201ffall99 - Economics B01 - Robert J. Gordon Final Exam...

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Unformatted text preview: Economics B01 - Robert J. Gordon Final Exam December 8th 1999. Instructions I) You have 2 hours to complete the exam. You will get 4 bOnus points for handing it in early, you will be penalized 5 points for handing it in late. H) You should have 2 lots of paper, the question sheet (this one) and the answer sheet. III) PLACE ALL ANSWERS & WORKING ON THE ANSWER SHEET OR IT WON’T BE GRADE] IV) There are 3 sections, two essay questions! (30 points), 45 multiple choice questions (4 points), and five short answer questions (45 points) for a total of 120 points. Allocate minute per point. V) READ THE QUESTIONS CAREFULLY. Essay Questions 1) The economy of Argentina is experiencing an? unemployment rate Of 14%. This is thought to be way above the natural rate of unemployment, and therefore Argentina’s GDP is below its potential level. You've been hired ‘ as a consultant to the government of Argentina to try to reverse this situation. a) Provide one fiscal policy option open to the government of Argentina to return the unemployment rate to its natural level. Explain in detail how it would work. You may use a graph if you wish. - (10 points) ._ b)'Provide one monetary policy Option open to the government of Argentina to return the unemployment rate to its natural level. EXplain in I \ detail how it would work. You may use a graph'if you wish. (10 points) I - I 2) Define the concept of automatic stabilizers. Give at least two examples, and explain how they operate. (10 points) ‘1); A) B) C) D l l l 1 Price level lGDP dellalor, l992= 100) 2) In the above figure, if A) B) C) D) 3) an increase in the price level. an increase in technology. an increase in the quantity of capital. an increase in the money wage rate. - Which of the following-changes would NOT create ashift in the‘short-nm aggregate supply Curve? ) my“ HIKWS 30 20 lo 00 *0 O L, O 6.6 6.8 Real G 7.0 7.2 7.4 7.6 DP (trillions of 1992 dollars) the economy is operating at point a, an _ will move the economy to __., increase in real wealth caused by a fall in the price level; point b. increase in real wealth caused by a fall in the price level; point c. increase in expected future income; point c. increase in expected future income; point d. Suppose an economy begins in long-run equilibrium with the aggregate demand, short-run aggregate supply and Ion: run aggregate supply curves all intersecting at a single point. Now suppose there is a permanent decrease in aggregate demand. We can say that the A) price level rises by more in the short-run than in the long-run B) price level rises by more in the long-run thaniin thejs‘hort-run C) price level falls by more in the short-run than in the‘long4run D) price level falls by more in the long-run than in the short-run 4) A) B) C) D) 5) A) B) C) D) 11' WWW” WVL‘Efl/hMV/VWfiQEfiPfiéWifii J3 ‘Kt‘ 3,". 3. ' 1 2 (billions of wk ,;4‘:»m<¥'~' 4.2 The table above gives aggregate demand-aggregate supply schedules. However, as you can see, you are not told which column represents aggregate demand, which represents short-run aggregate supply, and which represents long-run aggregate supply. Even so, based on your knowledge of these three concepts, you can tell that at the short-run equilibrium r ' ' ’ ‘ ' ’ the unemployment rate is below the natural rate of unemployment the unemployment rate is above the natural rate of unemployment money wages will go up in long-run ‘ L ' ' the economy is at full employment .. me“ i ww- 4 Suppose the economy is experiencing a re unemployment, and the price level? ‘ Money wages fall, unemployment rises, and thexpriLCe level falls. ‘ Money wages fall, unemployment falls, and the‘ price level falls. Money wages rise, unemployment rises, and the price level rises. r Money wages rise, unemployment falls,” and the price level rises. cessionary gap. In the long run, what will happen to money wage rates, A) An increase in the amount of equipment and machinery ' B) An improvement in the quality of equipment and machinery C) A change in the level of employment ' D) An improvement in the