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311M01F - Intermedlate Macroeconomlcs 311(Professor Gordon...

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Unformatted text preview: Intermedlate Macroeconomlcs 311 (Professor Gordon) Mld-Term 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 IS-LM 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 IS-LM—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 short-run aggregate supply curve(SAS). C) a rightward shift of the short-run aggregate supply curve(SAS). D) a leftward shift of the short—run aggregate supply curve(SAS). If the Federal Reserve intervenes in the foreign-exchange 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 IS-LM 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_-I--l_[.l W- . , ‘ _ 4 -—_-I_- . 441 BC (a) (10 points) With a base year of 446 BC, calculate chain-weighted 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 Chain-weighted GDP growth = (425/350 * 535/445) A 0.5 = 1.208 Corinthina Chain-weighted GDP 446 BC = 350: Corinthina Chain-weighted GDP 441 BC = 350*1.208 = 422.89 Syracuse’s Chain-weighted GDP growth :2 (280/250 * 342/302)" 0.5 = 1.126 Syracuse’s Chain-weighted GDP 446‘BC = 250. _ Syracuse’s Chain-weighted 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 city-state. 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 = 4.7-3.89 = .81 e’445 is 1.2563081) = 1.26 Therefore the exchange rate between the two city-statesin; 4545 BCwas 1.26 Corinthian gold coins fOI.‘ Ig‘of Syracuse’s silver coins. ' QUESTION 2 (30 points) Consider thefollowing econOmy: C=250-150r+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.I4Y-4e 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(1-t) + t '+ nx = 0.2 * (1-0.2) + 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*(800-G') + 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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