311F01F - _ Intermediate Macroeconomics 311 Professor...

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Unformatted text preview: _ Intermediate Macroeconomics 311 Professor Gordon Final Examination, Fall 2001 NAME: INSTRUCTIONS: 1. This is a closed book exam. You may use a calculator 2. Write your answers to Part A (multiple-choice) in the space provided on page 2. DO NOT WRITE YOUR ANSWERS ON THE MULTIPLE-CHOICE QUESTIONS. - 3. Write your answers to Part B and Part C in the spaces provided. TIME ALLOCATION POINT ALLOCATION PART A 40 40 PART B 50 50 PART C 30 30 TOTAL 120 120 PART A (40 points) Write your answers to the multiple—choice questions in the space below. WRITE LEGIBLY, USING CAPITAL LETTERS!!! !! 1. __ 11._____ 21._ 31.___ 2. __ I 12._____ 22% 32.— 3. _ 13.____ ' 23.___ 33._ 4. __ 14._ 24.__ 34.______ 5. __ 15._ 25._ 35.______ 6. _ 16.__ 26.___'__._~__ 36.— 7. ____ 17.___ 21+ 37.— 8. _’_ 18.____ 28._ 38._______ 9. I 19. 29. 39*. 10. 20. 30. 40. PART A (40 points) Multiple Choice Questions 1) 2) 3) 4) 5) If a society's rate of time preference increases, as may have occurred in the US. during the 19703, then, ceteris paribus, per capita A) current consumption increases, future consumption decreases and economic growth accelerates in the long run. ' B) current consumption decreases, firture consumption increases and economic growth decelerates in the short run. C) current consumption increases, future consumption decreases and economic grth decelerates in the long run. D) current consumption increases, future consumption decreases and economic growth stabilizes in the long run. If the actual real wage is above the equilibrium real wage rate there will be A) pressure for the actual real wage rate to rise B) pressure for the actual real wage rate to decline C) a tendency for prices to rise and output to fall D) None of the above There is currently a resurgence in Keynesian macroeconomics, based on the assumptions of market and expectations. A) non-clearing, adaptive B) non-clearing, rational C) clearing, adaptive D) clearing, rational In the short—run with fixed wages, the SAS’ curve is positively sloped because A) the marginal product of labor declines, marginal costs rise. B) the marginal product of labor increases, marginal costs rise. C) marginal cost equals price and marginal costs decline. D) None of the above. The Economist’s “winner” was the Dutch model. Which of the following two pairs best summarizes the strengths and weaknesses of the Dutch experience in comparison with large European countries like France and Germany A) Lower unemployment, lower inflation; shortage of workers, workers on disability B) Lower unemployment, shortage of workers; higher inflation, higher taxes C) Lower unemployment, lower taxes; shortage of workers, workers on disability D) Lower inflation, lower taxes; uncompetitive firms, poor incentives to work E) Lower inflation, strong incentives to work; uncompetitive first, higher taxes 6) 7) 8) 9). What key assumption changed the quantity equation into the quantity theory of money? A) wage rates were flexible B) only cash, currency, and demand deposits were considered money C) the velocity of money was relatively stable D) the money supply grew at a steady rate over the long run In the U.S., the long-run average growth rate of velocity in recent decades has been A) about 2 percent per‘year. B) about 1 percent per year. C) Virtually zero. D) about -1 percent per year. E) about -2 percent per year. The Keynesian revolution was based on the assumption of price and wage and thus the need for an activist policy. A) flexibility, monetary L B) flexibility, fiscal C). stickiness, monetary D) stickiness, fiscal If the economy is growing 3% a year and the government increases the ratio of interest on the national debt to GDP, we may conclude that A) the output ratio will fall. B) additional interest payments exceed 3% of GDP. C) tax revenues will fall. D) the Laffer curve will be inoperable. 