c11ffall98 - Intermediate Macroeconomcs C-ll—l(Professor...

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Unformatted text preview: Intermediate Macroeconomcs C-ll—l (Professor Gordon) ' ’ Final Examination: DeCember- 9, 1998 ' ‘ YOUR NAME: INSTRUCTIONS: \ 1) This is a closed book examination You may use a calculators * ~ 2) You should haVC 3 parts: short answer, multiple choice, and _ essay. I ' _ . 3) Write your answers to the multiple choice in the blanks below. 4) Write your answers to the short answer questions in Part B in the spaces provided. _ I ‘ ‘5) Write your answers to the Essays on the space provided below each essay'and or on the back of the page if necessary. 6)‘ You have Zhours for this exam. ’ PART A - In the spaces below write your answers to the multiple- choice questions (45 minutes, 1 point each). ‘ 1. 10. V ' , l9. __ __ __ 28/.._ ‘ 37.____ 2.__ 11.__r___ r 20.” .y 29._‘ j 38.____ '3.‘____ ~12.'____ __ 21.,_f__,‘ y~3o.__y__y., p V39._____ 4.‘____ 13.’__‘,_' 22._____ 31.'_‘_ " 4o;____ ’5.__ , 14+ 23.____‘ _ 32.9' , 41.___ 6.____ 1‘5]__’__ ” 24.’_;_‘_r i y-33;‘_\/___' 1 42;_ 7.___ l6._____ ' 25y._____ V _ 34.__;_ 43‘.____ 8.____ ' 17.__. r ‘,26.___'_ : “35._____‘7_r *44.____ 9, * ' 18. 27f ‘ _ 36. ,y 45. _— ___._ —_ _.__._ - , , —_ i OVER... Be sure to place all or your answers on the answer sheet provided” Recommended time: 45 minutes. 1) The slope of the per person production function is A) the marginal product of labor. B) the marginal product of capital. C) Iowa for a poor country than for a rich country. D) higher for a rich country than for a poor country. 2) If the growth rate of multitactor productivity is 1.775, b = 0.15, n = 1, and y = 3, then the growth. rate of capital is A) 1.225 B) 1.45 p C) 4.0 ' D) 2.5 3) The real consumption wage is . A) more important to workers than the real product wage B) not as important to workers as the real product wage C) identical to the real product wage D) the real product wage adjusted for inflation 4) A decrease in labor productivity and the real wage could be caused by A) a decrease in demand for labor or an increase in the supply of labor. B) a decrease in the demand for labor or a decrease in the supply of labor. C) an increase in the demand for or supply of labor. D) an increase in the demand for labor or a decrease in the supply of labor. 5) Which of the following will cause slower growth in labor productivity? A) decreased growth in physical capital B) decreased growth in human capital such as education and training C) decreased growth in government-financed infrastructure such as highways and airports D) a and c E) all of the above 6) Relative to the United States, Europe has A) higher unemployment. B) slower job growth. _C) higher real wage growth. _ D) a and b. E) all of the above. 7) In calculating multifactor productivity growth, the elasticity of output to changes in capital (given as "b" in the textbook) is assumed to be A) one minus the popiflation growth rate. B) the depreciation rate. C) the share of capital income in GDP. 8) "Disgruntled" workers who quit their jobs to find "a more reasonable boss" are experiencing A) involuntarin unemployment. B) mismatch unemployment. C) cyclically unemployment. D) turnover unemployment. 'l r 9) of hourly rate assemblyvline jobs for workers by robots is an example of A) involuntary- unemployment. L. __ C) cyclical-unemployment. B) ‘mismatch unemployment. L ‘D) turnover unemployment. 10) Compared to the Ugrc, France has A) Higher unemployment _ I _ B) Higher mimmum‘ wage ’ ‘ ‘ \ C) Higher inequality ' D) (a) and (b) ,_ E) None of the above 11) Which of thefollowing makes Europe less suitable than the United States for a single currency like the Euro?