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Unformatted text preview: Intermedlate Macroeconomlcs 311 (Professor Gordon)
MldTerm Examlnatlon Fall, 2001 YOUR NAME: _ I .,,_  . TA: INSTRUCTIQNS} 1. The exam is worth my pom
40pts for the multiple choree , , 2. Write your answers to Part A (the muItIple choice section) in the blanks on page 1.
YOU WILL NOT GET CREDIT FOR CIRCLED ANSWERS IN THE MULTIPLE
CHOICE SECTION ' , 3. Place all of your answers far, part B In the spaces provided I I total 60 pts for ‘the'two analytical questions, and: PART A Answer multiple choice questlons in the Space provided below.
Write clearly, USING CAPITAL LETTERS 1. B .61.,_C. 11_D;___ ' 16.;1)’: 2. _B_,_ 7, *A_ _G’12L,_A_ 174.11);
3._B___ 8.91); ‘ 131 _D___ ’18._A__,
4. ’A___ 9,. _D____ 14%; +C'—= 19.113,”
5. B ‘10. A 715. E I 201C __.... ._ *.— _...._._, PART A 1) 2) 3)) 4) ,5) 6) The aggregate demand curve may be derived from the IS LM analysis by shifting A) the IS curve as the price changes. B) the real money supply and thus LM curve for each new price level. C) both the LM and IS curves since the real money supply and real expenditures
change when P changes. D) the LM rightward when P increases to define Y. A steeper LM curve implies that the aggregate demand curve will be
A) steeper and the k1 multiplier becomes smaller. B) ﬂatter and the kl multiplier becomes smaller. C) unaffected and the k1 multiplier becomes smaller. D) horizontal and k1 multiplier becomes larger. Suppose we have an initial ISLM equilibrium at a certain price level. A rise in the price level puts pressure on the interest rate as the money market re
equilibrates, which in turn causes commodity market equilibrium to occur at an
output level the initial one. A) upward, above
B) upward, below
C) downward, above
D) downward, below Consider an initial ISLM—BP equilibrium point for a small open economy in a
ﬂexible exchange rate system. That point corresponds to a point labeled "A" on the
current AD curve. If autonomous net exports increase with no change in the price
level, the resulting IS—LM equilibrium corresponds to a point in the AD diagram A) which is exactly point A again. B) straight above A on a new AD curve. C) straight below A on a new AD curve. D) directly to the right of A on a new AD curve. E) directly to the left of A on a new AD curve. With the nominal wage rate given, an increase in the price level leads to
A) movement downward along a short—run aggregate supply curve (SAS).
B) movement upward along a shortrun aggregate supply curve(SAS). C) a rightward shift of the shortrun aggregate supply curve(SAS). D) a leftward shift of the short—run aggregate supply curve(SAS). If the Federal Reserve intervenes in the foreignexchange markets and buys foreign
currencies A) the US. money supply rises and foreign currencies depreciate. B) the US. money supply falls and foreign currencies depreciate. C) the US. money supply rises and foreign currencies appreciate. D) the US. money supply falls and foreign currencies appreciate. 7) 8), 9) 10) 11) 12) Suppose that a 256K memory chip costs 600 yen in Japan and $3 in the US. and
that the exchange rate was 250 yen/$. In this situation traders would increasing the and causing the dollar to A) buy chips in Japan; supply of $; weaken B) buy chips in Japan; demand for yen; strengthen C) buy chips in U.S.; demand for $; strengthen D) buy chips in U.S.; demand for yen; weaken A stronger dollar implies that foreigners will find US. exports and US.
citizens will find imports.
A) less expensive; more expensive
B) less expensive; less expensive
C) more expensive; more expensive
D) more expensive; less expensive Suppose that the nominal exchange rate between the dollar and the English pound
was 1 pound per $2 and that the English price level was twice that of the US, then
the real exchange rate is A) lpoundl$1. B): 2 pounds/$1. C) 1 pound/$2. D) 1 pound/$4. When an economy's ISLM intersection occurs above its BP line, the domestic
interest rate causes a capital that means a in its capital
account. ‘ A) inﬂow, surplus B) inﬂOw,'deﬁcit C) outﬂow, surplus D) outﬂOW, deﬁcit If nominal GDP increases, which of the following. will always take place? A) output will have increased but prices will have fallen or remained the same.