10) The "new classica " economics took advantage of the disarray and partial eclipse of Keynesian economics to reestablish macro model—building based on the assumption of price and market A) flexibility, clearing B) flexibility, non-clearing C) stickiness, clearing D) stickiness, non-clearing 1 1) Which combination of virtues and defects is selected by the Economist to describe the American economic model? Virtues include and ; defects include and . A) Saving rate, infi‘astructure; labor markets, secondary education B) Labor markets, minimum wage; saving rate, secondary education C) Labor markets, tax rates; capital markets, saving rate D) Infrastructure, tax rates; saving rate, secondary education E)“ Saving rate, tax rates; labor markets, secondary education 12) In the late 19505 and early‘ 1960s, postwar US. economic performance led to the - formulation of and belief in a ‘ A). vertical Phillips curve in the short and long ‘ B) vertical Phillips curve in the long run. ' C) horizontal Phillips curve- in the short and long runs. D) downward-sloping Phillips, curve in the short and long runs. _ is a burden in that it yields no __ 13) Government debt Which pays for benefits. A) hospitals, future B) ammunition for military target practiCe, current C) social security benefits, future D) public universities, current ‘ Figure 1 Price Level (P) YN Real GDP (Y) 14) In Figure l, a fiscal expansion from point A with no initial change in the nominal wage causes a movement to point. A) B. B) C. C) D. D) E. E) F. 15) As it is currently calculated,’ GordOn thinks that national saving is A) overstated. B) understated. C) accurately measured. D) so ambiguous that it is impossible to say in what direction its inaccuracies lie. 16) In Figure 1, at point C, the real wage is its equilibrium value, leading to changes in the nominal wage that A) above, shifi ADl back to ADO .B) below, shifi ADI further to the right. C) below, shifl SASO upward. D) above, shift SASO downward- 17) Two countries, F lexia and Status, have a labor force of 1 million, 40,000 unemployed at any one time, and an unemployment rate of 4%. Which of the following are true: in country the total number of people experiencing unemployment in a year is and the duration of unemployment is months. A) Flexia; 160,000; 3 I B) Status; 40,000; 3 C) Flexia; 160,000; 12 D) Status; 160,000; 12 E) A and D 18) In Figure 1, from initial point A, suppose ADO shifts to ADl. Under the assumptions of classical macroeconomics, we would A) stay at point A. B) almost immediately move to and then stay at point B. C) almost immediately move to and then stay at point C. D) almost immediately move to and then stay at point B. 19) The four-fold increase in the natural rate of employment in Europe is the result of "specific impediments in the operation of the economy." This is the A) structuralist argument which suggests that the natural rate follows the actual rate. B) structuralist argument which suggests that high marginal tax rates and unemployment benefits are responsible. C) hysteresis argument which suggests that high marginal tax rates and unemployment benefits are responsible. D) hysteresis argument which suggests that the natural rate follows the actual rate. 20) If technological change is "labor augmenting" then A) output per worker declines, output per unit of capital increases. B) "effective labor inpu " increases, output per unit of capital declines. C) output per worker increases, output per unit of capital is constant. D) “Both output per worker and output per unit of capital change. 21) Elimination of the corporate income tax would government saving and probably private business saving. A) increase, increase B) increase, decrease C) decrease, increase D) decrease, decrease 22) If technological change is "neutral" then A) output per worker declines, output per unit of capital increases. B) "effective labor input" increases, output per unit of capital declines. C) output per worker increases, output per unit of capital is constant. D) Both output per worker and output per unit of capital change. 23) Discussing the legal basis of economic growth, the Wall Street J oumal links which legal system to which country having which characteristics? A) Common law; United Kingdom; more government regulation B) Civil law; United Kingdon; more government regulation C) Common law; France; more protection of poropeity rights D) Civil law; France; more protection of property rights B) Common law; United Kingdom, more protection of property rights 24) The new growth theory that arose in the late 19803 has been described as because it treats technological change as A) exogenous, random unpredictable shocks B) exogenous, generated by market incentives C) endogenous, random unpredictable shocks D) endogenous, generated by market incentives 25) The work of Robert Lucas and Thomas Sargent the existence of a downward-sloping