ECON 201: Introduction to Macroeconomics Professor Robert Gordon

Final Exam: December 8, 2014

NAME ______________________________________________________ Circle your TA's name: Max Samir Vishal Circle your section time: 9:00 am 4:00 pm Directions: This test is in two parts, a multiple choice question part and a short-answer part. Use this answer packet to complete the exam. Calculators are permitted. Books, notes, reference materials, etc. are prohibited. Good luck! Part 1: Referring to the questions in the Multiple Choice Questions Packet, choose the one alternative that best completes the statement or answers the question. Each question is worth one point. There is no penalty to guessing, so be sure to answer all of them. Write your answers in the following table using capital letters.

1 11 21 31 41 51

2 12 22 32 42 52

3 13 23 33 43 53

4 14 24 34 44 54

5 15 25 35 45 55

6 16 26 36 46 56

7 17 27 37 47 57

8 18 28 38 48 58

9 19 29 39 49 59

10 20 30 40 50 60

1. What do a rubbernecking traffic jam and the paradox of thrift have in common? A) In both cases, individual behavior has large negative consequences for the whole of society. B) In both cases, seemingly bad behavior ends up harming everyone. C) In both cases, seemingly careless behavior leads to good times for all. D) In both cases, government intervention can only make matters worse. 2. If macroeconomic policy has been successful over time, it is likely that the economy has not seen: A) any inflation. B) any severe recessions. C) any unemployment. D) a business cycle. 3. For the past several months, per capita output has increased, but at a slower and slower rate. Over the same period, the unemployment rate has been falling, but it appears to have leveled off and may soon rise. Where in the business cycle is the economy? A) the business-cycle peak B) a recession C) the business-cycle trough D) an expansion 4. A depression occurs when: A) both output and employment increase. B) the economic downturn becomes extremely deep and prolonged. C) both price level and unemployment increase. D) output rises but employment remains unchanged. 5. A graph that plots the growth rate of real GDP per capita since the year 1300 shows A) a uniform growth rate over the centuries B) no growth until 1700, then a uniform steady growth rate until now C) a peak of growth in the middle of the 20th century, slower growth before and after D) a peak of growth in the middle of the 19th century, slower growth before and after 6. An open economy: A) trades only with its neighbors. B) trades goods but not services or assets with other countries. C) does not trade goods, services, or assets with other countries. D) trades goods and services with other countries. 7. The indirect ownership of physical capital refers to households owning: A) cash. B) stock. C) savings accounts. D) their house.

8. An example of a government transfer is a(n): A) expenditure on an interstate highway. B) bequest from a deceased relative. C) Social Security payment. D) salary for a member of the armed forces. 9. Which of the following is false? Gross domestic product: A) is aggregate output. B) is the total production of final goods and services. C) grows during an expansion. D) is the total production of all final and intermediate goods and services. 10. Which of the following is not in GDP A) income from Social Security B) income from wages C) income from interest on a bank savings account D) income from rent on property owned by landlords 11. Which of the following would NOT be included in this year's GDP? A) the production of a television show B) the purchase of a new hybrid truck C) the hiring of a new school teacher D) your purchase of your neighbor's house, which was built in 1994 12. You are a college student and not working or looking for work. You are: A) unemployed. B) in the labor force but not employed. C) not part of the labor force. D) not described by any of the above. 13. A survey reveals that on a small island initially 1,000 people have jobs, 200 people are looking for jobs, and 200 people are neither working nor looking for work. Suppose that 100 of the 200 people who weren't looking for work now begin looking for work and that half of the new entrants successfully find a job. What happens to the unemployment rate? A) It rises to 19.2%. B) It rises to 21.4%. C) It rises to 28.6%. D) Nothing happens to the unemployment rate. 14. If a country has a working-age population of 200 million, 135 million people with jobs, 10 million people who were looking for a job but have given up, and 5 million people unemployed and seeking employment, then the number of discouraged workers is: A) 25 million. B) 15 million. C) 10 million. D) 5 million.