B) prices will have increased but output will have fallen or remained the same.
C) both output and prices will have increased. _ D) none of the above. The leakage and injections approach implies that deﬁcit spending by the
government must be ﬁnanced by A) private investment less private savings plus net exports. B) private saving less private investment plus net exports. C) the trade deficit must always offset the government deﬁCit. D) B and C. 13) 14) 15) 16) 17) 18) "Okun's Law" is the relation between the and the difference
between the actual unemployment rate and the average rate of unemployment. A) direct; output ratio B) observed positive; price ratio C) implicit positive; output ratio D) negative; output ratio The dates of recessions in the U. S. are established by , based on
data. ‘ A) Fed; monthly B) Fed; quarterly C) NBER, monthly D) NBER, quarterly E) None of the above A nation with rising international indebtedness exhibits a current account
A) surplus and GDP greater than GNP B) deﬁcit and GDP less than GNP C) deficit and GDP'same as GNP D) surplus and GDP less than GNP F) deﬁcit and GDP greater than GNP Comparing the Fed, The European Central Bank (ECB), and the Bank of Japan
(BoJ), which has an explicit target for the inﬂation rate? A) Fed and ECB B) ECB and Bo] C) Fed and BoJ D) ECB only E) BoJ only Why do some people describe Japan as being in a "liquidity trap"?
A) The Bank of Japan will not expand the money supply B) The government debt/GDP ratio is above 100 percent C) Corporations will not build factories and buy equipment D) Banks reduce their loans and buy government securities instead
E) The yen is appreciating instead of depreciating Between the early 19903 and 2000, the U. S. private sector ﬁnancial deﬁcit
A) Went from positive to negative , B) Went from negative to positive C) Was equal to the government budget balance D) Was equal to thecurrent account balance E) None of the above PART B
QUESTION 1 (30 points) In the Corinthian and Syracuse economics the following commodities were produced in 446 BC and 436 BC at specified quantities and? prices: Corinth '  S racuse ‘ ﬂ_Il_[.l
W
. , ‘ _ 4 —_I_ . 441 BC (a) (10 points) With a base year of 446 BC, calculate chainweighted real GDP in each, city—state for each year. Expenditures:
Corinth Syracuse
Q 446 Q 441 , Q 446 Q 441
P 446 350 425 ' 250 280
P 445 445 535 302 342 Corinthian Chainweighted GDP growth = (425/350 * 535/445) A 0.5 = 1.208
Corinthina Chainweighted GDP 446 BC = 350:
Corinthina Chainweighted GDP 441 BC = 350*1.208 = 422.89 Syracuse’s Chainweighted GDP growth :2 (280/250 * 342/302)" 0.5 = 1.126
Syracuse’s Chainweighted GDP 446‘BC = 250. _
Syracuse’s Chainweighted GDP 441 BC = 250*1.126 = 281.55 (b) (10 points) Calculate the implicit GDP deﬂator for 446 and 441 and the average
annual inﬂation rate over the ﬁve years for each citystate. Hint: be sure to use at least two decimal places. Corinthian implicit GDP deﬂator 446 BC = 1 ‘ 
Corinthian implicit GDP deﬂator 441 BC = SSS/422.89 = 1.265
Corinthian inﬂation = 100*log(535/422.89)/5 = 4.7 % Syracues’s implicit GDP deﬂator 446 BC = 1
Syracues’s implicit GDP deﬂator 441 BC = 342/281.55 = 1.215
Syracues’s inﬂation = 100*log(342/281.55)/5 = 3.89% (c) (10' points) Suppose now that'the two countries trade with each other and the
Purchasing Power Parity (PPP) holds. Further, Suppose that the exchange rate between
the two city;states in 446 BC was 1.25 Corinthian gold coins for 1 of Syracuse’s silver
coins (€445 = I25). Assume that inﬂation was the same each of the five years between
446 andr441 BC (i.e. inﬂation in 445,,was the numbers calculated in part b). What is the '
exchange rate of geld for silver in 445 BC? Hint: be sure to Use at least two decimal
places. ‘ Ae’le" = p“! p'S = 4.73.89 = .81 e’445 is 1.2563081) = 1.26 Therefore the exchange rate between the two citystatesin; 4545 BCwas 1.26 Corinthian gold
coins fOI.‘ Ig‘of Syracuse’s silver coins. ' QUESTION 2 (30 points) Consider thefollowing econOmy: C=250150r+0.8(Y—T) Ms/P=500” , ,
T = 250 + 0.2 Y (M/P)d = 0.25 Y  25x
I=350~10r " " '
G =900 NX=640—0.I4Y4e where e is the exchange rate (foreign per local currency). .