Phillips curve in the A) first proposed, short run B) first proposed, short and long runs ' C) cast fiirther doubt on, long but not short run D) caSt further doubt on, short and long runs 26) The "nonconvergence" problem with the Solow growth model is that A) a higher return to capital in poor countries should essentially cause all nations to have roughly the same standard of living, yet they clearly do not. B) if a disturbance [dislodges an economy from the steady-state point, it continues moving further from that point indefinitely. C) technological change is assumed to just "drop from the sky." D) a rise in the rate of national saving does not raise the growth rate of real GDP per person. 27) A person who purchased a house with a small down payment just before an unanticipated inflation hits has from the decision to be in debt, and has by having an asset in the form of a house. A) benefited, benefited again B) benefited, been hurt C) been hurt, benefited ‘ D) been hurt, been hurt again 28) The depth of the 1981-1982 recession caused the Fed to abandon its experiment in targeting and move to what now appears to be rule. A) money growth, an interest rate B) money growth, a real GDP growth C) money growth, an unemployment rate D) interest rates, a high-powered money growth E) interest rates, a nominal GDP grth growth 29) According to the Economist, the prime culprits in the depth and length of the Great 30) 31)- 32) Depression were A) The banks and the Fed B) Herbert Hoover C) F. D. Roosevelt and his “New Deal” D) Hitler’s rise to power in Germany E) None of the above For countries with high inflation rates, joining the European Monetary System meant A) higher unemployment until they could lower their inflation rates sufficiently. B) facing periodic upward adjustments in their exchange rate with the deutsche mark. C) having to pursue loose monetary policy until they lowered the unemployment rate to the European average. D)« abandoning the fixed exchange rates they had preserved since the 19605. The rise in the US. debt-GDP ratio after 1980 must be blamed primarily on a ratio of to GDP. A) rising, government expenditures B) rising, tax revenues C) falling, government expenditures D) falling, tax revenues According to the Economist, the “latest fad” in emerging economies is the combination of A) Fixed exchange rates, tight monetary policy B) . Fixed exchange rates, inflation targeting C) Flexible exchange rates, tight monetary policy D) Flexible exchange rates, inflation targeting E) None of the above 33) 34) 35) 36) 37) The personal saving rate in the US. after the tax cuts of the early 19805, evidence the Barro-Ricardo Equivalence Theory. A) rose, supporting B) rose, opposing C) fell, supporting D) fell, opposing The Economist notes that some high-saVing countries grew slowly in the 19905 while some low-saving countries grew rapidly. Countries and are among the high—saving countries it discusses, while countries and are among the lower-saving countries. A) Brazil; Thailand; South Korea; Malaysia B) Malaysia; Thailand; Brazil; U.S. C) South Korea; Malaysia;‘Japan; U.S~. D) U.S.; Malaysia; Brazil; Japan E)- None of the above Direct investment in the stock market by the Social Security trust fund A) does not require that new money be brought into the system. B) would be more cost—effective than creating private accounts for each person in the Social Security system. C) would cause the government indirectly to own substantial parts of American companies. D) All of the above. Former Treasury Secretary Lawrence Summers advocated the following to cure the US. trade deficit A) No cure needed B) Demand expansion in foreign countries C) Demand expansion in US. D) Reduce demand for imports by tighter monetary policy E) None of the above In recent years new automobile factories have opened in California and Ohio and closed in Detroit where the unemployment of automobile workers has increased. This unemployment could be decreased if A) "moving costs" from Detroit to California and Ohio were reduced. B) information about the new jobs was made available to the unemployed workers at reduced cost. C) workers with the appropriate skills were relatively scarce in Ohio and California. D) None of the above 38:): The role ofoil prices in recent. years Waste push up, inflation in and hold down inflation M2000; 1,998,, ' _ BS) 1998'; 20001- C) 2000; 2001‘ D)- A;de _ E) A’andB 39,) '40)- ‘ approximately I Itis