11F_Mid1_Sol

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

This preview shows page 1. Sign up to view the full content.

This is the end of the preview. Sign up to access the rest of the document.

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 ...
View Full Document

{[ snackBarMessage ]}

Ask a homework question - tutors are online