educational attainment of the workforce ‘6) Which of the followingcorrespondsztoa movementalog rather than a 0fthe'production function: ‘ 7) Suppose that when the quantity of labor increases from 50 to 75 million hours, real GDP increases from $4 to $5 -' billion. What is the marginal product of labor? , . r J , ' ‘ A) 25 million hours ‘ B) $1 billion C) $25 per hour D) $40 per hour 8) If the labor market is in equilibrium and then the labor supply curve shifts rightward, 'A) V there will be a shortage of labor at the original equilibrium wage. ' " B) there will be a surplus of labor at the original equilibrium wage. C) the equilibrium wage rate will rise. I ‘ D) there will be a surplus of jobs at the new equilibrium. 2 E 9 LS Q 8: 9 o o a :2 T: a o M [D Labor (hours per year) , ’ Labor (hours per year) _ _ Labor market - I ~ I I Production function WWWMVMWWWW “5“???in :m’flxé‘i’iflé‘fififiw ‘ ‘ ' WWW"; v53”)? ‘:$W%3935515 t 9) Suppose'the economy is at point a in both of the above graphs. If the population increases A) the labor supply curve shifts rightward and the produCtioanunction shifts upw_ard._ __ L ' B) the labor demand curve shifts rightward and the production) function shiftsupward. _ - C) the labor supply curve shifts rightward and the economy moves rightward along the production function. D) the labor supply curve shifts rightward and the economy moves leftw;ird along the produCtion function. ‘ 10) You lend a friend $100 and he pays you back the $100 plus 5 percent next year, for a total of $105. Your purchasing ' power is , ‘ A) clearly higher because $105 is greater than $100. ' ‘ B) higher only if the inflation rate is less than 5 percent. 0) higher only if the inflation rate is more than 5,.percent.__,__, : D) unambiguously lower. ' 11) Suppose the current real interest rate is 4 percent the equilibrium real interest rate is 3 percent. Then A) prices rise and inflation occurs. ‘ B) there is a surplus of saving. C) there is a shortage of saving. I _ V , p. , I. _ y D) ’ there is neither a shortage nor surplus of saving. _ [V 12) In the US. during recentyears, national Saving (including government) has been less than nationalinvestment. As a result, the US. has experienced _ _ , _ _ A) positive net exports and positive international borrowing. _ B) positive net exports and negative international borrowing. L C) negative net exports and positive international borrowing. D) negative net exports and negative international borr0wing. 13) Suppose that the labor market is currently in equilibrium at a wage of $2.60 and labor supply of 1150. Suppose that the subsistence wage is $2.20. According to the classical theory of growth, which of the following describes subsequent events in the economy? '_ g o ‘ r , ._ . . , A) The economy is in equilibrium with labor supply equal to labor demand, sothe economy stays at this real wage B) Population will decline because labor supply is above the subSistence level of labor supply, C) Population will grow because the current real wage is above the subsistence wage D) Real wages will continue to grow above the subsistence level. s This table isused. for questions 14 I d 15. H J w 11000.: - .. 14) In the above table, C is consumption expenditure. I .is investment,?G isgovernment. purchases, X is exports, and M is ' imports. All entries are in dollars. What is the marginal propensity to consume? ' A) 0.20 B) 0.25 C) 0.75 D) 0.80 15) - In the above table, C is consumption, 1 is investment, Grisgovernment purchases, X is exports, and M , is imports. All entries are in dollars. If inveStment were to increase by $26 to a level of $51 then equilibrium expenditure will A) increase by $26. B) increase by $52. C) increase by $100. D) increase by $104. 16) The larger the MP0, , _ a _, A) the larger the value of the multiplier. B) the smaller the value of the multiplier. , C) less likely that the multiplier will be affected. a _. - _ _ , D) the more likely that the multiplier will be inconsequential. 18) Which of the following relationships is correct? A) actual budget deficit =ystructural deficit _-. cyclical deficit ; _, , B) ‘ cyclical surplus = actual budget deficit - cyclical deficit C) structural deficit = actual budget deficit - cyclical deficit D) cyclical deficit = actual budget deficit + structural deficit n, 1 fix; r. we we}: A m awe m is"? 