‘ A) Different languages _ _‘ . I , B) Heavier reliance on. government Welfare spending C) Decision by U. K. not to join the Euro D) History of higher inflation in Italy than Germany L E) None of the above a 12) According to the 'trilemma," which of the following are _ incompatible? L' _ * L A) Domestic monetary policy, flexible exchange rates, capital controls _ IL . _ B) Domestic monetary policy, flexible exchange rates, perfect capital mobility _ L _ _ _ C) Domestic monetary policy, fixed exchange rates, r capital controls L , D) Domestic monetary policy, fixedLexchang-e rates, perfect capital mobility L r 13) Which is NOT one of the “beneficial supplyshocks" of the 19905? I , L, ‘ L ' A) Lower real import prices 8) Lower real oil prices C) Lower real medical care prices ' D) Accelerating decline in computer prices E) Measurement improvements in the CPI 14) Which of the following is‘not an event that was followed by the emergence of the listed economic idea: L r A) Great Depression; Keynesianrevolution 8) World War II; Fiscalist revolution _ , , _ C) ‘Vietnam war inflation; Monetan'st revolution ' ,, \ D) lnflatiOn Lof 19705; supply shock version of Phillips curve _ V ‘ ' E) Volcker disinflation; demiSe of Monetarism , e 15) In ofwhat you knowabout inflation and unth in L \ 19949-98, would you describe the Feds response to fliei'benefi‘cial ‘L supply shocks of the 19905“, as: ' L ' ' ‘ _ ' r A) accommodative 8) neutral ‘ L r» acfivht _ ' , x ' h , I ‘ _ . E) none of the above ‘ ' ‘ Figure 7.1 I ' Price V Index- 0.5 1000 ,2000 3000 T4ooo__sooo_ 6000 ' Real Income 16) Employing Figure 7—1, assume that the initial equilibrium Y, was 2500 at E0 prior to a change in the nominal money supply. The movement from £0 to H' represents ' A) an increase in the nominal money supply With a constant interest rate. B) an increase in the nominal money supply with; a constant price level. C) a decrease in the nominal money supply with a constant price level. D) a' decrease in the nominal money supply with a risinginterest rate. I ' 17) The LM curve will shift to the _ _ A) left if the price level falls and the quantity of money is held constant. B) right if the price leVel rises and the quantity. of money is held constant. ‘ C) left if the price level is held constant and the quantity Of money rises. D) right if the price level falls and/or the quantity of money rises. ' ,18) TheAD curve will shift to the 20) When the price-firms receive fer their output rises, the resulting ‘ A) right if the price level falls‘and the quantity of money is held constant. B) right if the price level rises and the quantity of money is held constant. C) right if the price level is held constant’andtheLquantity' of money rises. ’D) right if the price levelis held constant and the quantity of money falls. 19) In a self—correcting economy; an increase in government expenditures in the long—run will A) raise equilibrium real GDP and raise the price level L B) lower the price level butleave real CDPLunaHected C) raise nominal GDP butl-eave, real GDP unaffected D) leave the price level and (real GDP'Vunaffected ' L in the, real wage rate leads firms to [profit-ably employ , laborthan beforethus - the amount of output willingly 5,“'PPlied. ‘ , ' ' - L «L r ' L A) fall, more} raising B) fall, less, raising L L C) rise-less, lower ' ,_ D) rise, more, raising ' 21) The long-run buildup of an economy's capital stock p the marginal product of labor thus ‘shifting the labor demand curve to the , which then causes A) increaSes, right, SAS to shift to the right B) increases, right, movement up the SAS curve C) increases, left, SAS to shift to the left I D) decreases, right, SAS to shift to the left 22) The short-run equilibrium of inflation and real GDP A) depends only on the rate of growth of the money supply. B) occurs where expected inflation equals actual inflation. C) depends only on the rate of growth of nominal GDP. D) None of these. 23) The long-run Phillips curve is A) horizontal at the level of expected inflation p(e). B) vertical at the natural level of Y/Y(n) = 100. C) dependent on price expectations. D) dependent on the rate of inflation. Figure 8-1 ‘ Price lndex (P) "-___ . 90 . ‘- - . SAS (W1 = 1.03) SAS (wo = 1.00) 97 100 103 106 109 Real GDPlY) Rate of inflation (p) i ............ = smog = 0) .............. .mn—anuunum." 94 97 lOO 105 l06 109 Real GDPW) yN 24) Everywhere to the left of the long-run Phillips curve as in Figure 81-1 A) actual inflation is less than expected inflation and the expected inflation rate will be reduced. B) actual inflation is less than expected inflation and the expected inflation rate will be raised. C) actual inflation is greater than expected inflation and the expected inflation rate will be raised; D) actual inflation is greater than expected inflation and the expected inflation rate will be reduced. 