311fa07 midterm 1

8/11/2019 311FA07 Midterm 1

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Intermediate Macroeconomics 311 (Professor Gordon)

First Mid-Term Examination Fall, 2007

!"# $%ME&

Circle the TA session you are attending: Costel Friday 9AM Costel Friday 3PM Jerry Friday 9AM Jerry Friday 3PM

I$'T#"TI!$'&

1. The exam lasts 1 hour.2. The exam is orth !" #oints in total: 3" #oints $or the three analytical %uestions& and

3" #oints $or the multi#le choice %uestions.3. 'rite your ansers to Part A (the multi#le choice section) in the *lan+s on #age 1.

,ou on-t get credit $or circled ansers in the multi#le choice section.. Place all o$ your ansers $or #art / in the s#ace #ro0ided.. ,ou must sho your or+ $or #art / %uestions. There is no need to ex#lain your

ansers $or the multi#le choice %uestions.!. ood uc+4

P%#T %

Anser multi#le choice %uestions in the s#ace #ro0ided *elo."'E %PIT% ETTE#'*

1. 5 + 55 !. 55655 11. 55/55 1!. 5 +% 55 21. 5 + 55 2!. 5 + 55

2. 5 + 55 7. 55A55 12. 5 + 5 17. 5 + 55 22. 5 +E 5 27. 5 6 5

3. 55/55 8. 5 +% 55 13. 55655 18. 5 + 55 23. 5 +E 55 28. 5 +E 5

. 55A55 9. 5 +E+ 5 1. 5 6 + 5 19. 5 + 55 2. 5 + 55 29. 5 + 55

. 5 +E 55 1". 5 +E 55 1. 5 + 55 2". 5 +% 55 2. 5 + 55 3". 5 + 5

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1) The output gap is ero hen(a) Actual real 6P ;atural real 6P

(*) Actual real 6P = ;atural real 6P

(c) Actual real 6P < ;atural real 6P

(d) ;atural real 6P = ".

2) Total ex#enditures on $inal #roduct are

(a) C + = + + =M.

(*) C + > + T + ?@.

(c) C + = + > + ?@.

(d) C + = + + ?@ =M.

3) The lea+age and inBections a##roach im#lies that the go0ernment sur#lus is e%ual to(a) #ri0ate sa0ing less #ri0ate in0estment #lus net ex#orts.(*) #ri0ate in0estment less #ri0ate sa0ing #lus net ex#orts.(c) #ri0ate in0estment #lus #ri0ate sa0ing #lus net ex#orts.(d) ;one o$ the a*o0e

) =n national income accounting& (> + T) is

(a) the #ortion o$ total income not consumed.(*) net national #roduct.(c) the go0ernment de$icit.(d) the $inal out#ut $irms a*sor* as in0estment.

) >u##ose that in our economy: = 11""& T = 9""& > = 1"& and ;@ = 9". o much

o$ our $inal #roduct is used $or in0estmentD

(a) 11"(*) 2""(c) 23"(d) "(e) 3"

!) A change in nominal 6P sums u# changes in(a) #rices alone.(*) #hysical #roduction alone.(c) #hysical #roduction and hours o$ #roduction time.(d) #hysical #roduction and #rices.

7) =n the consum#tion $unction& hen dis#osa*le income is ero& consum#tion is(a) Ca.(*) cT.(c) EcT.(d) Ca.

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8) 'hich element o$ total #lanned ex#enditure is not included in autonomous #lanneds#endingDG(a) c,(*) cT(c) ;@

(d) =#(e) Ca

9) The multi#lier is de$ined as the ratio o$ a change in income to the(a) marginal #ro#ensity to sa0e.(*) marginal #ro#ensity to consume.(c) change in the marginal #ro#ensity to consume causing it.(d) change in the marginal #ro#ensity to sa0e causing it.(e) change in #lanned autonomous s#ending causing it.

1") >hould autonomous consum#tion rise *y one dollar& the e$$ect o$ this on e%uili*rium

income can *e o$$set i$ autonomous taxes are(a) raised *y one dollar.(*) loered *y one dollar.(c) raised *y c dollars.(d) loered *y c dollars.(e) raised *y (1Hc) dollars.