16: =-8 IQ is “’0 2‘— 8 8;?) 92 57 m2 6 <E k o 2 4 6 8 10 L 12 Real GDP (trillions of l992 dollars) 17) The value of the multiplier in the economy illustrated in the figure above is - A) 2.0. B) 3.33. C) 4.0. D) 8.0. _. * (billion) r . . iorateincometaXesQ , _ _, Netbxortsfiifl" .r x “ . Government debt _, _ _ ~i’ ,VPur‘chases ofgoodsand- " ‘ “services: " ‘ * « "19)? Consider the above tablegTheflata s "ow the governme " A) budget deficit of $275 ' i 5‘? ~ . B) budget deficit of $300 ' C) budget deficit of $375 D) budget deficit of $1125 1 $40,r,what-h:ap‘pens to equilibrium'expenditure in the while rices are constant? V ‘l _ B) decrease $40 _ C) decrease $160 D) decrease $200 20) Suppose a country has no international trade, no income taxes, aMPC of 0.8. If lump-sum taxes are increased by 21) Traditionally fiscal policy has referred to attempts by government to influence aggregate demand, but in the 1980s a group of economists were convinced that fiscal policy could also influence aggregate supply. These‘“Supply-siders” believe that _ r r g " 'L ' i - ' ‘ H A) tax cuts would increase GDP by shifting the labor supply curve rightward! B) tax cuts would increase GDP by shifting the capital supply curve rightward. " ‘ C) Both of the above are correct. * "i I ‘ ' ‘ D) None of the above are correct. 22) When you toss your spare quarters into a jar so you can use them: _ terat’ the laundry mat, you areyuSing money in A) medium of exchange “ B) , unit of account C) store of value D) financial innovation ' C'Wwiflmfimii‘ifisfluhwgzrwiafixfif‘a‘.mw¥53¥?v?*M’Ivfimfii‘tm‘ifll‘wx’mhmfl mlesm’lmwtmfl’ - ' Amount ‘ (billions of dollars) 7 9 , _ Money market , mutual fund de osits ‘ ' 4 400 Component 1 237 _ ' 1 589 * Checkin deosits ~ 23) Based on the data in the table above, what is the value of M1? ’ I A) $2,950 billion I ,r - r- ' t t ~ 3 "1" B) $1,361 billion _ C) $752 billion D), $609 billion '5- .24») Wh'ichzofthe following balance‘sheetzitems is-a'liabili-ty of a commercial bank?‘ ‘ ’ A) the bank’s holdings of US government bonds h B) the bank’s holdings of Brazilian government bonds C) the public’s deposits with the bank , D) reserves of the bank at the Federal Reserve 25) Which of the following changes would reduce the value of the deposit multiplier? A) The public decides to hold less currency and‘more deposits. " ‘ ‘ 1 ' B) Banks decide to hold lower excess reserves. C) The public decides to hold more, currency and feWer deposits; ' ‘ D) The required‘reserve rationfalls. ~ ‘ ‘ ‘ ‘ 'r it ‘ " ‘ " 26) If nominal GDP = $8 trillion and the money supply is $2 trillion, what is velocity? A) 16 I _ B) 8 C) 4 , D) There is not enough information to answer the question. 27) Which of the following is M a monetary policy tool of the Federal Reserve? _ _ r A) changes in required reserves B) discount rate changes C) deposit insurance D) open market operations 28) Consider the Fed’s balance sheet. A) Federal Reserve notes are an asset of the Federal Reserve. B) Gold is a liability of the Federal Reserve. ‘ J r ‘ r C) Foreign exchange is an asset of the Federal Reserve. D) Government bonds are a liability of the Federal Reserve. 29) Which of the following would occur if the Fed buys $10 million of securities from the University National Bank? A) The Fed will credit the University National Bank’s deposit account with the Fed by $10 million. B) The University National Bank has $10 million more in securities. C) The Fed will debit the University National Bank’s deposit account with the Fed by $10 million. ' . D) The University National Bank has $10 million less in excess reserves. ' V " ‘ ‘ i ' " * 30) The money multiplier determines how much A) real GDP will be expanded given an increase in the monetary base. ‘ B) the monetary base will be expanded given a change in the quantity of money. C) the quantity of money will be expanded given a change in the monetary base. D) money demand will expand given a change in the quantity of money. 