11F_Mid1_Sol - ECONOMICS 204 PAGE NUMBER 1 UNIVERSITY OF...

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Unformatted text preview: ECONOMICS 204 PAGE NUMBER 1 UNIVERSITY OF VICTORIA ECONOMICS 204 ANSWERS MIDTERM 1 – FALL 2011 Section 1 (20 marks) Answer ALL 20 multiple-choice questions 1. C 2. A 3. A 4. D 5. A 6. B 11. A 12. C 13. A 14. A 15. D 16.B 7. B 8. B 9. C 10. D 17. D 18. B 19. D 20. D Section 2 (20 marks) 1. Brief explanation of following terms: (a) Monetary neutrality describes the irrelevance of money for real variables. Equivalently, changes in the money supply do not affect real variables. +2 (b) Endogenous variables are variables that a model tries to explain. Exogenous variables are variables that a model takes as given. +1 +1 (c) Transaction velocity of money (V) measures the rate at which money circulates in the economy. +2 (d) Net capital outflow (or net foreign investment) is defined as the difference between domestic savin g and domestic investment. +2 Equivalently, it is the amount that domestic residents are lending abroad minus the amount that foreigners are lending to us. 2. Given: ; ; (a) Prove: Whether production function is DRS – No. It is CRS. +0.5 +0.5 +0.5 +0.5 (b) Find: Labour’s share of output; i.e. The marginal product of labour MPL is found by differentiating the production function w.r.t. Y 1 labour: MPL AK 1/2 L1/2 L 2 +1 An increase in labour will decrease the marginal product of labour due to diminishing returns. 1 1 1 Labour income is: MPL L K 1/2 L1/2 L K 1/2 L1/2 Y 2 2 2 +1 1 Labour income ratio then is labour income to real output: MPL L / Y +1 2 ECONOMICS 204 PAGE NUMBER 2 (c) Prove: Sprivate + Spublic = I in equilibrium. (i) Private saving Sprivate +0.5 Public saving Spublic +0.5 private public National saving S =S +S +0.5 (ii) In equilibrium, the funds for investment come entirely from savings in a closed economy. Hence, = Sprivate + Spublic +0.5 (d) Graph: equilibrium level of S, I and r. National saving = Investment In equilibrium +0.1 +0.1 +0.1 S Y C (Y T ) G r rE I (r ) I (r E ) S , I (r ) (e) Given: Find: impact of such fiscal policy on the economy in equilibrium. (1) (2) – private public (3) S = S +S +0.7for clear labeling; +1 +1 +1 (f) Graph: equilibrium level of S, I and r. National saving = ; Investment In equilibrium +0.5 for clear labeling; +0.3 for shift in saving curve r S 1 Y C (Y T 1 ) G1 S 0 Y C (Y T 0 ) G 0 S 180 r1E r0E I (r ) I ( r1E ) I ( r0E ) S , I (r ) +0.2 for the magnitude of such shift ...
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