25) If there is a permanent adverse supply shock , A) the rate of inflation can be held constant if real wages are kept from falling B) an extinguishing policy will produce an acceleration of inflation C) the level of employment at the natural level of real GDP will remain constant only if the labor supply curve is vertical D) the natural level of real GDP will remain the same if the supply curve of laboris vertical J 26) the isls pezcmtnn're know to, the short-run Phillips curve othrougl'ttheg, I _ _ . p I ‘ A) horizontal'_axis~at Y = 105. ‘ ‘ ' ,_ , _ I B) horizontal axis at P = 1.05.- C) ylmg-run‘Phflhps' curve at P: 1.05.; ' D) long-run Phillips curve at p ': _27)'Compared to an economy staggered overlapping Wage contracts, an economy in which'wage ‘ contracts are mnegotiated simultaneously Will tend to, have « - ' ' _ A),steepe_r SP curves; ~ ' t B) flatter SP curves. ' , C) faster shiftingof its SP I ‘ I D) slower shifting of its SP curves. 28) From a long—run equilibrium with = p6 =’ 0, supposed: rises to 6., If initially pe remains at zero andprises to 4,.Y ‘ W ' I, ‘ , * A) 110. V ‘ ‘ B) 102. _ , , ' I C) 98,- - p D) 96.‘ ‘29) Supposethat the government passes a law households to increase savings 10% above previous levels. According to SoloW's growth theOry,'in the long run r ‘ - A) output per‘capita grows more rapidly." I ‘ ’ ' ‘ _ ' \ _ B) ‘ output per capita grows‘at the constant steady state rate, n. ' , C) output per capita stays constant. ‘ V‘ r ' D) None of the above. ' i ’ Figure 9—1 ‘Y/N ‘ I Y/N é Aof(K/N) - '(_K/N),Q , L I _ ‘K/NV 30)lnitia~lly, the economy is at point Bryn Figure 9-1, According to the Solow growth model, an increase in theoutput per capita Without an increase in capital per'worker is represented by ‘ _ ' "and could be the. result of _’ " ' ' ‘ ‘ ‘ ‘ ‘ A) the movement B to E;fncw‘p technology discoveries.” , , _ B) "the movement, B to H; iniproved health and education per'kaer. ‘ C), the movement [B to C;flanincrease inr'the savings rate. ‘ k D) the movement B to F; a decrease in» the Savingsrate; Figure 9-3 Y/N ' (Y/N)1 «um-awn. ’ (WN’o Production Function S(Y/‘N)1 r S(Y/N)o "‘""‘"""" B i O.”- m'll ‘ E E § t 00:00 (K/N)1 I Y/N s AortK/N) (n+d)K/N Sy/ N K/N '31) Initially, the economy is at point B on Figure 9-3. We conclude that before adjustment A) per person savings is at point ‘D and the level of steady state investment is at point C. B) per person savings is at point E and the level of steady state investment is at point E. C) per person savings is‘at point G and the level of steady state investment is at point E. D) per person savings is at point C and steady state investment is at point D. 32) If K = 3000, n = 0.015, and d = 0.082, then investment or A) 291 B) 201 C) 164 will hold (Y /N) constant. D) 549 33) Less-developed countries that nonetheless have access to the latest technologies must be suffering from a relative shortage of according to the Solow growth model, implying a very of return available on additions to capital in those countries. A) capital, low 8) capital, high 34) Unanticipated inflation will insure that A) homeowners with outstanding mortgage balances are hurt. B) homeowners with outstanding mortgage balances are benefited. C) creditors gain, debtors lose. D) none of the above 35) lndexation is designed to A) B) C) D) C) labor, low moderate the COSts of inflation, not inflation itself. rapidly reduce inflation. L reduce the natural rate of unemployment. rapidly reduce inflationary expectations. rate D) labor, high 36) If the nominal interest rate is 10% and expected inflation 5%, the real expected interest rate is A) 15% ; B) -57., . C) 5%. D) 10% . 37) The actual real interest rate and the expected real interest rate will be identical if A) Pe=P- B) pe>p. C) pe<p. D) none of the above 38) Real income“ . - ' the of _ inflation. I A) creditors to «debtors, anticipated _ L _ r B) creditorsto debtors, unanticipated C) debtors to creditors, anticipated _ l ‘ D) debtors to creditors,_unanticipated _39)-The sources 'ofkgovernment re\renue are taxes; the I ‘ . of high-powered ' ‘ ‘ of government bonds, and the r A) issuance, collection ‘ _ 3 ~ L _ B) issuance, issuance C) buying back. Collection {I . r - D)‘ buyingbado issuance ' 40) Suppose the public holds $1 in-xgmrernment all with an 8 percent nominal interest rate. If the Federal/Reserve can hold that nominal rate constant, what inflation rate would make the governmmt's net interest expense exactly-zero? ‘ ‘ A) 16 percent ‘ .