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v» . _ a Intermediate MaerOeconomics ClI 1 (Professor Gordon) Final Examination: December 9,1998 YOUR NAME: So [admins INSTRUCTIONS: 1) This is a closed beck” examination You may use a calculator.  2) You should have 3 parts: short answer, multiple choice, and
a . essay. L 3) Write your answers to the multiple choice m the blanks below
4) Write your answers to the short answer questions in PartB m L
the spaces provided. , ‘ '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 2 hours for this exam. PART A  In the spaces belovv write your answers to the multiple ehoice questiOns (45 minutes, 1 point each) L B? 10 L j  LL19_L_9____ 23L _ 37 L ,
1y1._/4_ LL 2*9.‘LLL 38.LL
12L L 30L 39». L
13.__C‘;__ ' 22L 31.L L40.L
.14.L __B_ 32. L MIL
15L; L 133._l_3__ _ ,42._0__L1_’L
16. L 25L 34. _5__ 43. L
17L 26.__L 35L 44._E_L_'
18. L NIL 36 _&_G 43._LD_¢' OVER... 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. loo
/ 3000100 p : 3700 + 100°C? ~ 75;; 12.00 :: lOof“ +lOOOP—IOOO
Ayoo = HOOP Y: gooo  (013(2) (b) (2 points) In period 2, suppose that the wage rate increased by 10%. What are the new equilibrium
values of P and Y? Wﬁllo
”D
300010on 200 4. [00059 7;;
13°“: ’°°‘°+ 1°°°v° "HOO Y=Drooo/co(%} W i (c) (2 points) Draw SASI an "I an s u ow 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 E2. (Graphs do not need to be drawn precisely, but
be sure to provide numerical labels for each value of P and Y). WC I’YN = 1800 Y Assume that the equation of the IS curve is Y= 3000  100 r (Ao =800, k= 5). Assume that the equation
for the LM culve is Y= 3 (M'IP) + 200 t, and the nominal money supply 15 equal to 500 The longrun
aggregate supply curve is given as Y= 2500.  (a) (3 points) Solve for the equation of the aggregate demand curvd. : oo sloo I _: '00” ‘ I945;
Y3: “3 ‘°°<°v>
Y: 3(1ng soot ’ 'yesooo _ (aw 4., 5:95 3000  Ioor _ ' 3 (5‘: 4 gear 300;“ : 3boo ' 152301
. , e , _ 5"
 o..._
r 1 P (b) (3 points) Solve for the Iongnmi equilibrium Values, OfY and P. . A
f‘ ”.16 QUESTION 2: (11 points) Consider an economy with an SP relationship initially deﬁned by
p = 13° + 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 = Y]: where x and y respectively denote.the growth rates of nominal and real output. Let expectations be formed according to
13° = 12: , where the —1 subscripts indicate values holding in the previous period. 8‘
Now suppose that nominal GDP growth falls permanently ﬁom 8% to 2%. (a) (2 points) What is the equation for the SP curve in period 1. (Leave p°, Y, and YN in the expression
for this part). a” r°+ ‘TMYY") (b) (1 points) What is pe in period 1? I c = Til
. r ‘ = 8
(c) (4points) Find the equili um values for p, y, and Y at the end of period 1. f _. Vi’ "a; ”(’00) 1:3, , .
K‘ %%(K_};) 31’ f"%; X
= 1—
a; 3+:(‘ﬁ/00)+ YI—IOO (11—:fZ ,
5/?"
