201F01F - Northwestern University Economics 201 Department...

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Unformatted text preview: Northwestern University ' Economics 201 Department of Economics Fall 2001 Robert J. Gordon Final Exam Monday, December 10, 2001 Instructions: - This exam consists of 47 multiple choice questions, worth 1 point each, and six short answers, worth 8 points each. - You have two hours to complete the exam. You will receive a 5 point bonus if you hand in before the time limit and you will be penalized 5 points if you hand in more than 5 minutes after the time limit» has expired - You must answer all questions and problems on the ANSWER SHEET not on the exam. You will hand in only the answer sheet, so make sure that all your answers have been recorded there. - You must answer in PEN. - Write your name, TA and section on the answer sheet. Now is a good time to do it. - Show all your work in your short answers. No credit will be given for correct answers with no explanation of how they were obtained, and partial credit may be given for incorrect answers if the procedure was correct. Last year, in a nation far to the South, real GDP was $90 million and 900,000 workers were employed. This year real GDP is $100 million and 950,000 workers are employed. Hence, labor productivity has increased. ’ decreased. remained constant. might have changed, but more information is needed to determine if it changed. .9an ‘ - * Amount Sdoil’arsi. Checking deposits 253 Savings deposits 858 Money market funds 428 Time deposits 479 Traveler's checks, 6 Currency ' 240 The above table has information about the hypothetical economy of Syldavia. Based on the data, the size of M1 is r a. $499 billion. b. $246 billion. c. $259 billion. d. $493 billion. When the loan a bank made is spent by the borrower, the bank’s a. assets increase. b. liabilities increase. c. reserves decrease. d. deposits increase. The clearing of checks between commercial banks increases the quantity of money. does not affect the quantity of money. decreases the quantity of money. ' "* None of the above is correct because checkable deposits are not part of money. 9953‘!” Assets (millions of dollars), Liabilities (millions of dollars) Required reserves 10 Deposits 100 Loans 55 ‘ Government securities 30 E ui, ent 25 20 The balance sheet of the Third State Bank of Syldavia, Illinois is above. The bank is holding no excess reserves. If the Federal Reserve Systembuys $10 million of government securities from this bank, the bank’s total- assets equal $130 million. liabilities equal $110 million. assets equal $120 million. . capital equals $30 million. the 9‘s» 16) Which statement is correct? A) The debt/GDP ratio in the U. S. is higher than in Japan but lower than in Italy B) The debt/GDP ratio in the U. S. is higher than in Italy but lower than in Japan C) The debt/GDP ratio in Japan and Italy is higher than in the U. S. D) The debt/GDP ratio in the U. S‘ris higher than in Japan and Italy E) None of the above 17) Relative to GDP, the size of "problem loans" in Japan is how large compared to the size of problem loans during the U. S. Savings and Loan crisis of the late 1980s? ' A) Half as large B) The same C) Twice as large D) Four times as large B) Fifteen times as large 18) Comparing the exchange rates of the dollar and the yen, which is the most accurate- statement? » ' A) The yen appreciated from 1992 to 1995 and depeciated from 1995 to 1998 B) The yen depreciated from 1992 to 1995 and appreciated from 1995 to 1998: C) The yen depreciated from 1992 to 1998 D) The yen appreciated from 1992 to 1998 E) The yen depreciated from 1992 to 1995 and was unchanged from 1995 to 1998 ‘ 19) The "international trilemma" describes the fact that three things are mutually incompatible. Which are they? _ A) Inflation, unemployment, and flexible exchange rates B) Inflation, capital mobility, and flexible exchange rates C) Inflation, capital mobility, and fixed exchange rates D) Domestic monetary autonomy, capital mobility, and fixed exchange rates E) Domestic monetary autonomy, capital mobility, and flexible exchange rates 20) In the article "The New World Disorder" (with the drawing of Keynes), the author argues in the context of thecunent Asian crisis that Keynes would have disapproved of A) IMF bailouts. B) Mathematical models to predict the future C) International capital mobility D) (A) and (B) E) (B) and (C) 21. If aggregate planned expenditure exceeds GDP, then ‘ a. ffinis’ inventories are larger than planned. I - b. the Change in firms’ inventories is the planned change. c. inventories are smaller than planned. I * d. I aggregate income is less than GDP. Oomurpfion atpa‘tdfl»l€_ { firilliomof ms doll'us'g- . I. , j} ‘ t1; 5 ' " ., - , 45" line , 4 .