estimated-that alfipercent in'the US. Would bear a shoe-leather cost of ' percent! of’GDP. ‘ ‘ A)1572 : B) 1 C} 5‘25: , _ , I, has a large positivenet international asset position; r ya irargenega‘tive intematiOnaI' asset position ‘ A}: Unitedf‘ffSISt-ates;‘United'angdom , ' _, B): Japan; ' ’ r C) Japan has Japan;‘United-Kingdbn ' ‘ , Nope oftheabeve PART B (50 points) QUESTION 1 (20 points) Shakyland's economy is described by the following equations: (1) Yt=KthtH° (2) It=Kt+r(1-d)Kt St=SYt where K, N and Y are capital, labor and output respectively. Equation (1) is the production function. Equation (2) states that investment is equal to the change in capital, gross of depreciation. Equation (3) describes the household's saving behavior: each period they save a constant fraction of their income. ' Assume that capital depreciate at a rate of 10% per year, the saving rate is equal to 25%, and the elasticity of output with respect to the labor input is 0.7. There is no population growth. (a) Derive» formulas for the steady state values of output per capita, capital per worker and consumption per capita. Compute, substituting the values above in the formulas you derived, output per capita, capital per worker and consumption per capita. (8 points) (b) Display formulas for the wage rate the interest rate. Evaluate them in steady state. (2 points) ' ' ' (c), Suppose that Shakyland is ma Steady state eqfllibrium, when an earthquake occurs, destroying half‘of the physical capitat, 2t}% of the population. What iscthe‘ impact effect on thelwage meme the interest rate?“ ' What happens ta the interest rate and-‘mitfieEWage rateflas cOnverges/ back to the steady state? Illistrate yeuxiafiewer'Wit, apgroyriate gzaph. (:10 points); QUESTION 2 (10 points) Consider an economy characterized by the following: (SP) p1 = pret+g Ii +2t=pi+g i +2: (LP) i=0 (96> = + '- pt (CY) 2,. = pl. (13} Pct = pet-1. +_j(p:-1 - pen) Assume that: ‘ t I 1%, more inflation corresponds to 10% extra‘log-output ratio; I expected inflation is revised, by incorporating 75% of the error committed in forecaSting inflation in the previous period, (a) Assume that the ecOnomy is in a lOng—run equilibrium at t = 0’, 560 =po=p°o=10, f0,:0. In period/Ii there is a Supply shock, 21 =1. Assuming an accommodating policy, and " V the efiuations above, cornlete the followin table (5 points): QUESTION 3 (20 points) Between interviews with CNN, the economic minister of the Northern Alliance explained the economic situation facing the part of Afghanistan occupied by his government. Here are the facts about the current period: Real Government Spending on Goods and Services ‘110 (excluding interest payments on the national debt) Real Taxes Net of Transfers, 100 Real National Debt at start of year 1,000 Real High powered money at start of year 600 Real Interest—bearing bonds at start of year ' r 400 Real Sales of Bonds this year 10 Nominal Interest rate 5 % Inflation rate ' 5 % Real GDP" growth r t 3 % (a) What is the basic government deficit of this economy? (2 pointS) (b) What is the total government deficit of this economy? (2 points) (c) What is the real increase in high powered money in the current period? (4 points) (d) What is government seignorage in the current period? (4 points) (e) What is the inflation tax in the current period? (3 points) (0 Is the existing deficit you calculated in part (b) sustainable, that is, dies it imply a stable or declining ration of the total national debt to GDP? (5 points) PART (30‘ points) - NAME: ESSay'questims (you must write your aHSWGrS pen): 1. There is, an active political anti, ecoxmmic dejbaifé about the future of the Sooiali Sacuritysysitfiemg I ‘ , , _ '_ * ‘ ,V _ , - _ _ , *&,):What is the cause of the anticipatEdififiure crisis? When is it‘expected to occur? h-JWhat dates the date of -thcf‘_"anti¢i>pated‘ firisis cfepencl' on, and; what can governmenthI-icy delta put'ityoff ' ' ‘ ' y _ ‘ y arathe pros anti cofisjq ‘_ _, findiViduaIs set up individual‘ retirement aeo‘ounts‘téiinvestth‘e Stack ‘ 'L L - ’ r ' 7 ' ggered thedevelépment _, With'the th¢0ry. ...
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This note was uploaded on 09/04/2010 for the course ECON 311 taught by Professor Gordon during the Spring '08 term at Northwestern.

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311F01F - _ Intermediate Macroeconomics 311 Professor...

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