Assume that We are dealing with a large openeconomy, and that the exchange rate is.
fixed at e = 60. ' ' ' a) (5 points) Write down the general formulas for the IS and LM equations, and then, in
particular, for the given parameter values of this eConomy. MLR =_ s(1t) + t '+ nx = 0.2 * (10.2) + 0.2 + 0.14 —; 70.5; " k1 = 1/MLR = 2
A0: 250  0.s*250 + 350 + 900 + 640  4*60 = 1,700 b=m+m=m IS: Y = k (Ao—br) = 3,400  40 1' LM: Y = (M‘lP+fr)/h~ = 2,000 + 100 r b) (5 points) Compute the equilibrium levels of Y, r, the quantity of net exports, and the
Government's budget deficit. Equating the right hand sides of the IS and LM equations,
3,400  40r = 2,000 + 100r —) r=10. Substituting r=10 in the LM, Y = 2,000+100r = 3,000 The equilibrium level of net exports and of the budget deﬁcit are determined as follows:
NX = 640'  0.14*3,000  ~4’F60 = 20
Deﬁcit = G  T = 900  250  0.2*3,000 = 50 c) (10 points) Assume the Government decides to decrease its spending, in order to
achieve a balanced budget, in equilibrium. By how much should it decrease G? What is
the effect on the equilibrium level of Y, r and net exports? The multiplier effects of A0 and Ms/P are:
k1 = 1/ (1/k + bh/f) = 1/0.7 = 1.429; k2 = bkllf = 0.8/0.7 = 1.143.
The equilibrium level of output can be written as:
(1) Y' = k1 [(A0  G') + G'] + k2 Ms/P = 1.429*(800G') + 1.143*500
where (A0  G') is the part of autonomous planned expenditures not dependent on the
interest rate, net of public spending, Y‘ is the new equilibrium level of output, and G' is the
new public spending.
The balanced budget requirement is:
(159' :1 =15$+$1T
We can solve the system of equations (1)(2) for Y' and G‘ to get:
G' = 830, Y' = 2,900
Hence AG = 900  830* = 70
From the LM equation, 2,900 = 2,000 + 100r, we get the equilibrium interest rate r=9.
The new equilibrium level of net exports is given by:
NX = 640  0.14*2,900  4*60 = 6 d) (10 points) Assume now that we are dealing with a small open economy and that the
foreign interest rate rf is equal to 10%. The Government adopts the fiscal policy
determined in c) above. By how much should the Central Bank change money supply in
order to maintain the exchange rate fixed at e = 60? What is the effect on the
Government's budget deﬁcit/surplus? In order to keep e ﬁxed, the Central Bank needs to tighten money supply, in order to keep
the interest rate from falling below rt.
Notice that the IS now, given r = rt, determines output as follows: IS: Y = 3,260  40rf = 2,860
The LM now determines money supply, which is endogenous: LM: Y = (Ms/P+frf)/h ——) 2,860 = 4*Ms/P + 1,000 > Ms/P = 465
The Government's budget is back to deﬁcit:
Deﬁcit = G  T = 830  250  0.2*2,860 = 8. ...
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 Spring '08
 GORDON

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