11) According to the $irst reading item (1I1) in contrast to the unconditional ad0ocacy o$$ull em#loyment in the $irst to decades o$ the #ostar era& a$ter 197" the goal changedto(a) ero in$lation(*) $ull em#loyment until the in$lation rate goes u#(c) $ull em#loyment until the in$lation rate goes don(d) steady in$lation neither going u# nor going don

12) 'hich o$ the $olloing statements is true a*out =rish #oliticiansD(a) 'hen they *rag a*out their #olicies they re$er to ;P(*) 'hen they *rag a*out their #olicies they re$er to 6P(c) 'hen they ant regional su*sidies $rom the ? they re$er to 6P(d) ;one o$ the a*o0e

13) =n the consum#tion $unction C = Ca + c(, T)& induced consum#tion is

(a) Ca+

c(, T)(*) Ca + c,

(c) c,(d) c(, T)

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1) =n e%uili*rium&

(a) income = #lanned ex#enditures.

(*) unintended in0entory in0estment is ero.(c) ?# (#lanned ex#enditures) crosses the Idegree income line.(d) all o$ the a*o0e.

1) =$ the interest rate ere to $all& e ex#ect that(a) the su##ly o$ money ill $all.(*) the su##ly o$ money ill rise.(c) autonomous #lanned s#ending ill rise.(d) the demand $or money ill $all.

1!) The 0elocityG o$ money is(a) the ratio o$ real 6P to the real money su##ly.(*) the real money su##ly di0ided *y the real 6P.(c) the money su##ly di0ided *y the #rice le0el.

(d) the money su##ly multi#lied *y the #rice le0el.

17) Along a donardIslo#ing money demand schedule& as the interest rate $alls(a) the %uantity o$ money demanded $alls.(*) the %uantity o$ money demanded rises.(c) real income rises.(d) real income $alls.

18) 'hen the demand $or money *ecomes less res#onsi0e to changes in income& the Mcur0e *ecomes 55555555 and it also shi$ts to the 5555555.(a) $latter& le$t

(*) $latter& right(c) stee#er& le$t(d) stee#er& right

19) =$ a gi0en $iscal #olicy is $ully accommodated *y monetary #olicy& then(a) 6P ill remain constant.(*) the interest rate ill remain constant.(c) 6P and the interest rate ill mo0e in the same direction.(d) 6P and the interest rate ill mo0e in the o##osite direction.

2") An increase in the real money su##ly ill ha0e its maximum e$$ect on the

e%uili*rium le0el o$ 6P hen the(a) M cur0e is 0ertical.(*) M cur0e is horiontal.(c) => cur0e is 0ertical.(d) => cur0e is negati0ely slo#ed.

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21) The article ad0ocating reen ;;PG argues that(a) 6P must *e adBusted donards $or the de#letion o$ natural resources(*) 6P must *e adBusted donards $or the de#reciation o$ #hysical assets(c) ;;P must *e adBusted donards $or the de#reciation o$ #hysical assets(d) A and /

(e) A and C

22) An article re#orts that to million men ha0e dro##ed out o$ the la*or $orce since199. As a counter#art o$ this:(a) More men are recei0ing disa*ility #ayments(*) More men are in #rison(c) More men are discouraged or+ers(d) A and /(e) A& / and C

23) The .>. sa0ing rate as almost ero in 2""I"7. At the same time

(a) ousehold net orth $ell(*) ousehold net orth rose(c) >a0ing $ell as oners o$ stoc+ #aid ca#ital gains taxes(d) Consum#tion $ell as oners o$ stoc+ #aid ca#ital gains taxes(e) / and C($) / and 6

2) Com#lete crodingIoutG descri*es the situation in the economy hen(a) $iscal #olicy is e$$ecti0e in changing out#ut.(*) the shi$t in the M cur0e *y monetary #olicy is im#otent.G(c) the shi$t in the => cur0e *y $iscal #olicy is im#otent.G(d) $iscal #olicy crods out monetary #olicy.

2) The three ays o$ reducing a go0ernment *udget de$icit are to(a) decrease go0ernment s#ending& reduce consum#tion& increase the tax rate.(*) increase go0ernment s#ending& decrease real income& reduce the tax rate.(c) decrease go0ernment s#ending& increase real income& reduce the tax rate.(d) decrease go0ernment s#ending& increase real income& increase the tax rate.

