Final Exam 2011 Fall Econ 201 With Solutions

8/18/2019 Final Exam 2011 Fall Econ 201 With Solutions

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ECON 201: Introduction to Macroeconomics

Final Exam

December 5, 2011

NAME: _________________________________

Circle your TA’s name: Agustin Brian Meysam

Circle your section time: 9 a.m. 3 p.m.

INSTRUCTIONS:

1. The exam lasts 2 hours.2. The exam is worth 120 points in total: 45 points for the multiple choice questions (Part A), and

75 points for the six analytical problems (Part B).

3. Write your answers for part A (the multiple choice section) in the blanks below. You won’tget credit for circled answers in the multiple choice section. There is no penalty to guessing, so be sure to answer all of them.

4.

Place all of your answers for part B in the space provided.5. You must show your work for part B questions. There is no need to explain your answers for the

multiple choice questions.6. Calculators are permitted. Books, notes, reference materials, etc. are prohibited.

7. Good luck!

PART A: Multiple Choice Problems. Answer multiple choice questions in the space provided

below. PLEASE USE CAPITAL LETTERS.

1 11 21 31 41

2 12 22 32 42

3 13 23 33 43

4 14 24 34 44

5 15 25 35 45

6 16 26 36

7 17 27 37

8 18 28 38

9 19 29 39

10 20 30 40

MC Q1 Q2 Q3 Q4 Q5 Q6 Total


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Part A. Multiple Choice Questions (45 points)

1. Money is

A) backed by gold in Fort Knox.

B) the same as income.

C) the value of all coins and currency in circulation at any time.

D) anything that is generally accepted as a medium of exchange.

2. The development of money as a medium of exchange has facilitated the expansion of trade because

A) holding money increases people's income.

B) no other mediums of exchange are available.

C) money eliminates the "double coincidence of wants" problem.

D) holding money increases people's wealth.

3. The price of bonds and the interest rate are

A) not related.

B) positively related.

C) negatively related.D) sometimes positively related and other times negatively related, depending on the bond payments.

4. As the interest rate falls, people hold ________ money instead of bonds because the opportunity cost of

holding money has ________.

A) more; fallen

B) more; risen

C) less; fallen

D) less; risen

5. The lecture and readings explain the recent rise in food prices by

A) Subsidies to ethanolB) Economic growth in China

C) Economic growth in the US

D) Quotas on corn imports

E) A) and B)

F) A) and D)

6. An example of a contractionary monetary policy is

A) an increase in the required reserve ratio.

B) a reduction in the taxes banks pay on their profits.

C) a decrease in the discount rate.

D) the Fed buying government securities in the open market.

7. Which of the following sequence of events follows an expansionary monetary policy?

A) r↓ ⇒ I ↓ ⇒ AE↓ ⇒ Y ↓.

B) r↑ ⇒ I ↑ ⇒ AE↓ ⇒ Y ↑.

C) r↑ ⇒ I ↓ ⇒ AE↓ ⇒ Y ↓.

D) r ↓ I ↑ AE↑ Y ↑.


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8. A major source of economic growth discussed in the course packet readings but not in the textbook is

A) Ignoring the effects of environmental pollution

B) Saving instead of consuming

C) Accumulating human capital

D) Rural-urban migration

9. The aggregate demand curve shows a ________ relationship between ________ and aggregate output________.

A) positive; the price level; demanded

B) negative; the price level; supplied

C) negative; the price level; demanded

D) positive; the interest rate; demanded

10. When the general price level rises,

A) investment rises as a result of the real wealth effect.

B) consumption increases as a result of the multiplier effect.

C) investment rises as a result of the multiplier effect.

D) consumption falls as a result of the real wealth effect.

Refer to the information provided in Figure 1 below to answer the three questions that follow.

Figure 1

11. Refer to Figure 1. An aggregate demand shift from AD2 to AD0 can be caused by

A) an increase in the price level.

B) a decrease in the price level.

C) a decrease in money supply.

D) a decrease in taxes.

12. Refer to Figure 1. An aggregate demand shift from AD1 to AD0 can be caused by

A) an increase in the price level.

B) a decrease in the price level.

C) a decrease in government spending.

D) an increase in money supply.


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13. Refer to Figure 1. Suppose the economy is at Point A , an decrease in government purchases can cause

a movement to Point

A) E.

B) B.

C) C.

D) D.

14. The acronym “ZLB” refers most directly to

A) monetary policy

B) fiscal policy

C) agricultural subsidies

D) environmental pollution

Refer to the information provided in Figure 2 below to answer the two questions that follow.