31) Suppose the money market has an equilibrium interest rate of 10 percent. If the actual interest were 8 percent, which of the following would bring the money market back to equilibrium? I A) People buy bonds, the price of bonds rises and the interest rate rises. B) People buy bonds, the price of bonds falls and the interest rate rises. C) ' People sell bonds, the price of bonds rises and the interest rate rises. D) People sell bonds, the price of bonds falls and the interest rate rises. 32) The term “stagflation” refers to the situation when I A) the aggregate supply curve shifts leftward, prices increase and real GDP decreases. ‘ B) real GDP and the price level both rise because of an increase in aggregatedemand. C) prices become stagnant and do not increase or decrease. ID) the aggregate supply and demand curves shift in opposite directions. 33) Along the long-run Phillips curve, A) ‘ actual inflation is greater than expected inflation- B) actual inflation is equal to expected inflation C) actual inflation is less than expected inflation D) None of the above answers is correct. 34) Poland has a comparative advantage in, vodka while-Argentina: hasazcomparative advantage, in, beef. Withfree trad« the price ofvodkawill ‘- w- ~ ‘ ' '~ -‘ * A) fall in both Poland and Argentina. B) rise in both Poland and Argentina. C) fall in Poland and rise in Argentina. D) rise in Poland and fall in Argentina. 35) The United States both exports and imports cars. This occurs because A) of voluntary export restraints. ~ , r - v B) the United States has both an absolute advantage and absolute disadvantage in the "production of cars. C) a diVersity of tastes allows for other countries to demand U.S. cars while US. consumers demand foreign cars. a D) US. car exports are subsidized by the government. Japanese export supply of cars 30 plus tariff 25 Japanese export r ................................ .. supply of ca” 20 ..................... .. I U! Price (thousands of dollars per car) 10 U.S. import demand for r ‘ cars 0 l 2 3 4 5 6 Quantity (millions of cars per year) 36) The above figure shows the effect of a $10,000 per car tarifi' imposed by the United States. ‘How much tax revenue ‘ does the tariffgenerate? : ». ,_ . '. . ~ a - B) $20 billion. _ r _ . C) $30‘billion. r . . . . , ‘ , , ,. v, , . 7 l . , . D) $40 billion. 37) The greater the demand for US. exports, the r A) smaller is the demand for US. dollars. B) larger is the demand for US. dollars. C) larger is the current account deficit. _ D) larger is the demand for non-US. currencies. » r amt/as c: 4', mm“; . .. _ _ ,thm .mmwiflwww, Exchange rate (yen per dollar) Quantity (trillions cl dollars per day} 4 - ' v r _ ' '_ .- 38) In the figure above, the shift in the demand curve for US. dollars from Do to DI could occurswhen A) the expected future exchange rate decreases." ~ “ ' 7 ' “ ‘ ' ' ' ‘ ‘ ' i ‘ B) the US. interest rate rises. C) people expect that the dollar will depreciate. D) foreign interest rates increase. ’ 39) Suppose the exchange rate between the Argentinean peso (ARP) and the Israeli Shekel (ILS) is 1 ARP 4—- 4 ILS. A goat sells for 20ARP in Buenos Aires and 60 ILS in Tel Aviv. ' _ -‘ ' ' ‘ " r ' ' i A) Purchasing power parity does not prevail with these prices. " ~ ' B) The Argentinean peso would be expected to depreciate. C) The Israeli Shekel would be expected to appreciate. D) All of the above are correct. F 40) According to Krugman, reasons to be concerned about the tradedeficit include: p A) destroys jobs _ ' ‘ , ‘ ’ ‘ V l _ B) burden'of paying interest to foreign investors C) might lead to political pressure for protectionism _ D) A and B -_ ' E): BandC * ' 41) In minimizing the importance of the budget deficit, the "View from the lefi" stresses A) people will boost private saving to offset the deficit, so national {Saving is not affected B) inflation causes an overstatement of the real value of L'gov'e‘rnm‘ent interest payments, y C) the deficit includes not only government current expenditures but capital" expenditures that create benefits in the ‘ ‘5- “itfia‘kil-zhr =. ~«v -‘ ‘ ' ' D) A and C E) B and C 42) The two main reasons for a low rate of national saving in the late 19905 were: I A) low foreign saving and