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Unformatted text preview: Intermediate Macroeconomics 311 0
Professor Gordon
Final Examination, Winter 2000 NAME: SSN (last four digits): INSTRUCTIONS: 1. This is a closed book exam. You may use a calculator 2. Write your answers to Part A(mu1tiplechoice) in the space provided on page 2.
DO NOT WRITE YOUR ANSWERS ON MULTIPLECHOICE QUESTIONS.
3. Write your answers to Part B and Part C in the spaces provided. THVIE ALLOCATION L I POINT ALLOCATION PART A 40 40
PART B 50 50
PART C 30 30
TOTAL 120 120 GRADE: .r ” * , __I;>5} ‘tﬁe‘mfﬁplerchmce queStimis 18'. L, * 434.
‘ _ ’35:; I 37. L 39;; 1) The simplest calculation of the growth rate of multifactor productivity starts with the
growth rate of real GDP and then: (a) subtracts the growth rate of labor (b) subtracts the growth rate of capital (c) subtracts the gr0wth rate of labor and some fraction of the growth rate of the
capitallabor ratio (d) adds the growth rate of labor and then subtracts the depreciation and
population growth 2) Private savings and thus investment could be increased by which of the following
government policies, ceteris paribus? (a) Elimination of the corporate income tax. (b) Allowing corporations to use “replacement cost accounting”. (c) Exemption of interest earnings from income taxation.
(d) All of the above. 3) An increase in the nominal money supply will shift (a) AD up and raise the price level. (b) AD down and lower the price level.
(0) SAS up and raise the price level. (d) SAS down and lower the price level. 4) When the price ﬁrm’s receive for their output rises, the resulting   in the real wage rate leads ﬁrms to proﬁtably employ  labor than before, thus — the
amount of output willingly supplied. (a) fall, more, raising
(b) fall, less, raising
(c) rise, less, lower
(d) rise, more, raising 5) From one period to the next, the change in real GDP depends on the shift in aggregate
demand (a) but not on how SAS might shift. (b) and on SAS, but only if it is horizontal.
(c) and on SAS, but only if it also shiﬁs.
(d) and on the slope and shitting of SAS. 11) The steady state in the Solow growth model with no exogenous growth is deﬁned as a
situation in which I (a) aggregate variables are constant (b) aggregate variables growat a constant, but different rates across them
(0) per capita variables grow at a constant and positive rate (d) aggregate variables grow at a constant and equal rate (e) savings are equal to zero 12) In the Solow growth model, the new equilibrium after an increase in the savings rate
has (a) a higher growth rate of per capita variables (b) the same growth rate of per capita variables as in the old equilibrium
(c) a lower per capita output level (d) both (a) and (c) (6) both (b) and (c) 13) Assume investment and consumption do not respond to the interest rate, there is a
Pigou effect and demand for real money balances in downward sloping but does not
depend on output. Then if government spending increases the equilibrium interest rate and if the money supply increases the equilibrium output (a) increases; increases; (b) falls; does not change; (c) does not change; increases. (d) increases; falls. (e) does not change; does not change 14) Assume investment and consumption respond negatively to the interest rate, there is
a Pigou effect and demand for real money balances is inﬁnitely elastic with respect to
the interest rate. Then, if the government increases the money supply, the interest rate and output in equilibrium, if it increases government
spending the interest rate and output in equilibrium. (a) decreases; stays the same; increases; increases; (b) stays the same; stays the same; stays the same; increases;
(c) increases; decreases; increases; increases; ((1) stays the same; increases; stays the same; increases. 20) In the contest of growth, the goal of stabilization policy once per capita output is
equal to potential per capita out is to (a) insure that the percentage change in per capita output and potential per capita output
over time» are equal. (b) raise the growth rate of potential per capita output above that of per capita output.
(c) raise the growth rate of per capita output above that of potential per capita output.
(d) none of the above is correct. 21) Since we don’t want population growth to distort our analysis the best measure of a
country’s economic growth is the growth of (a) real domestic investment
(b) real GDP. (c) real GDP per person.
(d) real consumption. 22) When we study economic growth, we are most concerned about changes in (a) the output ratio. (b) the level of natural real output. (c) the absolute difference between natural and actual real output.
((1) none of these. 23) The slope of the perperson production function is (a) the marginal product of labor. (b) the marginal product of capital. (c) lower for a poor country than for a rich country.
((1) higher for a rich country than for a poor country. 24) The long run Phillips curve is (a) horizontal at the level of expected inﬂation.
(b) vertical at the natural level of Y/YN = 1.
(c) dependant on price expectations. ((1) dependant on the rate of inﬂation. 25) Whenever the growth rate of nominal GDP exceeds inﬂation (a) y must be positive.
(b) y must be negative.
(c) Y must be above YN.
((1) Y must be below YN. 31) In a small open economy with ﬂexible exchange rates, the effect of an expansionary
ﬁscal policy is to shift the IS curve and the LM curve (a) right; right (b) right; not atall (c) right then left; not at all
(d) right then left; right 32) In the Solow growth model, Y/N = Af(K/N), would be represented
by an increase in A. (a) an increase in capital stock at the same rate as the increase in labor supply
(b) an increase in capital stock in excess of the growth of labor supply (c) a Y3K computer glitch the Causes computers to crash (d) school choice reform increases the effectiveness of education 33) The name given to the direct stimulus to aggregate demand caused by an increase in
the real money supply and does not require a decline in the interest rate is (a) the Keynes effect
(b) the Pigou effect (c) the Fischer effect.
