Midterm 2 with Solutions Econ311

Intermediate Macroeconomics 311 (Professor Gordon) Final Examination Fall, 2009 YOUR NAME________________________________ INSTRUCTIONS 1. The exam lasts 2 hours. 2. The exam is worth 120 points in total 30 points for the manifold choice questions, 60 points for the analytical questions, and 30 points for the essays. 3. Write your answers to Part A (the multiple choice section) in the blanks on page 1.You wont get credit for circled answers in the multiple choice section. 4. Place all of your answers for disjoint B in the space provided. 5. You must show your work for part B questions. 6. Write your essays with a pen. Write understandablyly 7. Good Luck and Happy Holidays damp A (45 points) Choose the ONE alternative that BEST completes the statement or answers the question. Your answers must be in the space provided below. USE CAPITAL LETTERS. PART B (45 points) Please show your work and redeem down the formulas you use for par tial credit. Question 1 (5 points) (a) What monthly mark of inflation causes the wrong take to make up by a factor of 5 (500 percentage points) all over a year? (2 points) (HINT Use the LN and EXP formulas from Chapter 9, Problem 2, further examples of which were presented in lecture on November 11). victimisation the log formula p = light speed*log(5)/12 = 13. 4%. b) If the come out of monthly inflation is 25%, by what factor would prices capture risen over a year? (3 points) Lets call the initial price level P0 and the price level at the end of the year P12 25 = deoxycytidine monophosphate*log(P12/P0)/12 P12/P0 = exp(25*12/100) = 20. Question 2 (10 points) knock over an economy where inflation expectations are given by the equivalence pet = . 4 pt-1 + . 6 pet-1 . in like manner assume that when the log of the output ratio increases by 1 points, inflation increases by 4 points. a) Write down the SP equation, both its general form and its circumstantial form with thes e particular parameter assumptions inserted. (2 points) pt = pet + gYt-1 + zt = . 4pt-1 + . 6pet-1 + 4Yt-1 + zt ) Write down the DG equation (no need to derive anything, just write it down). (1 point) Y = Y-1 + pic p c) Combine the SP and DG equations to express p as a function of pt-1, pet-1, Yt-1,pict, and zt. (2 points) (HINT Your answer must necessitate p on the left side of the equation and terms not including current p on the right side, with all the relevant parameters inserted and solved out. ) p = 0. 4p-1 + 0. 6pe-1 + 4Y + z = 0. 4p-1 + 0. 6pe-1 + 4(Y-1 + pic p) + z 5p = 0. 4p-1 + 0. 6pe-1 + 4Y-1 + 4pic + z p = 0. 08p-1 + 0. 12pe-1 + 0. 8Y-1 + 0. 8pic + z For the re principal(prenominal)der of the problem, assume that in finis t=1 the economy has set given by p0 = 3pe0 = 3Y0 = 0 ) guess there is no depict shock in period 1 (z1 = 0) and that pic1 = 5. Solve for period 1 values p1 and Y1. (2 points) p1 = 0. 08(3) + 0. 12(3) + 0. 8(0) + 0. 8(5) + 0 = 4. 6 Y1 = 0 + 5 4. 6 = 0. 4 e) Suppose instead that there is a period 1 supply shock that increases the value of z from 0 in period 0 to 1 in period 1. Find the period 1 values p1,pic1 and Y1 as well as the expected period 2 inflation, pe2, if the government adopts an accommodating policy. (3 points) Accommodating policy means Y1 = 0, so from the DG equation p1 =pic1 and from the SP equation p1 = . 4(3) + . 6(3) + 4(0) + 1 = 4 = pic1 pe2 = . 4(4) + . 6(3) = 3. 4 Question 3 (15 points)Consider a country whose primal Bank issued 100$ of High-Powered cash (H). Citizens cash holdings (dollar bills) amount to 10% (. 1) of their deposits plot of ground each commercial bank has to have militia for 15% (. 15) of the volume of deposits. a) What is the level of deposits? (2 points) D = H/(c+e) = 100/(. 1+. 15) = 400 b) What is the level of the Money Supply defined as dollar bills and deposits? (3 points) M = (1+c)D = 1. 1*400 = 440 c) Suppose the Central Bank wants to increase Money Supply to 528. How ma ny extra wholes of High-Powered Money do they have to circulate? (4 points) M = (1+c) H / (c+e) 528 = 1. 1 H / . 25 H = 120 So they should print 20 extra units of H ) Assume now that the Central Bank still wants to set the Money Supply to 528 but the Government forbids them from printing High-Powered Money. What option is left to the Central Bank? (Hint restrict your attention to this simplified modelling where there is zip like direct lending or any opposite exotic policy) (2 points) Change the reserve requirement e) Given your suggested policy, which of the parameters of the model would they be changing? To which radical value? (Remember that here H=100 and cannot be changed by assumption and M=528) (4 points) M=(1+c) H / (c+e) 528=1. 1 * 100 / (. 1 + e) e=. 1083 = 10. 8% Question 4 (15 points) Consider two nations, Richland and Poorland.Both nations have the equivalent Cobb-Douglass production function, Y=AKbN(1-b). Let Poorland have an economy with technology level A=18, c hapiter elasticity of production b=(1/3), population development invest n=. 13, chief city depreciation graze d=. 07, and savings rate s=. 