low household saving ' " B) low corporate saving and low household saving C) low foreign saving and low corporate saving , _ D) low government saving and low corporate saving _ E) low government saving and low heusehold saving ’~ 43) Milton Friedman’s policy rule'fas rdeSCfibed‘ by ngman‘recom'm-ends ' l A) constant interest rates ' ‘ ' B) constant unemployment rate at the NAIRU I I C) constant rate of‘growth in the money‘supply ‘ L f‘ “ ' l ' it ' D) constant rate of inflation “ " ' 7 "i? ‘ “i ‘ ’ ' ‘ E) B and C I 44) According to Krugman, a 30 percent decline in the dollar causes A) U. S. real wages to decline by 30 percent B) U. S. real wages to decline by 15 percent C) U. S. real wages to decline by 5 percent D) U. S. real wages to decline by 2 percent _ E) U. S. real wages to remain unaffected 45) The economist A W Phillips, who discovered the relationship between unemployment and inflation,rcame from a - country closest to: ’ , .. , . _ r -. , A) Argentina B) Australia __ C)‘Israel" ' ' D) Poland SHORT ANSWER PROBLEMS Remember: NO working - NO partial credit with NO exceptions Question 1 (8 points) Place the following events in which the Fed performs an open market operation (0M0) in chronological order. Note that there maybe zero, one or some events that DO NOT happen in the normal course of OMOs. Placing incorrect events in the list will be penalized. A) The money supply curve has shifted'fully to __the,righ_t. _ I B) Commercial bank depositsand public currency holdings increase. C) The money demand curve has‘s'hifted fully to the left. _ ‘ ' D) New York'Fed buys securities from Commercial banks. E) An excess supply of money forces the interest rate down. F) Commercial bank reserves, excess reserves and the monetary base increase. .6) Federal Open Market Committee (FOMC) votes to implement an 0M0. H) Commercial banks increase their lending. , _ Question 2 (8 points! This problem is meant to illustrate the point made in the text that higher bOnd-prices mean lower interest rates. ' a , ‘ US treasury bills have a fixed face value and pay interest by selling ‘at a discount’ (i.e. below face value). For example if a 1-year bill with a $1000 face value sells today for $950 its owner can get $1000 in a year, (and hence earn $1000 - $950 ’=- $50? of interest. The ‘ interest rate on this bill is therefore $50 / $950 = 5.26%. ‘ » . A) (2 points) Suppose the price of the 1-year bill with $1000 face value is $940. What the interest rate on-thatrbill? - ~ B) (2 points) Now suppose the price of the bill rises to $960; What is the new interest rate? '- r ' Let P denote the price of the bill (hence the interest earned is $1000 — P) and let r denote the interest rate on the bill. C) (2 points) What is the general formula relating P and r? I L - _ t r v D) (2 points) Using the formula you have just derived, explain why a higher price means a lower interest rate. Question 3 (10 points) Consider the following economy: 0 consumption function: C = 150 + 0.75* YD 0 investment demand: I = 300 + 0.2 * Y - 50 * r , where YD denotes disposable income, Y is GDP, and r, the interest rate, is measured in percentage points (that is, if the interest rate is 4%, then r = 4). Taxes are 20% of income. _ ' - exports: X = 300 0 import function: ' M = 50 + 0.2 * Y 0 government purchases G = 800 The price level is fixed and the central bank uses its monetary policy to keep the interest rate at a fixed level r = 8. J A) (4 points) What is the equilibrium level of income? B) (1 point) Is there a budget deficit or budget surplus? What is its level? C) (1 point) Is there a trade deficit or trade surplus? What is the amount of it? Suppose now that the currency appreciates, so that, as a result, autonomous exports and autonomous imports both change by 50 (you have to work out the direction of the change on your own). I D) (4 points) What is the new equilibrium level of GDP? Question 4 (8 points) " On J anuary 1st 1998 Kuba closes his Polish sausage factory in South Chicago. After selling his business he has $10 000 to deposit in the bank (this amount is not taxed). The government taxes Kuba at a rate of 30 percent of his income. In 1998 the interest rate on bank