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Unformatted text preview: ECONOMICS 204
PAGE NUMBER 1 UNIVERSITY OF VICTORIA
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.
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 (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.
MPL AK 1/2 L1/2
An increase in labour will decrease the marginal product of labour due to diminishing returns.
Labour income is: MPL L K 1/2 L1/2 L K 1/2 L1/2 Y
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.
Private saving Sprivate
Public saving Spublic
National saving S =S
In equilibrium, the funds for investment come entirely from savings in a closed economy.
= Sprivate + Spublic
(d) Graph: equilibrium level of S, I and r.
National saving =
In equilibrium +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) –
(3) S = S
+S +0.7for clear labeling; +1
+1 (f) Graph: equilibrium level of S, I and r.
National saving =
+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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