15. Which of the following has declined by about four percentage points since 2007 A) unemployment rate B) employment-population ratio C) ratio of actual to potential real GDP D) ratio of consumption to disposable income 16. An increase in the number of discouraged workers in the economy tends to: A) raise the official unemployment rate. B) lower the official unemployment rate. C) lower the number of people who are frictionally unemployed. D) increase the number of people who are structurally unemployed. 17. In the absence of minimum wages, efficiency wages, or labor unions, a decline in the demand for labor will likely result in which of the following if wages are flexible? A) higher levels of employment B) no changes in employment C) lower level of employment but likely no change in the unemployment rate D) lower level of employment and a higher unemployment rate 18. The ______________in an economy whose aggregate real output is growing faster than the total population. A) real GDP per capita is rising B) standard of living is declining C) national income is falling D) nominal GDP per capita is rising 19. The rule of 70 indicates that a 6% annual increase in the potential level of real GDP would lead to the potential output doubling in _______ years. A) 6 B) 12 C) 24 D) 30 20. When the production function is drawn as a curve plotting output per person vs. capital per person, which of the following shifts the curve up A) upward shift in total factor productivity B) upward shift in output C) upward shift in the number of persons D) upward shift in the quantity of capital 21. If output is growing at 5% annually, how many years will it take for output to quadruple? A) 14 years B) 10 years C) 20 years D) 28 years

22. An example of human capital is: A) the money a person has. B) the job skills a person has. C) the capital goods or machines a person owns. D) the stocks and bonds in an individual's portfolio. 23. Diminishing returns to physical capital implies that when the human capital per worker and the state of technology remain fixed, each successive increase in physical capital leads to: A) a smaller increase in productivity. B) a larger increase in productivity. C) a decrease in productivity. D) negative productivity. 24. Which of the following would shift the production function upward? A) an increase in the price of oil B) an improvement in technology C) a decrease in the supply of labor D) a decline in the birth rate 25. The ratio of productivity growth contributed by the second industrial revolution compared to the third industrial revolution is A) 0.5 B) 1.0 C) 2.0 D) 3.0 26. Which of the following is considered to be investing in a physical asset? A) purchasing shares of stock in IBM B) selling shares of stock in IBM C) buying a bond issued by IBM D) buying a new factory that produces IBM handheld devices 27. The interest rate is 5% in the market for loanable funds. Investors wish to borrow $100 million and savers wish to save $125 million at this interest rate. We would expect: A) the interest rate to fall, as there is a shortage of loanable funds. B) the interest rate to rise, as there is a surplus of loanable funds. C) the interest rate to rise, as there is a shortage of loanable funds. D) the interest rate to fall, as there is a surplus of loanable funds. 28. A firm does NOT want to borrow money for a project when: A) the interest rate is higher than the rate of return on the project. B) the interest rate is lower than the rate of return on the project. C) the interest rate is positive. D) the rate of return on the project is positive.

29. The demand curve for loanable funds slopes: A) upward, since it takes a higher rate of return to get more funds. B) downward, because there are more potential projects that yield 10% than yield 5%. C) upward, because higher rates of return are necessary to cover higher costs. D) downward, because the demand is lower when the price to borrow money is higher. 30. Which of the following is true? A) European productivity growth was faster than in the US before 1995 B) US productivity growth was faster than in Europe before 1995 C) European productivity growth was faster than in the US after 1995 D) B) and C) 31. You have heard about a new light bulb that is costly to purchase but uses less electricity and thus allows you to save money on your utility bill. Suppose the new light bulb costs $10 today, but next year your electricity bill will be $50 lower. If the interest rate is 10%, what is the net present value of buying this new light bulb and using it for one year? A) $40 B) –$45.45 C) $55 D) $35.45 32. If the MPS = 0.1, then the value of the multiplier equals: A) 1. B) 5. C) 9. D) 10. 33. Suppose the marginal propensity to consume is equal to 0.9 and investment spending increases by $50 billion. Assuming no taxes and no trade, by how much will real GDP change? A) $450 billion increase B) $90 billion increase C) $500 billion increase D) $500 billion decrease 34. According to the table, the MPC and autonomous consumption are ________ and ________, respectively, for Bob. A) 0.6; $10,000 B) 0.4; $13,000 C) 0.6; $9,000 D) 0.4; $9,000 35. Which region provides the strongest support for the convergence hypothesis? A) Africa B) Eastern Europe C) Western Europe D) East Asia