‘ B) 8' percent ‘ _ C) 0 percent I I D) -8 percent 41) A flatter 'lS curve imPliesthat-the aggregate demand curve will be ’ - A) steeper and the multiplier (k) becomes larger. ' 1 ' ‘ ‘ B) flatter and the multiplier (k) beth larger. ‘ V C) steeper, and the multiplier (k) becomes smaller, D) flatter and the multiplier (k) becomes smaller. E) vertical and the multiplier (k) is unaffected. 42) A comparison of the U. S. net .intemational investment position with U. net international investment income reveals: A) The formeris positive; the latter is negative, ' ‘ B) The former is negative;_the latter is-pOsitive : C) The former is positive; the latter is positive D) The former is negative; the latteris negative E) Both are close to zero ' 43) Among the causs of the (non-Japanese) Asian crisis were: A) Currencies tied to the yen; capital account surplus B) Currencies tied to the yen; capital account deficit ‘ C) Currencies tied to the dollar; capital'account surplus VD) Currencies tied to the dollar; capital account'deficit ' E) Currencies tied to the yen; current account surplus ~- 44), In the past decade the ratio of earnings of higheskilled L workers to low-skilled workers has; ‘ ‘ l A) Fallen in the U.-S.'; risen in France , B) Risen in; the U. 5.; risen in [France , _ C) [Risen in the-U. 5.;‘rstayed the'same in the U. K ,. D) Fallen in the U. S.;'s_tayed~ «the samesi‘n the U. K. E) Risen in the U. S.;'stayed thesame in France 45) 1997 and 1998 the ‘U.‘ 5. government sector has run a surplus. This has been accompanied ‘. v A) B) c) D) E). Current account surplus; domestic saving greatet than ‘ domestic investment , ' Current account deficit; domestic saving greater than domestic investment _ ' Current account surplus; domestic saving less than . domestic investment I ‘ Current account deficit; domestic saving less than domestic investment * Current account surplus; domestic saving equals domestic invtment PART B: (45 minutes) write your answers in the spaces provided. Show all your work! Partial credit will be given. - QUESTION 1: (12 points) _ Part 1: ‘ ' . Assume that the aggregate demand is Y = 2000 - 100 P. The equation for the aggregate supply curve (SASO) is Y = 800 + 1000[P - (W/ 100)], where W is the nominal wage rate. (a) (2 points) Suppose nominal wages are fixed at W = 100 in period 1. Solve for the equilibrium values of Y and ‘P. r r ' . (b) (2 points) In period 2, suppose that the wage rate increased by 10%. What are the new equilibrium values of P and Y? (c) (2 points) Draw SASl and AD] and show the equilibrium values of P and Y for period 1 (from part (a)). Then show how these graphs change in period 2, and label the new equilibrium values of P and Y (from part (b)). Label these equilibrium points E, and E3 (Graphs do not need to be drawn precisely, but be sure to provide numerical labels for each value of P and Y). YN = 1800 Y Part 2: Assume thatthe equation of theIS curve is = 3000 — 100 r (A0 =800, 'k = 5). Assume that the equation for the LM curve is Y = 3 (Ms/P) + 200 r, and the nominal money supply is equal to 500. The long-run aggregate supply curve is given as Y = 2500. _ , , * _ (a) (3’ points) V Solve for the equatien of the aggregate demand curve. (b) (3 points) Solve for the long-runyeqlfilibn'um values of Y and P. QUESTION 2: (11 points) Consider an economy with an SP relationship initially defined by 'p = 19° + g(Y-Y”), where p and pe denote actual and expected inflation, Y denotes real output, and YN = 100 denotes natural real output. Also, suppose that when inflation increases by 1%, real GDP increases by 2%. Initially (in period 0) p° = p =8, x = 8, y = 0, and Y : Y1: where x and y respectively denote the growth rates of nominal and real output, Let expectations be formed according to e p = P-1 a ' where the —1 subscripts indicate values holding in the previous period. Now suppose that nominal GDP growth falls permanently from 8% to 2%. (a) (2 points) What is the equation for the SP curve in period l.'