3 a) Rewrite the production function as a function relating Y/N and K/N. (2 points) Y/N = A(K/N)b = 2(K/N)(1/3) b) Solve for the steady state values of the capital-labor ratio (K/N) and per-capita gross domestic product (Y/N). (6 points) s(Y/N) = (n+d)(K/N) sA(K/N)b = (n+d)(K/N) (K/N) = sA/(n+d)1/(1-b) (K/N) = . 1*18 /(. 2)3/2=27 (Y/N) = (n+d)(K/N)/s (Y/N) = (. 2)(27)/. 1=54 c) Richland has a per-capita GDP that is triple that of Poorland. Given hat Richland has the same production function as Poorland, the capital-labor ratio in Richland is what multiple of the capital-labor ratio in Poorland? (In other words, if Poorland has a capital-labor ratio of K/N= x and Richland has a ratio of K/N= y, what is y/x? ). (3 points) pic d) Compute the marginal products of capital in the two nations. (3 points) MPK = b(Y/N)/(K/N) MPKA = (1/3)(54)/(27)=2/3=. 6667 MPKb = (1/3)(162)/(729)=2/81=. 0247 e) judge from your answer in part (d), does the Solow model predict that poor countries have a higher or start rate of return on capital? (1 point) The Solow model predicts a higher rate of return for poor countries.This is one of the critiques of the Solow growth model. PART C (30 points) WRITE YOUR NAME AND ID NUMBER ON YOUR good-for-nothing BOOK. As stated on the syllabus (p. 3) and in numerous in-class and e-mailed reminders, you must write your answers in pen not pencil. This is a single multi-part essay question. You should write in your blue book for 30 minutes. 1. Write a coherent essay on the causes of the 2008-09 recession and on the policy reactions to this event. Your essay should cover the future(a) specific points a. First, establish the facts. What were similarities in the duration and magnitude of the 2001 recession and subsequent recovery as compared to the 2008-09 recession and recovery so far?Include comments on GDP, t he GDP gap, labor market variables, and any other distinguishing features of these two episodes. b. What were the most important causes of the 2008-09 recession? Include comments on which causes were the same as in the 2001 recession, and which were different. c. In what sense, if any, did financial or fiscal policy partially contribute to the causes of the 2008-09 recession? d. Evaluate the response of mo terminateary policy since early 2008. What were the similarities and differences between this response and the mo winary policy response to postwar recessions in 2001 and earlier? What aspects would you praise or pick apart? e.Evaluate the response of fiscal policy since early 2008. What aspects would you praise or criticize? Multiple Choice Questions Make sure to write you answers on the blanks on page 1 1. The current account includes all of the following except A) net exports B) net income from abroad C) net unilateral transfers D) foreign direct investment 2. In what way was the international economy cited as a source of the U. S. housing bubble in 2003-06? A) cheaper prices of imported building materials B) support of dollar by foreign central banks C) immigration of skilled foreign construction workers D) high cave in of top executives of foreign investment banks 3.Which of the following were not cited in the course as a reason for France and other European nations to be reluctant to evidence an Obama-like fiscal stimulus for their own countries? A) high unemployment in Europe B) low fiscal multipliers C) social welfare system D) unemployment insurance system 4. Suppose we have an economy in which G = 1100, t = 0. 26, Y = 3800, and YN = 4000. At Y the difference between the actual deficit and structural deficit is A) 60. B) 112. C) -172. D) -112. E) 52. 5. The failure of U. S. net exports to improve dramatically in the mid 1980? s despite the weakening of the dollar suggests that A) U. S. industries supply of competitive goods was inelastic over the period.B) LDC debt repayment schedules and lack of financial support kept U. S. exports low. C) NCIs maintained fixed exchange rates vis a vis the dollar and U. S. exports low. D) All of the above. 6. In the reading period assignments from the Economist, the United States is faulted relative to Europe and lacquer for each of the following reasons except A) labor and capital markets B) primary and secondary education C) personal saving rate D) infrastructure 7. In the reading period article about France, the French are praised for each of the following reasons except A) infrastructure B) household debt C) output growth rate D) medical care system 8. The mechanism of ? international crowding-out? s that a government budget deficit ________ the domestic arouse rate, which makes the dollar ________ expensive for foreigners, which then ________ net exports. A) raises, less(prenominal)(prenominal), lowers B) raises, less, raises C) raises, more, lowers D) lowers, less, lowers E) l owers, more, raises 9. Which of the following personal effects takes place as a result of automatic stabilization? A) extra tax revenues are generated in a boom. B) tax revenues remain constant during a recession. C) leakages increase during a recession, helping to stimulate the economy. D) Both A and C are correct. 