Figure 2

15. Refer to Figure 2. The money demand curve will shift from to , ifA) the level of aggregate output increases.

B) the interest rate decreases.

C) the price level decreases.

D) the inflation rate increases.

16. Refer to Figure 2. If the money demand curve shifts from to ,A) planned investment will increase and aggregate output will increase.

B) planned investment will decrease and aggregate output will decrease.

C) planned investment will increase and aggregate output will decrease.

D) planned investment will decrease and aggregate output will increase.

17. Which of the following is not attacked by the Economist article as a “myth” about the Great

Depression?

A) The Great Depression started with the stock market crash of October, 1929

B) The New Deal raised wages and prices in 1933-35

C) Policymakers were passive and did nothing in 1929-33

D) The New Deal was responsible for the recovery


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18. The Economist article the “secret sauce” discusses a concept called “Total Factor Productivity” As

explained in lecture, this is the same as the textbook’s concept of

A) Productivity

B) Embodied technical change

C) Disembodied technical change

D) Human capital

19. A course packet article about business cycles concludes that

A) Households should not worry about saving because the government will spend

B) Households should not worry about saving because the government should spend

C) The government should not worry about spending because households will spend

D) The government should not worry about saving because households will spend


Figure 3

20. Refer to Figure 3. Which of the following causes the economy to move from Point A

to PointE

?A) technological progress

B) an increase in the price level

C) an oil embargo that increases the price of oil

D) an influx of immigrants

21. Refer to Figure 3. Suppose the economy is at Point A , an increase in the price level moves the economy

to Point

A) E.

B) B.

C) C.

D) D.

22. Refer to Figure 3. During the 1990s, many firms in the United States were investing in new capital. If

the economy was originally at Point A , this would have caused a movement to Point

A) E.

B) B.

C) C.

D) D.


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23. Which of the following are not examples of a fiscal policy stimulus cutting unemployment by half or

more

A) Germany 1933-37

B) US 2001-06

C) US 1940-42

D) US 2008-11

E) A) and B)F) B) and D)

24. If a decrease in net taxes in the United States resulted in a very large increase in aggregate output and

a very small increase in the price level, then the U.S. economy must have been

A) on the very steep part of the short -run aggregate demand curve.

B) on the very flat part of the short -run aggregate demand curve.

C) on the very flat part of the short-run aggregate supply curve.

D) on the very steep part of the short -run aggregate supply curve.

25. If an economy like China’s has growth in real per-capita real GDP of 10% per year, the level of its

per-capita GDP will triple in __ yearsA) 7

B) 9

C) 11

D) 13


Figure 4

25. Refer to Figure 4. Suppose the economy is currently at Point A producing potential output Y 0. If the

government increases spending, the economy moves to Point ________ in the short -run and to Point

________ in the long-run.

A) D; E

B) B; D

C) C; B

D) B ; C


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27. Refer to Figure 4. For this economy to produce Y 1 and sustain it without inflation

A) potential output must increase.

B) the government must implement an expansionary fiscal policy.

C) the government must implement an expansionary monetary policy.

D) the price of oil must increase.

28. The large government deficit experienced by the U. S. during 2010-11 was due to the ratio ofgovernment spending to GDP being unusually ____________ and the ratio of government revenues to

GDP being unusually _____________.

A) High, Low

B) Low, High

C) High, High

D) Low, Low


Figure 5

29. Refer to Figure 5. Cost-push inflation occurs if

A) the aggregate supply curve shifts from AS1 to AS0.

B) the economy moves from Point A to Point B on aggregate supply curve AS1.

C) the aggregate supply curve shifts from AS1 to AS2.

D) the economy moves from Point A to Point C on the aggregate supply curve AS1.

30. Refer to Figure 5. Assume the economy is at Point A. Higher oil prices shift the aggregate supply

curve to AS2. If the government decides to counter the effects of higher oil prices by increasing

government spending, then the price level will be ________ than P2 and output will be ________ than Y 2.

A) greater; less

B) less; less

C) greater; greater

D) less; greater

31. Refer to Figure 5. Assume the economy is currently at Point A on aggregate supply curve AS1. An

increase in inflationary expectations that causes firms to increase their prices

A) moves the economy to Point C on aggregate supply curve AS1.

B) moves the economy to Point B on aggregate supply curve AS1.

C) shifts the aggregate supply curve to AS2.

D) shifts the aggregate supply curve to AS0.


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32. A rightward shift in the aggregate demand curve generates a ________ inflation and ________ output.