- g; 3 _ 2 _ I , Disposable income (tn—imam l _ as dense; The figure above shows a nation’s consumption function; amount of autonomous consumption . expenditure is L' ' " 'y a. $0. b. $1 trillion. c., $2 trillion. d.’ $3 trillion. 23. In the figure above, the marginal propensity to consnrne , a 3/2 , ' ‘ * b. 2/ 3' c. ' 1/ 2’ d- "1 , e. There not enough information to calculate it I i 28. 29. 30. 31. 32. 33. If government purchases increase by $200 billion and taxes simultaneously increase by $200 billion, then aggregate demand remains the same. decreases. increases. might change depending on what the effect is on aggregate supply. 909‘!” To eliminate an inflationary gap using fiscal policy, the government could only increase government purchases. only decrease taxes. increase government purchases and decrease taxes. increase taxes. P-OP‘?’ Automatic stabilizers decrease the impact of a recession on the level of economic activity because they reduce the interest rate and so allow firms to increase their level of investment. increase taxes so the budget is always balanced. raise the exchange rate 50 US. exports become more attractive to foreigners. mean disposable income does not change by as much as real GDP. 9‘99“? In order to raise interest rates, the Fed __ government securities in open market operations, so that banks’ reserves __ and the quantity of money _. buys; decrease; increases sells; decrease; decreases- sells; increase; decreases buys; increase; increases rm 9‘? When there is a threat of inflation in the economy, the Fed can the interest rate so to aggregate demand and ' the price level. a. lower; increase; decrease b. raise; decrease; increase c. lower; increase; increase d. raise; decrease; decrease Price level Aggregate supply Aggregate demand (GDP deflator, (billions of (billions of I 1996 = 100 f 1996 dollars 1996 dollars 30 28 16 25 25 19 20 22 22 15 19 25 1 0 1 6 28' Using the data in the above table, if potential GDP for this economy is $25 billion, then in order to restore full employment, discretionary fiscal policy might be usedso that aggregate supply increases. fiscal policy might be used so that aggregate demand increases. monetary policy might be used so that aggregate demand decreases. monetary policy might be used so that aggregate supply increases. 9-957? 37. When the exchange rate between the US. dollar and the Japanese yen changes from 107 yen per dollar to 93 yen per dollar, then the a. Japanese yen has depreciated. b. US. dollar has depreciated. c. US. dollar has appreciated. ‘ d. None of the above, there is not enough information to answer the question. 38. The U. S. has net exports of +$400 billion, net investment income of -$20 billion, and net international transfers of -$30 billion. This implies a. U. 5. international indebtedness-is '-$450 billion. b. U. 5. international indebtedness of -_$350 billion. 1 c. A change in U. 5. international indebtedness of -$350 billion. d. A change in U. S. international indebtedness of +$350 billion. e. A change in U. S. international‘indebtedness of +$450 billion. 39. Foreign investment that builds factories in the U. S. is: a. A bad thing because Americans have to pay interest and dividends to foreigners. b. A bad thing because Americans’ net indebtedness to foreigners increases. c. A good thing because foreign-owned plantscreate jobs in the U. S. V d A good thing because U. 5. local governments can collect property taxes on the foreign-owned factories. e. All of the above 40. According to Krugman, national saving, fell in the 19803 while remained high, thus requiring an increase in , A investment; the government deficit investment; foreign borrowing private saving; foreign borrowing private saving, the government deficit private saving, net exports Pang-p 41. In response to those who suggest that a decline in the dollar does not affect trade and creates inflation, Krugman cites the 1985-87 episode when: a. Import growth increased, export growth declined, even though inflation soared. b. Import growth increased, expert growth declined, while inflation declined. c. Export growth increased, import growth declined, even though inflation soared. (1. Export growth increased, import growth declined, while inflation did not