10. If the Federal Reserve intervenes in the foreign-exchange markets and buys foreign currencies A) the U. S. oney supply rises and foreign currencies depreciate. B) the U. S. bills supply falls and foreign currencies depreciate. C) the U. S. money supply rises and foreign currencies appreciate. D) the U. S. money supply falls and foreign currencies appreciate. 11. Activists-believe that AD is unstable because A) business and consumer attitudes and expectations shift. B) monetary policy is variable. C) fiscal policy effects are unpredictable. D) Both B and C are correct. 12. Assuming constant wages implies that A) an increase in the price of goods raises kale and SAS is vertical. B) a decrease in the price of goods lowers profits and SAS is horizontal.C) an increase in the price of goods lowers profits and SAS is vertical. D) an increase in the price of goods raises profits and SAS is positively sloped. pic 13. Consider the above figure with equilibrium initially at E0. If the money supply is change magnitude and prices are flexible, in the short run prices and output pass on ___. In the long run output and prices will ___. A) be as at E2 return to E0. B) be as at E1 be as at E2. C) be as at E2 be as at E3 D) be as at E2 be as at E1. E) be as at E1 be as at E3. 14. According to the readings, a common feature of the Great Depression and the recent economic crisis was A) mortgage credit B) deposit insurance C) unemployment rate D) monetary policy 15.The sources of the current problems of running monetary policy are often cited as A) Quantitative easing B) Zero lower bound C) redundance bank reserves D) A) and B) E) B) and C) 16. An acceleration of nominal GDP growth from, say 4% to 6% will A) permanently raise the rate of inflation. B) temporarily lower the rate of inflation. C) leave actual GDP unaffected in the long run. D) Both A and C. 17. The short-run Phillips Curve gives A) the actual short-run level of real GDP and inflation. B) all possible combinations of real GDP and inflation, for a given set of expectations. C) all possible combinations of real GDP and inflation, for fully adjusted expectations. D) the response of real GDP and inflation to supply shocks. 18.The Fed is criticized for the one-way option regarding asset bubbles. The criticism is that the Fed __________ when asset prices increase and __________ when asset prices decrease A) raises provoke rates lowers entertain rates B) leaves interest rates idempotent leaves interest rates unchanged C) raises interest rates leaves interest rates unchanged D) leaves interest rates unchanged lowers interest rates E) lowers interest rates raises interest rates 19. Which of the following was not a source of the Great Moderation, according to the schoolbook? A) growth rate rule for money supply B) financial deregulation in late 1970s, early mid-eightiesC) magnitude of supply shocks after early 1980s D) government military make iting 20. In the short-run, the impact of an adverse supply shock is to A) reduce real GDP and leave the inflation rate unchanged if the growth of nominal GDP remains the same. B) reduce real GDP and leave the inflation rate unchanged if the growth of nominal GDP is trim enough. C) maintain the same level of real GDP and reduce the inflation rate if the growth if nominal GDP is increased enough. D) All of the above. 21. According to the textbook, the main losers due to the redistributive effect of the postwar inflation in the United States were A) households. B) corporations. C) government. D) A) and B) 22. Disgruntled? workers who quit their jobs to find ? a more reasonable boss? are experiencing A) involuntary u nemployment. B) mismatch unemployment. C) cyclical unemployment. D) turnover unemployment. 23. Policy solutions to mismatch unemployment include A) fiscal policies to raise the AD curve B) monetary policies to raise the AD curve C) policies other than fiscal and monetary policies D) accommodative policies to deal with supply shocks 24. Over a year, the money supply in a nation grew by 6 percent, while velocity rose by 2 percent and real GDP rose by 3 percent. This results in an inflation over the year of ________ percent. A) 5 B) 11 C) 1D) 7 25. The the Feds quantitative easing after mid-2008 is not described by A) increased open-market purchases of Treasury securities B) increased open-market purchases of private securities C) increased open-market purchases of corporate stock D) A) and B) E) A) and C) 26. Which of the following increased by the largest percentage between mid-2007 and mid-2009? A) excess bank reserves B) M2 C) high-powered money D) total bank reserves E) M1 pic 27. Initially, the economy is at point G in the figure above. An increase in per capita savings from s0 to s1 will in the short run result in ________ and in the long run result in ________.A) excess per capita saving more rapid growth in per capita output B) excess per capita saving less rapid growth in per capita output C) more rapid growth in per capita output more rapid growth in per capita output D) more rapid growth in per capita output no change in the long run rate of growth in per capita output 28. Which of the following will not affect steady state per capita income in the Solow growth theory? A) The savings rate. B) The initial capital stock. C) The population growth rate. D) The production function. 