2!) 6omestic =ncome is e%ual to(a) 6PI=ndirect /usiness Taxes(*) 6PI=ndirect /usiness TaxesIde#reciation(c) 6PI=ndirect /usiness TaxesIde#reciationI>ocial security contri*utions cor#orate taxes(d) none o$ the a*o0e

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27) =n the =>IM Model& a reduction in go0ernment #urchases o$ goods and ser0ices ()tends to

(a) raise e%uili*rium in0estment(*) crod out in0estment(c) reduce e%uili*rium out#ut

(d) A and C

28) 'hich o$ the $olloing concerns may limit the amount *y hich the Fed reducesinterest rates to deal ith the su*I#rime mortgage crisis(a) Fear o$ higher in$lation(*) Fear o$ higher unem#loyment(c) Moral haard(d) Fear o$ $alling household ealth(e) A and C($) / and 6

29) 'hen the Economist argues that it-s a good time $or a s%ueeeG& ho does it su##ortits #ositionD(a) Pro$its ha0e *een high $or years so com#anies ha0e lots o$ cash(*) American consumers are de*tIladen and are *eing *attered *y $alling house #rices(c) ?merging mar+ets (less de0elo#ed countries) ha0e large $oreign exchangereser0es(d) A and C(e) / and C

3") According to the Business Week article Kur idden >a0ingsG hich o$ the $olloingis not trueD(a) K0er the #ast decade . >. stoc+ #rices ent u# $ar more than in ?uro#e or Ja#an(*) o . >. sa0ing re%uires *orroing $rom $oreigners(c) The . >. s#ends less on higher education than in ?uro#e or Ja#an(d) The . >. has a loer national sa0ing rate than ?uro#e or Ja#an(e) L6 s#ending is not counted as #art o$ 6P

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P%#T

Nuestion 1. (1" #ts)

China is 0ery $ast groing economy today. The 6PH#erson $or China is O3&"""& it isgroing at 8 #er year& on the other side& .> 6PH #erson is 3"&"""& and it-s groing at #er year. >o ho many years does it ta+e $or China to sur#ass .>D 'hat i$ .>6PH#erson is groing at #er yearD

'.//ose it taes (x) ears and GP at tat time is G, so

0*0 4 $(G53000)5x (1)

0*06 4 $(G530000)5x (2)

'oles tese t8o e9.ations, 8e :et&

;4 <7*= rs

If "*' GP :ro8s at <> /er ear,

;47=* rs

;ote 1: This is su##osed to *e a 0ery easy %uestion& es#ecially a$ter Pro$essor hasrecommended that you loo+ at the groth rate $ormula. /ut = don-t understand hy so

many #eo#le ha0e $ailed in this %uestion. =n my im#ression& a*out 2H3 o$ the studentsha0e #ro*lem in this %uestion.

;ote 2: >ome students hate the natural log ay o$ sol0ing %uestion. They resorted tocommon sense& such as:

3""" Q ( 1E"."8) n R 3"""" Q ( 1 E "." ) n &

/y this ay you ill get slightly di$$erent anser li+e !1 yrs and 82 yrs& although = #re$er the standard solution& = don-t ant to *e considered too sti$$& so = ga0e this solution8" o$ the score.

;ote 3: i$ you do any attem#t hich = thin+ is serious& no matter ho rong you are& =ill gi0e you 1I3 #oints&

=$ you rite don the correct e%uation and $ail to sol0e it& = gi0e you I7 #ointsde#ending on ho close you are.

=$ you are almost correct *ut only rong at the last num*er& = ill gi0e 7. 8 #oints.

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;ote : >ome students rite don the correct e%uation *ut $ail in go through the #rocesssuch as #ut logG on *oth sides o$ the e%uation& = thin+ it is a 0ery 0ery #ity thing. =suggest them go *ac+ to their math manual and seriously #ractice some *asic math.