((1) the Solow effect. 34) Incentives for governments to create inﬂation include which of the following:
(a) Seignorage
(b) Inﬂation tax revenue
(c) Temporary reduction in unemployment
(d) (b) and (c)
(e) (a), (b), and (c) 35) Supporters of the hysteresis hypothesis to explain European unemployment
predict: ' * (a) A decline in unemployment will cause a permanent acceleration of
inﬂation . (b) A decline in unemployment will cause a temporary acceleration of
inﬂation ' (c) A decline in unemployment will cause no change in inﬂation (d) A decline in unemployment will cause a temporary deceleration of
inﬂation (e) A decline in unemployment will cause a permanent deceleration of
inﬂatiOn PART B (50 points)
QUESTION 1 (17 points) Consider'the economy characterized by the following equations: IS: é 1500 — SOr Labor Demand; W/P = 600‘ — lON
Money Demand: = 0.5Y — 5r Production Function: Y = 5N
Money Supply: = 150» ' Wages: W = 300 (a) Calculate the curve. (Hint: First think about how to deriVe it graphicaly.
Then ask yourself which equations from above you need. Finally substitute
out variablesto get an equation relating Y to P.) (5 points) ‘ (b) Calculate the SAS curve. (Hint: Use the same procedure from above, to obtain
an equation relating Y to P) (5 points) QUESTION 2 (16 points) Consider an economy with the following SP relationship
p=p°+0.5 l; +z where p and pe are actual and expected rates of inﬂation, )9 is the log output ratio (where Y =100*ln[Y/YN] where YN is the natural rate of real output) and z is a supply shock.
Assume that the natural rate of real output growth is zero, so that nominal GDP growth is
the same as excess nominal GDP growth. Also assume that inﬂationary expectations p“
adjust according to the following rule: pe=p1. Supply shocks have been absent in the last years and the government has maintained a
constant rate nominal GDP growth of 2% Ge. z=0 and x=2 in all years up to and
including 1999). The economy is in the steady state in 1999. a) Write the equations for the DG and SP curve and solve for the initial l; and p in 1999
(3 points) b) In the year 2000, there are presidential elections, and the current president wishes to be
reelected. As a way to increase votes, he orders the Finance Minister to implement an
expansionary ﬁscal policy to reduce unemployment and increase the level of output 2%
above the natural level. Assume there are no supply shocks during the year 2000. What level of nominal GDP growth (x) delivers this objective? What is the resulting
inﬂation rate during the year 2000? (6 points) QUESTION 3 (17 points) The following question studies some of the macroeconomic eﬁect of Spain’s entry into
the European Community in 1986. Suppose that output in both Spain and Germany is produced with the same CobbDouglas
production function. The factors of production are physical capital (K) and labor (N). The
elasticity of output with respect to labor is given by a=0.7. The autonomous growth component is constant in time, but can vary across these two
countries. Denote As and AG to be the Spanish and German autonomous growth
components, respectively. Suppose that there is competition between ﬁrms in these two countries, and hence the
interest rate is given by the marginal product of capital. (i) (2 points) Write down an expression for per capita output in Spain and in
Germany [(Y/N)S and (Y/N)G] and fer the respective interest rates (rS and r0), as
functions of capital per worker [(K/N)S and (K/N)G]‘ and the autonomous growth
components (As and AG). (4 points) According to Summers and Heston (1991), in 1986 capital per worker was (K/N)S = 45 in
Spain and (K/N)G=73 in Germany (in 1985» international dollars). (ii) Assume that AS = AG. Given the observed differences in capital per worker, what
would we expect to be the ratio of output per worker across countries? (ie: what number is (Y/N)S / (Y/N)G equal to?) (3 points) L The reason that these different interest rates were sustained without arbitrage
opportunities is. that Spain imposed restrictions on international capital ﬂows before
1 986. V In 1986:, When Spain joined what then was the European these restrictions
were eliminated.  ' ’ (v) ,Assnmingthat the German capital per worker ratioremained constant after this
event, howmuch Should the Spanish capital; pet workerratio increase in order
to be consistent with a world with full capitalfmobility?(igeé; what is (K/N)S so that
the interest rate equals the unchanged {Til 1 __‘ intereSt rate) (6 points) PART C (30 points)
YOUR NAME: Over the past two centuries, some countries now called "industrialized" or "rich" have
grown much faster than other countries now called "less developed" or "poor". (a) The Solow growth model has been criticized as failing to explain the enormous gap
in income per capita between the rich and poor countries. What are these criticisms? (b) The lecture on this topic proposed a framework that meets these criticiSms but is not
included in or explained the textbook. Please explain the approach develOped in
lecture, using the same symbols, and relate it to the speciﬁc criticisms of the Solow
model that you included in your answer to part (a). (c) The HallJones article in the readings provides another related f‘r’ameWork fer
explaining the income gap between. rich and poor. Explain their approach and any
differences between it and the approach developed in the lecture. ...
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 Spring '08
 GORDON

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