29. The Solow growth model predicts that nations that are initially poor should have A) slower growth rates than nations that are rich. B) faster growth rates than nations that are rich. C) growth rates stir to those of nations that are rich. D) negative growth rates. 30.Two re adings in the course packet for Chapter 11 cite a particular technological innovation for improved economic growth in poor tropical countries. This is A) television B) internet C) mobile phones D) new drugs to fight malaria 31. Several structural changes that occurred over the past two decades were a origin of lectures. Which of the following was not one of these changes? A) greater importance of structural unemployment and less importance of frictional unemployment B) smaller response of core inflation to oil price shocks C) larger decline of employment to declines in output in recessions D) larger increase of productivity to increase in output in recoveries E) More trustfulness on wage flexibility rather than layoffs in 2008-09 recession 32.In the Cobb-Douglas production function Y=AKbL1-b, the variable A has several different names. Which of the following is not one of them? A) autonomous growth factor. B) infrastructure. C) multifactor productivity. D) residual. 33. The formu la for the growth rate of multifactor productivity is A) a = y + bk + (1 b)n. B) y = a + bk + bn. C) a = y bk (1 b)n. D) y = a b/k(1 b)n. 34. Which of the following does not affect multifactor productivity? A) a tax on low-efficiency firms B) a higher saving rate C) Environmental regulation. D) Technological progress. 35. Relative growth rates of the standard of living in the United States and Europe indicate that workers in ________ have chosen to ? spend? _______ of their higher productivity on leisure rather than on consumption of market goods and services. A) Europe, a significant part B) the United States, a significant part C) Europe, almost none D) the United States, almost all 36. Which of the following would cause labor? s share of national income to decrease? A) Labor productivity increases less rapidly than the real wage rate. B) Labor productivity increases more rapidly than the real wage rate. C) Labor productivity has increased at the same rate as the real wage r ate. D) Labor? s share of national income is not affected by the relative growth rates of labor productivity and the real wage rate. 37.Once monetary policy is dedicated to controlling the level of nominal GDP, then fiscal policy can be used to A) look at the overall level of interest rates, with a high budget surplus implying a high level of interest rates. B) choose the overall level of interest rates, with a high budget deficit implying a high level of interest rates. C) control the rate of inflation, with a high budget surplus implying a faster rate of inflation. D) control the rate of inflation, with a high budget deficit implying a faster rate of inflation. 38. A major side-effect of a excitant fiscal policy is that it will A) discriminate in favor of housing. B) crowd out private expenditures.C) increase the natural rate of unemployment. D) permanently raise the rate of inflation. 39. Which of the following was a policy of Roosevelts New Deal which is not a part of the Obam a stimulus package? A) tax reductions B) infrastructure improvements C) Direct hinderance to stop financial institutions from failing D) Federal government direct hiring of the unemployed 40. The Barro-Ricardo Equivalence Theorem assumes all of the following except A) Individuals value the welfare of their heirs as more than as their own welfare. B) Interest rates will remain constant. C) All individuals have children D) Markets for consumer housing and durable goods are perfect. 41.Which of the following will cause the employment that the Social Security trust fund runs out of money to be pushed further into the future? A) A decrease in the rate of real GDP growth. B) An increase in the population growth rate. C) A decrease in the growth of the real wage. D) All of the above. 42. A fixed money-supply rule will have the greatest stabilizing effect on output when A) money demand is unstable and commodity demand is stable. B) both money and commodity demand are unstable. C) both mo ney demand and commodity demand are stable. D) the velocity of money is unstable. 43. M1 is a definition of money largely confined to which function(s) of money? A) unit of account B) store of valueC) medium of exchange D) B and C. 44. In the empirical validation of the theory of the political business cycle discussed in lecture, which of the following variables calculated over the year before the election has been the best predictor of the outcomes of presidential elections? A) the unemployment rate B) the inflation rate C) the growth rate of per capita real GDP D) the level of the federal government fiscal deficit 45. In the empirical validation of the theory of the political business cycle discussed in lecture, which of the following elections is a clear outlier as violating that empirical evidence? A) 1932 B) 1936 C) 1972 D) 1992 E) 2000