Nuestion 2. (1" #ts) Consider an economy descri*ed *y the $olloing e%uations:

4 % ? c( @ T)

c 4 *6

% 4 3000 @ 20r

T4<00?*2

I/ 4 1000 @ 10rG 4 1<00

$; 4 100 @ *12

(M5P)d 4 *2 @ 60r

Ms5P 4 10

%) 6eri0e the => and M cur0es. (2 #oints)

415(*=A(1-*2)?*2?*12)41*2<4<56

%/43000-20r -*6A(<00)?1000-10r?1<00?1004<600 -30r

I'& 41*2<A(<600-(20?10)r) so&

I' .re

4 =7<0 @ 37*<r

or

r 4 10 @ (1537*<) 4 10 - *02==7

M& 10 4 *2 @ 60r so&

M .re

4 <0 ? 200r

or

r 4 -(152<) ? (15200) 4 -*2< ? *00<

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;ote 1 : M cur0e is 0ery easy to sol0e. => cur0e is not hard either& many #eo#le mainly$ail to get correct A# or +. Mostly i$ you Bust ma+e numerical error & = only deduct ". #oints& *ut since this directly a$$ect your anser in %uestion (*) & so in $act #eo#le homa+e numerical %uestion su$$er 1. #oints o$ loss.

;ote 2 : some #eo#le include , in A #& this is 0ery serious crime& so = deduct 1 #oint $romthat error.

;ote 3 : some #eo#le rite A # R "" ( excluding 3"r)& hich is $ine *ecause it is only #rocess o$ calculating => cur0e.

) Find the e%uili*rium real out#ut and interest rate& res#ecti0ely ,1 and r 1. (2 #oints)

4 =7<0 @ 37*<r

-( 4 <0 ? 200r)

0 4 17<0 @ 237*<r

'o,

r1 4 2*210<

1 4 <=B2*11

;ote 1: As long as you rite don the e%uation& you normally get 1 #t& *ut as = ha0e said&i$ you ma+e a numerical mista+e& = can only gi0e 1#t.

) >u##ose that consumer con$idence #lummets and causes CA to dro# *y !"& ceteris #ari*us. ;o su##ose the go0ernment is considering ta+ing action to restore out#ut in theeconomy to the le0el you com#uted in #art *& (i.e. *e$ore the negati0e shoc+ to consumercon$idence). 6etermine the magnitude and direction o$ change in the $olloing #olicy

0aria*les needed to restore out#ut to its desired le0el. Also com#ute the ending interestrate (r 2)& that is& the #re0ailing interest rate a$ter the go0ernment has ta+en action.

(i) Autonomous Taxes (TA) (3 #oints)

$eed to mae %/ 4 <600 a:ain* 'o&

<600 4 (3000-=0) @*6A(<00?CT%)?1000?1<00?100

'o,

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CT% 4 -1<0

r is .ncan:ed Deca.se 8e are .st siftin: te I' c.re Dac to its ori:inal /osition,

so&

r242*210<

Magnitude o$ Change in Taxes (TA) R 1<06irection o$ Change R dro/

?nding =nterest rate (r 2) R 2*210<

;ote1: grading #olicy is : i$ you get right magnitude& 1 #t =$ you get right direction& 1#t =$ you get right interest rate 1#t& ( e0en you get a rongnum*er& i$ you can #oint out that r is the same as in *& you get $ull #oints in this #art)

(ii) Leal Money >u##ly (MsHP) (3 #oints)

$e8 I' .re& 4 1*2<A(<600-=0 @ 30r), 4 ==7< @ 37*<r

esired !.t/.t m.st lie on tis ne8 c.re&

<=B2*11 4 ==7< @ 37*<r, so ne8 r m.st De&

r242=*210<

'o $e8 M c.re m.st De defined D&

10 ? C(Ms5P) 4 *2A(<=B2*11) @ 60A(2=*210<)

'o,

C(Ms5P) 4 ?0

Magnitude o$ Change in Taxes (MsHP) R 0

6irection o$ Change R increase

?nding =nterest rate (r 2) R 2=*210<

;ote1: grading #olicy is the same as the a*o0e one.

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Nuestion 3: (1" #ts)

The li%uidity tra#

Ja#an as once the economic star o$ Asia& *ut during 199"s and early year this century it

su$$ers the longest economic stagnation in history. (see Ta*le 1) Kne #ossi*le ex#lanation

is the li%uidity tra#.

