quiz_1_solutions

quiz_1_solutions - 14.02 Principles of Macroeconomics...

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14.02 Principles of Macroeconomics Spring 2009 Quiz 1 Thursday, March 5 7:30 PM – 9 PM Please, answer the following questions. Write your answers directly on the quiz. You can achieve a total of 100 points. There are five multiple choice questions and two long questions. The quiz is nine pages long. There will be no questions allowed during the quiz. Good Luck! NAME: ________________________________________________ TA: ________________________________________________ CLASS TIME: ________________________________________________ EMAIL: ________________________________________________ (Table is for corrector use only) 1 2 3 4 5 6 7 8 9 Total Short Questions Long Question 1 Long Question 2 T o t a l
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1 Multiple Choice (30 points, 6 points each) Choose only one answer per question. 1. An increase in taxes (at an unchanged level of government spending and money supply) (a) reduces private investment (b) stimulates private investment (c) has an ambiguous e/ect on private investment Solution: c. Investment increases because of the decrease in the interest rate but decreases because of the lower income. 2. Consider an economy with 2 goods and compute the real GDP growth rate between years t and t+1 using the chain index. Data are Good 1 p 1 t = 1 : 0 y 1 t = 1 : 0 p 1 t +1 = 1 : 0 y 1 t +1 = 1 : 1 Good 2 p 2 t = 1 : 0 y 2 t = 1 : 0 p 2 t +1 = 1 : 4 y 2 t +1 = 1 : 2 The correct answer is (a) 16 : 3% (b) 15 : 4% (c) 15 : 0% Solution: b 1 2 p 1 t +1 y 1 t +1 + p 2 t +1 y 2 t +1 p 1 t +1 y 1 t + p 2 t +1 y 2 t + p 1 t y 1 t +1 + p 2 t y 2 t +1 p 1 t y 1 t + p 2 t y 2 t ± 1 = 1 2 (1 : 15833 + 1 : 15) 1 = 15 : 4% 3. When the central bank has brought the interest rate to zero, an open market purchase of bonds (a) raises investment but has no e/ect on consumption (b) raises investment and consumption 1
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(c) leaves investment and consumption unchanged Solution: c. When the interest rate is zero, an expansionary monetary policy cannot lower the interest rate further, given that it is already zero. Hence, it cannot change investment, consumption, or output. 4. (Use the Goods Market Model to answer this question.) The Congressional Budget O¢ ce estimates
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quiz_1_solutions - 14.02 Principles of Macroeconomics...

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