G: .g—Y‘vIS—O a “#413 (d) (4 points) Find the eq inum values for p, y, and 1’ "t the end of period 2. 78* val/W» .. J—(‘g—loo
f3~é+a_,, ) m “he m, ‘32: (Y; 94) ‘15—!
a: Q4» :(‘fr [00) 1‘ K~7E XL? 11+ y;
,/_ 3 \
"i“‘Yflq(9 . 1" L‘13 ark 'Ileiyl ' 9;: 3
,1 3;: M3 VA
4 QUESTION 3: (12 points) Your text talks about several limitations of the the Solow growth model. To
address some of these limitations, Robert Lucas proposed adding “human capital” to the production
function. For example, consider an economy with a constantreturns CobbDouglas production function: Y = AKmNBHa' 0  13) Let Y, A, K, N, and H denote real output, the autonomous growth factor,¢apital, labor, and human capital
respectively. And let y, a, k, n, and 11 represent the respective growth 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 (a) (3 points) Suppose the level of human cgpital m this economy were to double. How much would this chan e real output? .1
g V Y: m< N r"HA 7
.1. .6 _ 3 . 5° Y («clease;
Yr— AK N m) ' b an;
.3 .3. ,c. 1. Y
X: A K A) H
52.. 931’. (cmpoints)
7n= CL+ OLOLL'V‘) + (I‘d‘ t8)("‘ “3
7 ,_ :L W
l “A ‘ (d) (3 points) If A is growing at 0.1, andn = 0.04, h = 0.14, and k = 0.09. What is the growth rate in real
output? ”3“” = .1 * .l(O°l‘~.o'<') 15.34.14:qu
‘3': .09 i‘.[+.E~(°5.) +.1C.l°) ’ 2’1 .,N + .01 4D). QUESTION 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? /00 x LOBX 1.09 X 1.03 y—
.—— (b) (2 points) Suppose you invested $1, 000 at the beginning of 1995, and this investment paid a 9%
nominal return each year. How much will this $1, 000 investment be worth in real terms at the end of
1997? (Use price data from part (a)). ' 6M”) 00°03 = 47M? (0) (3 points) Now suppose your friend, who is not an economics major, asks you for investment advice. He wants to invest $10,000 for 2 years starting at the beginning of 1999. He is deciding whether to invest
in an indexed bond which pays a return 3 percentage points above inﬂation each year, or to invest in a 2
year bond with a 8 % annual return. Suppose that you anticipate a 2% inﬂation rate for 1999, but because
of the Y2K problem you expect a supply shock to result in 9% inﬂation for 2000. Based on these I
expectations, and assuming your friend is risk neutral, which investment do you recommend. (Be sure to
show why you make this recommendation). indent; camp
I ’ Nora“! 6.44
(€170,000) X(Wx(¢%rﬁz) Q/gooa) (Loy); (W0) 000) X (£95) K (ll’9») s“ 7&0 #150534
= I (d) (3 points) If the real interest rate in the US. is 4%, and the real interest rate in Japan is 20%.
Currently the exchange rate is 100yen/$. However in the next period it will be 120yen/$. Will it be more
proﬁtable to invest in Japan or in US (Show your work)? U3 FC‘LK r¢*hrn‘, (1‘2 RQ+Krw ”gram {AU9J+I'I\A 1'4 TQPAA: 50W You [Avert $700. 05
(+70 > 0/0 "WOOX {0° yen T '9,030 72% 50 (ﬁve)? s/\ V,_)_ 10/000 yen x I 9.0 ~_ )1 000 y
1;, en
/ y A x [loyeq ‘ PIG:
'n (1.5 454cm "‘ > 02) rel“w“
g; h I $X 92"" fiﬂgo 'vea This admirable answer was written by student Tze Chang Loh at the fall1998 ﬁnal exam in C11.
Tze Chang wrote this exam as a firstquarter freshman, which should serve as an inspiration not just to the students in this course but also to the professor! Economics C11 Final Exam
Robert J. Gordon December 9, 1998 v7 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. 1. The economy of the United States in the 19905 has been called the "miracle",
“Cinderella", or Goldilocks economy enthusiastic phrases? 005’“ MP T‘tgvl gist 5‘! r \ .}
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. __ pm... =45? (,qu M ‘ so" / a. What are the distinguishing features of the economy that elicits these \ .Asc
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aunt would understand it at the Christmas dinner table. b. 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.
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