A) demand-pull; higher

B) cost-push; lower

C) demand-pull; lower

D) cost-push; higher

33. The Federal Reserve's policy to "lean against the wind" means that

A) the Fed slows money growth as the economy slows.

B) the Fed lowers taxes as the economy slows.

C) the Fed increases money growth as the economy slows.

D) the Fed raises required reserves as the economy slows.

34. The recognition lag of stabilization policy represents

A) the time that it takes for the economy to adjust to the new conditions after a new policy is introduced.

B) the time that is necessary to put the desired policy into effect.

C) the time needed for the Federal Reserve Board to meet.

D) the time that it takes for policy makers to recognize a change in the economy.

35. In general, fiscal policy has a longer ________ lag than monetary policy but shorter ________ lag.

A) response; implementation

B) implementation; response

C) recognition; response

D) implementation; recognition

36. The time interval taken for information to be communicated was reduced by the greatest magnitude

by the invention of:

A) The telephone

B) The internet

C) The telegraph

D) The personal computer

37. The lecture diagnosis of the weakness of the 2010-11 economic recovery was …

A) Weakness of monetary policy

B) Weakness of fiscal policy

C) The double hangover

D) (A) and (C)

E) (B) and (C)

38. The economic impact of ________ during expansionary periods is to moderate growth.

A) positive demand shocks

B) tax cuts

C) automatic stabilizersD) implementation lags

39. An example of automatic stabilizers is

A) government spending rising during an expansion.

B) government spending falling during a recession.

C) deficit targeting.

D) taxes rising in an expansion.


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40. Which of the following concepts discussed in lecture but not in the book explain why many poor

countries remain so poor?

A) Physical capital

B) Political capital

C) Human capital

D) Embodied technical change

41. Diminishing returns to a factor implies that with capital fixed

A) as labor increases, labor productivity eventually decreases.

B) as output increases, labor increases.

C) as labor increases, output decreases.

D) as labor increases output always increases.

42. A company uses 100 workers and 30 units of capital to produce 500 units of output. If this company

increases its capital to 50 units and, as a result, its output increases by 300 units, the productivity of labor

________ to ________ units per worker.

A) increases; 1

B) increases; 3C) increases; 8

D) decreases; 4

43. Which of the following is NOT an investment in human capital?

A) older workers return to school to update their skills

B) the Ferris Advertising Agency replaces its secretaries' typewriters with personal computers

C) the Precision Tool Company teaches all its workers how to repair all the machines in the factory

D) local governments begin providing free hepatitis vaccinations to any resident who wants one

44. The convergence theory suggests that a diagram plotting the ratio of a country’s level of real GDP per

capita in 1960 on the horizontal axis relative to the US, and its growth rate from 1960 until now on the

vertical axis, should display the following pattern

A) A negative slope

B) A positive slope

C) A horizontal slope

D) The convergence theory makes no prediction about the slope on that diagram

45. In Econ 201 during Fall 2011, the example of the Netherlands was introduced in relation to which

topic?

A) Agriculture

B) Economic growth

C) Unemployment

D) Monetary policy


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Part B: Short Answer Questions (75 points)

PROBLEM 1: (15 points): 1 point per blank

Complete the blanks using the following table. Round all values to the nearest two decimal places,

including percentages. That is, answers should look like 13,300.72 or 29.87%.

112 113 Percentage Change

(LN formula)Price Quantity Price Quantity

125mm Railguns 7900 2 8700 4

Quafe 50 450 44 250

Nominal GDP 1. 38,300 2. 45,800 3. 17.88%

Real GDP in 2009 prices 4. 38,300 5. 44,100 6. 14.10%

Real GDP in 2010 prices 7. 37,200 8. 45,800 9. 20.80%

GDP Deflator with base

year 2009100

10. 103.85 11. 3.78%

GDP Deflator with base

year 2010

12. 102.96

100

13. -2.91%

14. What is the percentage growth rate in chain-weighted GDP? _______________ 17.45%

15. What is the inflation rate according to the chain-weighted GDP deflator? _______________

-0.43%


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PROBLEM 2: (8 points): point value specified

Answer the following questions using the following table.

Real GDP per capita Annual growth rate

Amarr 1100 1.3%

Dodixie 900 2.1%

1. (1 point) At the given growth rates, how many years will it take for Amarr’s real GDP per capita

to quintuple (increase fivefold)? _______________ 123.80

2. (2 points) At the given growth rates, how many years will it take for Dodixie to match Amarr’s real

GDP per capita? _______________ 25.08

3. (2 points) At what annual growth rate must Dodixie grow in order to catch-up with Amarr in exactly

20 years? _______________ 2.30%

4. (1 point) At what annual growth rate must Amarr grow to ensure Dodixie never catches up?