36. Planned investment spending: A) is positively related to the interest rate. B) is negatively related to the interest rate. C) is independent of the interest rate. D) moves in the same direction as does the market interest rate. 37. In 2005, Airbus Co. purchased raw materials worth $400 million in order to manufacture airplanes for a total value of $900 million. In that year, Airbus Co. sold airplanes for a total value of $800 million. During 2005, Airbus Co. registered inventory investment of: A) $900 million. B) $500 million. C) $400 million. D) $100 million. 38. The aggregate expenditure line has a slope: A) greater than 1. B) less than 1. C) equal to 1. D) less than 0. 39. The aggregate demand curve is negatively sloped due to: A) the substitution effect of an aggregate price level change. B) the wealth effect of an aggregate price level change. C) the elasticity effect of an aggregate price level change. D) the fiscal policy effect. 40. Which of the following did not happen during 2007-2009 A) household saving rate rose B) household liabilities increased C) household assets decreased D) household net worth decreased 41. Suppose that consumer expectations about the future improve. How will this affect the aggregate demand curve? A) The aggregate demand curve shifts to the left. B) There will be a movement upward along the fixed aggregate demand curve. C) The aggregate demand curve shifts to the right. D) There will be a movement downward along the fixed aggregate demand curve. 42. The short-run aggregate supply curve slopes upward because of: A) wage and price stickiness. B) wage and price flexibility. C) increasing technology. D) a reduction in resource availability at higher price levels.

43. If nominal wages fall, then the short-run aggregate: A) supply curve shifts to the right. B) supply curve shifts to the left. C) demand curve shifts to the right. D) demand curve shifts to the left. 44. The level of output that the economy would produce if all prices, including nominal wages, were fully flexible is called: A) real GDP. B) Keynesian GDP. C) structural GDP. D) potential output. 45. Which of the following is true about automatic stabilizers? A) they raise the government deficit in recessions B) they reduce the government deficit in recessions C) they occur when the government cuts spending to avoid raising the deficit in recessions D) they occur when the government raises spending to try to keep the unemployment rate from rising 46. Government payments to households for which no good or service is provided in return are called: A) transfer payments. B) government purchases. C) consumption expenditures. D) investment expenditures. 47. Suppose the economy is in a recessionary gap. To move equilibrium aggregate output closer to the level of potential output, the best fiscal policy option is to: A) decrease government purchases. B) decrease taxes. C) decrease government transfers. D) increase real interest rates. 48. If the economy is at equilibrium below potential output: A) there is a recessionary gap, and expansionary fiscal policy is appropriate. B) there is an inflationary gap, and expansionary fiscal policy is appropriate. C) there is a recessionary gap, and contractionary fiscal policy is appropriate. D) there is an inflationary gap, and contractionary fiscal policy is appropriate. 49. All of the following are examples of fiscal policy EXCEPT: A) increasing the size of reimbursements under Medicaid. B) reducing the money supply in order to raise the interest rate. C) increasing personal income tax deductions for home ownership. D) reducing federal subsidies to state universities.

50. Which of the following is not true of quantitative easing? A) Raises Fed assets B) Raises Fed liabilities C) Raises difference between gross federal debt and net federal debt D) Reduces difference between gross federal debt and net federal debt 51. The double coincidence of wants problem can be solved by: A) more resources. B) more production. C) money. D) economic growth. 52. When you are using money to purchase a new MP3 player, money is serving as a: A) store of value. B) medium of exchange. C) unit of account. D) double coincidence of wants. 53. A reserve ratio is the: A) proportion of cash and security reserves the bank holds. B) fraction of deposits that the bank is required to hold. C) loan-to-deposit ratio in the bank's balance sheet. D) money belonging to the bank's largest depositors. 54. Banks are illiquid because: A) their deposits are less liquid than their loans. B) their loans are less liquid than their deposits. C) their assets are greater than their liabilities. D) their liabilities are greater than their assets. 55. The introduction of ATMs: A) increased the demand for cash because it made cash easier to get. B) decreased the demand for cash because it reduced the cost of moving from other assets into cash. C) did not change the demand for cash because it is proportional to the price level. D) did not change the demand for cash, as ATMs do not affect public spending habits. 56. Given an inflationary gap, the Federal Reserve will use monetary policy to _______ interest rates and _______ aggregate demand. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease

57. If the AD curve shifts to the right, in the short run there will be: A) an increase in aggregate output and an increase in the price level. B) an increase in aggregate output and a decrease in the price level. C) a decrease in aggregate output and a decrease in the price level. D) a decrease in aggregate output and an increase in the price level. 58. Without banks, people would: A) hold more of their wealth as cash. B) hold less of their wealth as cash. C) invest most of their wealth in real estate. D) earn higher rates of return and enjoy more liquidity. 59. In an asset bubble: A) depositors withdraw their deposits from banks until the bank fails. B) the price of an asset is pushed to an unreasonably high level because of expectations of further price gains. C) the price of an asset falls because demand for the asset is so high. D) savers and investors engage in maturity transformation by borrowing long term and making short-term loans to take advantage of interest rate increases. 60. Which of the following is an example of maturity transformation? A) Jordan borrows $15,000 to buy a car. B) Aaron buys new running shoes and pays for them with his American Express credit card. C) Angela gives Russell $100 in cash for a graduation gift. D) Tyler lends $1,000 to his roommate Nick for a year.

Part 2: Solve the following problems in the provided space. Show all your work clearly.

Problem 1 (10 points)

a) (4 points) Fill in the blanks below:

2010 2011

Annual change between 2010-11 using LN formula

Price Quantity Price Quantity

Apples 10 400 15 450

Oranges 15 350 10 350

Nominal GDP 1. 2.

Real GDP in 2010 prices

3. 4. 5.

Real GDP in 2011 prices

6. 7. 8.

b) (2 points) Calculate the percentage growth rate in chain-weighted GDP

c) (2 points) Calculate the GDP deflator with Base year 2010

i) For 2010 _______________

ii) For 2011 _______________

d) (2 points) Calculate the GDP deflator with Base year 2010

i) For 2010 _______________

ii) For 2011 _______________

Problem 2 (10 points)

a) (1 point) Neverland’s GDP is growing at 10% a year. How long until it increases by 25%?

b) (1 point) Jungleland is facing economic problems and its GDP is decreasing at a rate of 5% a year. How long until Jungleland’s GDP is cut in half?

c) (2 points) Fargo’s GDP is 5,000 and it’s growing at 10% a year. Sin City’s GDP is 20,000 and it’s growing at 2% a year. How long until Fargo’s GDP catches up to Sin City’s?

d) (6 points) In the year 2000, both Duckburg and Goosetown’s GDP was 10,000. 10 years later, in the year 2010, Duckburg’s GDP was 28,292.17 while Goosetown’s GDP was 34,556.13. During those 10 years, there were periods of very good economic growth (in which Duckburg grew at 18% a year and Goosetown grew at 20% a year) and periods of relatively good economic growth (in which Duckburg grew at 8% a year and Goosetown grew at 12% a year). However, there was also a period in which Goosetown and Duckburg went to war against each other. During those war years, both Duckburg and Goosetown’s GDP decreased at 10% a year. How long did the war last?

Problem 3 (10 points)

Consider the following table:

Age Have a job and not looking for another one

Have a job but looking for another job

Don’t have a job but are looking for one

Don’t have a job and are not looking for one

Total

<10 0 0 0 1000 1000 10-15 0 0 0 2000 2000 16-20 400 250 600 250 1500 21-30 2000 1000 500 250 3750 31-50 4000 2000 500 250 6750 51-70 2000 500 250 1000 3750 >70 250 100 100 2000 2450 Total 8650 3850 1950 6750 21200

a) (1 point) How many people are in the labor force?

b) (1 point) How many people are considered unemployed?

c) (1 point) What is the unemployment rate?

d) (2 points) Suppose 1000 employed people leave the country. Half of these people leave with exactly one child under the age of 16. Now what is the unemployment rate?

e) (2 points) Continuing from part d, now what is the labor force participation rate?

f) (3 points) Continuing from part d, suppose that 500 unemployed people give up looking for work and that a certain number (call it x) of unemployed people become employed. How many unemployed people became employed if the unemployment rate has changed to 10%?