deposits is 10 percent, while the inflation rate is 5 percent. A typical basket of goods costs $1 on January 1st 1998. A) (1 point) How many baskets of the good could Kuba buy on January 1st 1998 (with his $10 000)? B) (1 point) How much interest income does Kuba earn before tax in 1998? C) (\1 point) How much interest income does Kuba earn after tax in 1998? D) (1 point) How many baskets of the good could Kuba. buy on December Blst 1998 (with his $10 000 plus after-tax income)? (Hint: remember the price of a basket of goods has increased) Consider instead the slightly different scenario. On January lst 1998, Kuba deposits $10 000, but now the interest rate on bank deposits is 15 percent, while the inflation rate in 1998 is 10 percent (so the real interest rate is the same as the first case). The cost of the typical basket of goods in the economy on January 1st 1998 is still $1. ' E) (1 point) How much interest income does Kuba earn before tax in 1998? F) (1 point) How much interest income does Kuba earn after tax in 1998? G) (1 point) How many baskets of the good could Kuba buy on December 31st 1998? (Hint: remember the price of a basket of goods has increased) H) (1 point) Explain in words why Kuba can purchase fewer goods on the 31st of December 1998 in the second scenario, even though he still faces a real interest rate of 5 percent? Question 5 (11 points! * Consider the following MULTIPLE BANKS system. There are 3 banks in Chicago, the Australian-American Bank of Commerce (Bank A), the Brazilian Gonna Be Bust soon Bank (Bank B), and the China Credit Bank (Bank C). The required reserve ratio is 0.1, Banks B and C always hold the minimum reserves required by law, while the cautious Australian-American Bank always has a reserve ratio of 0.2. Securities are US Treasury bills (kept by Bank A). Reserves consist of cash and deposits at the Fed (a bank can exchange cash for deposits at the Fed on a 1 to 1 basis at anytime). Here are the initial balance sheets of the 3 banks. Australian American Bank Brazilian Bust Bank China Credit Bank Securities $1500 Deposits $10 000 Reserves $100 Deposits $1000 Reserves $500 Deposits $5000 Reserves $2000 Loans $900 Loans $4 500 Loans $6 500 ALL loans made by Bank A, are made in cash, of which 50 percent is kept as currency, the other 50 percent is deposited at Bank B. ALL loans made by Bank B, are made in cash, of which 50 percent is kept as currency, the other 50 percent is deposited at Bank C. ALL loans made by Bank C, are made in cash, which is ALL held as currency. A wealthy Argentinean student arrives in Chicago and deposits his (parents’) life savings of $10 000 in cash in the well- respected Australian—American Bank. A) (1 point) Draw up the balance sheet of Bank A, immediately after this deposit (i.e. before any subsequent balance sheet adjustments have taken place) B) (1 point) Draw up the balance sheet of Bank A, after Bank A adjusts the level of its loans to desired level. C) (2 points) Draw up the balance sheets of Banks B and C, after they make all possible loans. In the initial situation (described by the balance sheets above) suppose that Fed performs an open market operation (0M0) during which it purchases US. Treasury bills worth $1000 from the Australian-American Bank of Commerce. D) (1 point) Draw up the new balance sheet of Bank A, immediately after OMO (i.e. before any subsequent balance sheet adjustments have taken place). E) (1 point) Draw up the balance sheet of Bank A, after Bank A makes all desirable adjustments. F) (2 points) Draw up the balance sheets of Banks B and C, after they make all possible loans. G) (3 points) By how much has the money supply changed as a result of the 0M0? (Hint: remember that money is defined as deposits, plus currency in circulation — thus reserves of commercial banks are NOT monev) ...
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This note was uploaded on 09/04/2010 for the course ECON 201 taught by Professor Witte during the Spring '08 term at Northwestern.

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201ffall99 - Economics B01 - Robert J. Gordon Final Exam...

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