change ’ e. None of the above 42. "Snategic trade policy" as discussed by Krugman: a. Depends for its justification on high development costs of a product. b. Justifies protection of products made for the Defense Department c. Justifies a monetary policy that pushes down on the exchange rate d. Implies that quotas are superior to tariffs when protection is desired e. b and d 43. Consider a tariff as an alternative to a quota that leads to the same price and quantity sold of a product. Then we know. H H H « ' - The cost of the tariff to consumers is higher than the cost of a quota. The cost' of the quota to consumers is higher than the cost of the tariff. The cost of the tariff is greater than the consumer surplus lost to consumers. The cost of the tariff is less than the consumer surplus lost to consumers.\ ‘ b and d EDP-99"!” Short Answer 1 a) Complete the graph in the answer sheet: Depict the effect of introducing credit cards into this economy. (1 point) b) Suppose that the Fed increases the money supply. Explain briefly the process through which the economy gets to the new equilibrium (Hint: Refer to the Bonds market)». (2 points). ‘ c) Assume that the Fed decreases the money Supply. Describe the effects on the; (i) Nominal interest ratein the short run (1 point) (ii) Nominal interest rate in the long run (1 point) (iii) If your anSwer to (i) and (ii), is the same then explain why. If your answer to (i) and (ii) (is different then explain how does the economy move from the short run to the long, run. Answer in onesentence (1 point) d) Assume that the real GDP decreases. If the Fed wants to maintain the economy at the same nominal interest rate that was prevailing before this decrease what should it do? (1 point) e) In 2001, the real interest rate in Luxembourg was 4%, and the nominal interest rate was 6%. If in 2002, the real interest rate remains the same and the nominal interest rate rises to 8% then what can we conclude about the inflation rate? (1 point) Short: Answer 3 Suppose that Investment Demand is given by I = 7 — R (in million 8), The Households Saving Supply is given by Sp = 1 + 2R (in million S), The government runs a balanced budget Treat each question separately (that is, the situations are not “cumulative”): a), What is the equilibrium interest rate. What is the level of investment? (2 points) b), cominittee (on which your professor sits) declares that a recession has “officially” started. This causes investors to become pessimistic about the future. If the savings supply dees: not change, what will be an effect on interest rate? (1 point) c) Howcould the fear of an upcoming recession affect the households savings supply? (1 point} ' d), Suppose the Government increases its deficit to 6’and the 'Ricardo-Barro effect holds partially — for every dollar of increased government spending households savings go up by 50 cents. Calculate the new equilibrium interest rate and investment level (2 points) e) Suppose now that government sets a maximum interest rate of 1%. What is the effect ‘on the capital‘market? Explain in detail. (2 points). Short Answer 5 The following equations represent supply and demand for the famous “Pacman” video game (in millions) in the US. Qd=17—2P Qs=2+P a) Compute the equilibrium prices and quantity if there is no international trade. (1 point) Suppose now that there is free international trade and that the world price for a “Pacman” game is $4. ' b) Does the US have a comparative advantage in producing “Pacman” games? Answer yes or no and explain why in one brief sentence. (1 point). e) Will the US export or import games? How many of them? (1 point) Suppose that the US government imposes a tariff of 25% on “Pacman” games. (1) Will the US export or import games now? How many?(1 point). , Suppose that a Taiwanese company decides to use dumping to sell its stock of “pacman’ games, that is, they sell one game for $3 (without taking into account the US tariff). e) Will the US export or import games now? How many? (Keep in mind that the US government has imposed the tariff Of 25%)? (1 point) Return to the initial flee trade situation. Suppose now that the US government imposes a quota of 6 million “Pacman” games. D What will be the price equilibrium, the quantity imported and the quantity produced by US firms? (2 points). g) Were consumers better off Without the quota? Why? (Answer in one sentence) (1 point) Economics 201 ‘ YOUR NAME: Fall 2001 YOUR TA; Robert J- Gordon YOUR SECTION DAY: ' Final Exam — Answer Ke - Multiple choice questions, 1.d 11.b*6 ‘ 21.0 31.b 41.d 2.0 12.02 I , 22.b 32.d ‘ 42.a 3.d I 13.3, I 23.b ‘ 33.b - 43.0 4.b 14.3 24.0 34.0 44.a 5.b 15.b . 