Problem 4 (10 points)

Consider the following model economy:

Investment 510 Government spending 100 Exports 150 Imports 200 Taxes 300 Transfers to households 100

a) (2 points) You know that if Y=3000 then C=2540 and if Y=5000 then C=4140. Solve for MPC and autonomous consumption

b) (3 points) Using the information provided and the solution to a), calculate the equilibrium output

c) (2 points) Suppose the goods of this country become more popular to other countries, resulting in an increase in exports from the initial level of 150 to a new level of 250. Find the new GDP. (not the change in GDP)

d) (3 points) Suppose that Government Spending increases by 120, and Taxes increase by 150. Find the change in equilibrium output

Problem 5 (10 points)

Consider the following model economy:

Autonomous consumption (A) 600 Autonomous taxes (Ta) 300 Net exports (X – M) 200 Planned investment (Ip) 400 Government spending (G) 1,000 Income tax rate 20%

a) (1 point) Suppose the multiplier in this economy is 2 for the rest of this question. What is the marginal propensity to consume (MPC)?

b) (2 points) What is planned autonomous aggregate expenditure in this economy?

c) (3 points) What is the equilibrium level of output?

d) (2 points) Suppose the government wants to increase the equilibrium level of output by 300 by decreasing autonomous taxes. By how much would the government need to decrease taxes?

e) (2 points) Suppose the government wants to increase the equilibrium level of output by 300 by increasing G. By how much would the government need to increase G?

Problem 6 (10 points)

You are given the following information:

Bank deposits (D) 1,000 Currency-to-deposits ratio (c) 0.08 Required reserve ratio (rr) 0.12

a) (2 points) Solve for the monetary base level (B) in this economy

b) (2 points) Solve for the money supply level (M) in this economy.

c) (3 points) Suppose there is a sudden rise in the currency-to-deposits ratio, from the original level of 0.08 to a new level of 0.16. There is also a change in the required reserve ratio. After these changes take place, the monetary base increases by $5 and the money supply increases by $20. What is the new required reserve ratio?

d) (3 points) For this part, disregard what happened in part c). The currency-to-deposit ratio increased to a new level of 0.32. If everything else remains unchanged, what is the level of monetary base needed to keep money supply fixed at the level you solved for in part b?

SOLUTIONS

Answer Key 1. A 2. B 3. A 4. B 5. C 6. D 7. B 8. C 9. D 10. A 11. D 12. C 13. A 14. C 15. B 16. B 17. C 18. A 19. B 20. A 21. D 22. B 23. A 24. B 25. D 26. D 27. D 28. A 29. D 30. A 31. D 32. D 33. C 34. D 35. D 36. B 37. D 38. B 39. B 40. B 41. C 42. A 43. A

44. D 45. A 46. A 47. B 48. A 49. B 50. D 51. C 52. B 53. B 54. B 55. B 56. B 57. A 58. A 59. B 60. D

Problem 1

a)

1. 9,250

2. 10,250

3. 9,250

4. 9,750

5. 5.26%

6. 9,500

7. 10,250

8. 7.60%

b) 6.43%

c) i) 100

ii)105.13

d) i) 97.37

ii)100

Problem 2

a) 2.23 years

b) 13.86 years

c) ln(5,000)+0.1t=ln(20,000)+0.02t

0.08t=ln(20,000)-ln(5,000)

t=17.32 years

d) Let G be the number of years of very good economic growth and R be the number of years of relatively good economic growth. The war lasted for 10-G-R years

ln(10,000)+0.18G+0.08R-0.1(10-G-R)=ln(28,292.17)

ln(10,000)+0.20G+0.12R-0.1(10-G-R)=ln(34,556.13)

Solving the system of 2 equations and 2 unknowns we get

G=6, R=2

Hence, the war lasted for 2 years

Problem 3

a) 14,450

b) 1,950

c) 1950/14450=13.5%

d) 1950/13450=14.5%

e) 13450/17200=78.2%

f) (1450-x)/12950=0.1

x=155

Problem 4

a) A=300, MPC=0.8

b) 3500

c) 4000

d) 0

Problem 5

a) MPC=0.625

b) AAEp=2012.5

c) Y=4025

d) 240

e) 150

Problem 6

a) B=200

b) M=1080

c) rr=0.13

d) B=360