(Leave p‘, Y, and Y" in the expression ~ for this part). , ' _ (b) (1 points) What is p° in period 1? (c) (4 points) Find the equilibrium values for p, y, and Y at the end of period 1. (d) (4 points) Find the equilibrium values for p, y, and Y at the end of period 2. QUESTION 3: (12 points) Your text talks about several of the the Solow growth model. To address some of these limitations, Robert Lucas proposed adding “human capital” to the production fimction. For. example, consider an economy with a canstanteretm'ns Cobb-Douglas production function; , Yi--— AKaNBHa' °‘ ' B) Let Y, A, K, N, and H denote teat output, the autonomous growth factor, capital, labor, and human capital respectively. And let y, a, k, n,' and h represent the respective rates of these quantities. The share of capital in total real output is 0.2, and the share of labor in total real output is_0.6. ' r (a) (3 points) Suppose the IeVel of humsncgp ital-in ecOnomy were to double. How much would this chmge real output? _ ' _ » ' ' ' * _ \ (b) (3 points) Re-write the production fimction solving for per capita income in terms of A,_ K, N, and H. (c) (3 points) Now write this equation in terms of the growth rate of per capita income. (d) (3 points) If A is growing at 0.1, and'n = 0.04, h =¢0;l4, nnd k = 0.09. What is the growth rate in real output? - ' * e r L QUES'l'ION 4: (10 points) (a) (2 point) If you let: 1994 be the base year (i.e. P94 = 100) and inflation in 1995 is 3%, in 1996 is 4% and in 1997 is 3 %, What is the value of the price index at the end of 1997? (b) (2 points) Suppose you invested $1,000 at the beginning of 1995, and this investment paid a 9% I nominal return each year. How much will this $1,000 investment be worth in real terms at the end of 1997? (Use price data fi'om part (a)). (c) (3 points) Now suppose your friend, who is not an economics major, asks you for investment advice. He wants to invest $10,000 for 2 years starting at the beginning of 1999. He is deciding whether to invest in an indexed bond which pays a return 3 percentage points above inflation each year, or to invest in a 2 year bond with a 8 % annual retum. Suppose that you anticipate a 2% inflation rate for 1999, but because of the Y2K problem you expect a supply shock to result in 9% inflation for2000. Based on these expectations, and assuming your friend is risk neutral, which investment do you recommend.’ (Be sure to show why you make this recommendation). ' (d) (3 points) If the real interest rate in the US. is 4%. and the real interest rate in Japan is 20%. _ Currently the exchange rate is lOOyen/S. However in the next period it will be lZOyen/S. Will it be more profitable to invest in Japan or in US (Show your work)? * 1) Economics C11 Final Exam Robert J. Gordon December 9, 1998 Essay Questions. Answer both of the following questions. Watch your time carefully so that you spend roughly, the same amount of time on each question. Answer each question on the sheet provided. ‘ The economy of the United States in the 19905 has been called the "miracle", "Cinderella", or Goldilocks economy . ‘ x a. What are the distinguishing features of the economy» that elicits these enthusiastic phrases? ' , - b. How do you explain the behavior of the economy? Be sure to distinguish the role played by monetary policy, fiscal policy, and other possible factors. The ‘Asian crisis played a major role in the evolution of the world economy over the past 18 months. a. If you were asked tolist the tap three causes of the Asian Crisis, what elements wouldmake your list; Be sure to explain each cause briefly enough so that yOur aunt would understand it atvthe Christmas dinner table. h. Do you support the policy approach taken by the IMF? If not, why not? c. List at least three ways in which the Asian crisis has been good for the U. S. economy. ' ‘ - ' ' L ...
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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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c11ffall98 - Intermediate Macroeconomcs C-ll—l(Professor...

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