwood in Age Have a job and not looking for another one Have a job but looking for another job Don t have a job but are looking for one Don t have a job and are not looking for one Total < > Total A) (1 point) How many people are in the labor force in 2010? B) (1 point) How many people are unemployed in 2010? 4540 C) (1 point) How many people are employed in 2010? D) (2 points) What is the labor force participation rate in 2010? 58.91% (1pt for correct working age pop but incorrect final ans) E) (1 point) What is the unemployment rate in 2010? 17.13% F) (2 point) The youth unemployment rate is the unemployment rate among year olds. What is the youth unemployment rate? 32.94% G) (2 point) In 2012 the labor force of Sherwood consists of 45,000 people and the unemployment rate is 8%. How many people were employed in 2012? H) (2 point) What was the average annual growth rate in the number of people employed between 2010 and 2012? (Use the LN formulas shown in class) 31.68% Page 18

19 PROBLEM 6: (9 points) Table: National accounts of Solaris, 2011 GDP $260.2b Government spending $75.4b Taxes $97.2b Transfers $25.1b Private saving $40.9b Net capital inflow $27.0b Exports $13.2b A) (2 points) What was the government budget balance in 2011? S G =T-G-TR = =-$3.3b B) (1 point) What was the value of national savings in 2011? S N = S G + S P = =$37.6b C) (2 points) What was consumption in 2011? S P =Y+TR-T-C C= Y+TR-T-S P C= C=$147.2b D) (1 point) What was investment in 2011? I= S N -NCI = =$64.60 E) (1 point) What were imports in 2011? NCI=IM-X IM=NCI+X IM= =$40.2 F) (2 points) As at 31 st December 2010 the government debt in Solaris was $22.8b. What was the government debt as at the 31 st of December 2011? Debt 2011 end = Debt 2010 end deficit = =$26.1b Marking guidelines: full points if get correct answer, half points if have the formula but get the wrong answer, full points for part if error is carried over from a previous part Page 19

20 PROBLEM 7: (8 points) Figure: Productivity in Chinchilla H is human capital per worker and is measured in years of schooling. Use the ln formula for growth. Human capital per worker grew from 10 in 1952 to 13 in Physical capital per worker grew from 200 in 1952 to 700 in 2012 A) (2 points) What was the average annual rate of productivity growth in Chinchilla between 1952 and 2012? x=100/60*ln(8/2.25)=2.11% B) (2 points) What fraction of productivity growth can be attributed to growth in physical capital per worker? x=100/60*ln(3/2.25)= /2.11=22.68% C) (2 points) What fraction of productivity growth can be attributed to growth in human capital per worker? x=100/60*ln(4/3)=0.479 (or x=100/60*ln(8/6)=0.479) 0.479/2.11=22.68% D) (1 point) What fraction of productivity growth is not attributable to either growth in physical capital per worker or growth in human capital per worker? =54.64% E) (1 point) The part of productivity growth is not attributable to growth in physical capital per worker or growth in human capital per worker is generally attributed to technology growth Page 20