Ta*le 1 6P groth and annual nominal interest rate in Ja#an $rom 1991 to 2""3

Leal 6P groth Annual nominal interest rate( in #ercentage)

1991 3.8 .!3

1992 1." 3.!9 1993 ".3 2.31

199 ".! 1.7

199 1. 1."2

199! 3.9 "."

1997 2." "."

1998 I2. "."

1999 ".2 "."

2""" 2.8 "."

2""1 ". ".23

2""2 I".3 ".1" 2""3 2.1 ".1"

(a) oo+ing at the interest rate shon in Ta*le 1& is there a natural loer limit L " o$ nominal interest rateD ?x#lain. (2#ts)

es, ( 0*< /t) nominal # cannot De ne:atie, # 0 4 0, ( 1 /t) Peo/le cannot /as to

D. a ero interest Dond, te 8o.ld rater s/end it toda* (0*< /t)

;ote1: #eo#le mostly are con$used *y the num*er ta*le& hoe0er& thin+ a*out this& i$ youare go0ernor o$ /and o$ Ja#an and = *ring a #iece o$ the ta*le in $ront o$ you& do youreally *elie0e you cannot loer interest rate than ".1D =$ you try to #ersuade me& you atleast should #ersuade yoursel$.

;ote 2: = admit that in real li$e& it is #ossi*le that ".1" or "." or any small num*er could *e the limit o$ a s#eci$ic central *an+ can achie0e at a certain time& *ut it is not natural

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one. =$ e li0e under a military dictatorshi#& it might e0en *e #ossi*le that e are $orced #ay national *an+ to de#osit. /ut it is not natural.

;ote3: the #oint o$ #utting 6P there is to sho that loer interest really $ail to generatesustained 6P groth& = didn-t mean to con$use you guys.

(*) >u##ose (MHP)d R 1HL& hat ould ha##en $or money demand $unction hen L isa##roaching L "D (1#t)

If ertical axis is # , and oriontal axis is M5P, ten te f.nction 8ill Decome

flat 8en # a//roac 0, M5P 8ill a//roac ?infinit*

;ote 1: =$ you correct recognie that (MHP)d ill increase& you get ". #ts. (c) 'hat ha##ens to the M cur0e i$ interest rate is 0ery close to L "D (2#ts)

en # is close to ero, M c.re 8ill De er flat* onsider tis, for #

a//roacin: #0, 5#4(M5P)s is er lar:e, so # 4 (15 (M5P) ) A is a linear c.re

8it slo/e a//roacin: ero* 'o M c.re is flat*

;ote: i$ you read Pro$essor-s *oo+& this %uestion is 0ery easy. (although detailedreasoning needs more or+). >omeone said: M cur0e is shi$ting rightG& *ut this is anunarranted anser& *ecause 1) e as+ing a static thing hen e%uili*rium L is smallinstead o$ mo0ing L . 2) e0en e are mo0ing L& e are not necessarily mo0ing M.Peo#le ho anser something li+e this *ut correctly mention M is $lat somehere elsein the exam& = ill count that you actually +no hat the anser is& and = gi0e you 1#t.For someone ho ne0er shos that heHshe +nos the anser& = am sorry a*out that.

(d) Ta+e your M cur0e o*tained in (c)& su##ose that interest rate is 0ery close to L "& andthe central *an+ increases the su##ly o$ money. 'hat ha##ens to the interest rate at agi0en le0el o$ incomeD

Interest rate 8ill old almost te same* ( it act.all dro/s er little Dit in

teor)

(e) >u##ose => cur0e is linear $unction ith negati0e slo#e& can an ex#ansionarymonetary #olicy alone increase out#ut hen the interest rate is already 0ery close toL "D /rie$ly ex#lain.

$oH If M c.re is nearl flat, ten moin: M c.re ri:t8ard 8ont increase

m.c, in extreme case, if M is /erfectl oriontal, moin: M ri:t8ard 8ont

mae difference at all*

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($) ;o can you #ro#ose any #olicy that might sa0e the country out o$ tra#D ( int:consider => cur0e no)

"se ex/ansionar fiscal /olic to moe I' c.re ri:t8ard to increase o.t/.t,

and ind.ce inflation*

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311fa07 midterm 1

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