ECON 3010 Intermediate Macroeconomics Exam #1

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1 ECON 3010 Intermediate Macroeconomics Exam #1 Multiple Choice Questions. (25 points; 2.5 pts each) #1. In any closed macroeconomy, saving equals a. consumption. b. investment. c. government spending. d. output. #2. The unemployment rate is the a. percentage of the population without a job. b. percentage of the population in the labor force. c. percentage of the labor force without a job. d. percentage of the labor force employed. #3. In the U.S., the largest portion of consumption is a. non-durable goods. b. durable goods. c. unplanned inventories. d. services. #4. GDP is a. the sum of all goods and services purchased at home and abroad. b. a flow variable. c. excludes exports. d. excludes unplanned inventories. #5. The labor demand curve a. is equal to the marginal product of labor. b. slopes up. c. is parallel to the labor supply curve. d. shifts to the left with increases in technology.

2 #6. Assume an economy experiences 10% growth in the labor force and the capital stock. If GDP increases by 10%, the economy has a production function with a. an increasing marginal product of labor. b. an increasing marginal product of capital. c. decreasing returns to scale. d. constant returns to scale. #7. The nominal wage is measured in units of a. dollars per hour worked. b. output per hours worked. c. dollars per unit of capital. d. dollars per unit of GDP. #8. A company with a marginal product of capital lower than the rental price a. is maximizing its current profit. b. should reduce the size of its capital stock. c. should rent more capital. d. is maximizing its total revenue. #9. The demand for investment a. depends negatively on output. b. depends positively on the nominal interest rate. c. depends primarily on the nominal interest rate. d. depends primarily on the real interest rate. #10. The money supply in the U.S. is determined by a. Congress. b. the President. c. the FOMC. d. the Secretary of Commerce.

3 Problem Solving / Essay Questions. (75 points) #11. (30 pts) Consider a macroeconomy that produces three goods. Use the information below to answer the following questions. Quantity Price Product A $20 $30 B $15 $20 C $10 $10 (a) (10 pts) Calculate nominal and real GDP for 2000 and 2010 using 2000 as the base year. What is the growth rate in nominal and real GDP over this period? Which growth rate better captures the change in economic well-being? Why? (b) (10 pts) Assume that the typical consumer s basket of goods is (A=1, B=2, C=3), calculate the CPI for 2000 and 2010 using 2000 as the base year. What is the inflation rate? (c) (10 pts) The FOMC is concerned the inflation rate in part (b) is too high. Describe the recommended policy to lower inflation assuming the money multiplier is equal to two. It is not necessary to give exact numbers, but carefully describe the FOMC s procedure and required adjustment to the monetary base.

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5 #12. (30 pts) Consider the following Neoclassical model of the economy, where rr is in percentage terms. Show all your work. Supply YY = FF(KK, LL) = 10 KKKK KK = 100; LL = 64 Demand CC = (YY TT) II = 50 2rr GG = 100, TT = 100 NNNN = 0 (a) (10 pts) What is the level of GDP in the economy? How much of national income goes to workers and how much goes to the owners of capital? (b) (10 pts) Find the interest rate that produces equilibrium in the goods market. Use a demand-supply diagram (with rr on the vertical axis) to show how the equilibrium interest rate would change if Trump s tax policy is implemented. (c) (10 pts) Assume the tax decrease in part (b) decreases taxes to TT = 90. Find the new equilibrium interest rate and show that this new interest rate clears the market for loanable funds (i.e., causes national saving to equal investment).

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7 #13. (15 pts) True or False. If False, correct the statement to make it true. (a) (5 pts) The goal of macroeconomic policymakers is to maintain zero growth in the price level and real GDP. (b) (5 pts) If households deposit 2/3 of their money in checking accounts and banks loan out 2/3 of their deposits, the money multiplier is equal to 3. (c) (5 pts) National saving in the U.S. is negative.

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