25.b ~ 35.0‘ 45.0 6.0 16.0 26.a 36.3 46.0 7.b 17.0 I 27.b 37.b 47.d 8.a 18.0 28.0 38.d 9.a 19.b 29.d 39.0 10.0 20.a 30.d 40.b Short Answer 1 1) 1) Ms goes up 9 Agents face themselves with “too much” money 9 They go to the “Bond Market” and try to buy bonds with the extra money they have 9 Since the demand for bonds go up, their price rise 9 If the price of the bond rises then the nominal interest rate falls till we’achieve the new short run equilibrium I 2) (a) In the short run, the contraction in the money supply rises'the nominal interest rate. (b-c) In the long run money demand shifis leftward and we are in the initial nominal interest rate (but with a smaller quantity of money). 3) Since real GDP decreases the money demand shifts leftward and therefore the nominal interest rate is lower. If the Fed wants to maintain te same nominal interest rate it should lower the money supply. In 2001 the inflation rate was 2%, and in 2002 it increases to 4%. - . I) Since the economy is now Opentfotrade we would expect the multiplier to decrease, since part of the increaSe' , the home 2) Consumption Expenditure ' , - economy v GDP didn’t change and 4) ~ AE (a) The multiplier muals: 1/0,.8}. \ ’ LL The effect equals to the mul ©~15/o'.9: (d) 1/0.? 5) in the autonoumos part would “fly” awat fiom Disposable Income. nsnmption. Therefore, since the current real 11 yearwe will expect to see a fall in savings. \ Disposable Income ' ShortAnswer 3 Suppose that Investment Demand is given by I = 7 — R (mln $)~,, Housholds Saving Supply by equation S = 1 + 2R (mln $), and government deficit is equal to 0 (mln S). Treat each question separately: 1. What is the equilibrium interest rate. What is the level of investment? (2 points) R = 2, r v 2. Fear of upcoming recession caused fall in “animal spirits” of investors. If saving supply stay the same, what will be an effect on interest rate? -(1 point) R goes down 3. How fear of upcoming recession can affect housholds saving supply? (1 point) Savings can increase now, beccause expected future income goes down 4. Government increases deficit to 6 and Ricardo-Barre effect holds partially — for every dollar of governmental spending more housholds savings go up by 0.5 dollar. Calculate new equilibrium. (2 points) 5. Suppose now that government savings are given by GS = l + xR. What is the value of x if interest rate is equal to 1? (2 points) Short Answer 4 Treat each question separately . Be sure to sign every graph you are drawing carefully. potential Y GDP 1. Development of new, factor saving technology changes potential GDP of Gondor. Show how economy reaches the new long-run equilibrium. Will economy go throug inflation or deflation? Draw a graph (2 points). potential GDP moves rightwards, AS follows. We have deflation. 2. Gondor produces all of factors and intermediary goods it uses in production. It is also a major exporter of manufactured goods to Rohan, its closest neighbour. Suppose that ‘ Gondorian‘ dollar appreciated significantly against Rohanian yen. What is the new short- run and long-run equilibrium? Draw one graph for each case. (2 points) short-run —— AD goes leftwards, deflation long-run — AS- goes rightwards (wages fall) and we come back to the potential GDP output level with lower prices ‘ ' 3. War with Mordor breaks out. Government of Gondor (in person of His Highness Denethor) initiates plan of spendings in order to build up an army. How will it affect output and prices? Draw a graph. Be sure to distinguish, between direct and mutliplier effect. (2 points) AD goes rightWard,’ output and prices rise 4. Assume now that autonomous consumption for given price level P is given by equation A{p) = 10— 2P. / ' Aggregate expenditure for price for price P is equal to AE(p) = A(p) + 0.75 Y. Derive curve. (2 points) AD(p)=Y(p)=A(p)+0.75Y(p), so Y(p) = 40-8P‘ Short Answer 5 a. P=5 b. no 0. US supply=6. US demand=9. Import=3z (1. New price=5. Import =0 e. Price of Taiwanese game:3.75. US supply 5.75. Us demand: 9.5. Import=3.75 f; P=3. Q produced=5, Q imported=6 _ Short Answer 6, E=2, Q=8r Db’=12-E E’=3 Decrease by 4~millions of dollars Increase supply of Bath by 2., demand for Baht will decrease (Pr—“9999‘s” ...
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201F01F - Northwestern University Economics 201 Department...

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