_______________ 2.1%

5. (2 points) Suppose Dodixie can bomb Amarr and cause it to suffer two years of zero growth before

resuming normal growth of 1.3%. How many years will it take for Dodixie to match Amarr’s real GDP if

Amarr is bombed? _______________ 21.83


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PROBLEM 3. (15 points) Complete the following blanks.

Suppose supply is given by P = 20 + 2Qs.

Suppose demand is given by P = 90 – 3Qd .

1. For this closed free market, complete the following table:

(1 point) Equilibrium Quantity 14

(1 point) Equilibrium Price 48

(1.5 points) Consumer Surplus 294

(1.5 points) Producer Surplus 196

2. Suppose the government provides a subsidy of $15 per unit. Complete the following table:

(1 points) Quantity 17

(1.5 points) Price Paid (by consumers) 39

(1.5 points) Price Received (by producers) 54

(1.5 points) Consumer Surplus 433.5

(1.5 points) Producer Surplus 289

(1.5 points) Total Subsidy Cost 255

(1.5 points) Deadweight Loss 22.5


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PROBLEM 4. (23 points)

The following table summarizes some macroeconomic quantities of a country called Utopia:

Planned investment: I = 200

Government purchases: G = 400

Exports: EX = 100

Imports (as a function of Y): IM = Autonomous taxes: TA = 200

Autonomous consumption: a = 50

- Let denote the marginal propensity to consume of the country.-

In Utopia there is an income tax: let be the income tax ratio.-

Let be the imports-to-income ratio of this economy,

a. (2 points) Show the Multiplier of Utopia, as a function of and .

b.

(1 points) Assume, for the remaining of problem 3, the following:

What is the numerical value of the Multiplier of this economy?

Multiplier −−+

Multiplier

−−

+


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c. (2 ponts) What is the level of autonomous planned expenditure of Utopia?

d. (2 points) Calculate the equilibrium output of Utopia.

e.

(4 points) What is the level of government surplus, and of domestic private savings (S) in thiseconomy?

Solution:

A p = a - b T a + I +G + EX = 50 – 0.8 (200) +200+400+100 = 590

A p =

Solution:

Y*

= Multiplier x A p = 3 x 590= 1770

Y*

=

Solution:

T = Ta +t Y = 273.75

Gov. Surplus = T – G = 273.75 – 400 = -126.25 (2 points)

C = a + 0.8 ((1-1/24)Y) - 0.8 Ta = 1247

S = Y – C – T = 1770 – 1247 – 273.75 = 249.25(2 points)

Gov. Surplus =

S =


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A change in government expenditure policy:

For the remaining of problem 3 (that is, for items (g), (h), (i) and (j)), assume what follows: the ruler of

Utopia, Sir T. More, is considering to reduce the government expenditure to G1=300 .

f. (2 points) By how much will the equilibrium output change?

g.

(2 points) By how much will tax revenue change?

h. (2 points) By how much will consumption change?

i. (6 points) What would be the new levels of Domestic Private Savings, Government Surplus, and

Imports?

Solution:

ΔY = Multiplier x ΔG = 3 x (-100)= -300

ΔY =

Solution:

ΔT = t ΔY= (1/24) x (-300)= - 12.5

ΔT =

Solution:

ΔC = b x ( Δ(Disposable Income))

= b x ( ΔY – ΔT) = 0.8(-300+12.5) = - 230 ΔC =

Solution:

S1 = S0 + ΔY – ΔC – ΔT = 249.25 +(-300) – (-230) – (-12.5)

= 249.25 -300 +230+12.5 = 191.75 (2 points)

Gov. Surplus1 = (Gov. Surplus )0 + ΔT – ΔG

= -126.25 + (-12.5) – (-100) = -38.75 (2 points)

IM1 = m (Y 0 + ΔY)

= 0.1 (1770+(-300))= 147 (2 points) S 1 =

Gov. Surplus 1 =

IM1 =


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PROBLEM 5. (6 points)

Now consider the country of Macondo.

a.

(1 point) If nominal GDP in 2011 in Macondo is 216 and the GDP deflator is 108, what is 2011real GDP?

200

b. (1 point) What was the % change (LN) in real GDP between years 2000 and 2001, if 2000 real

GDP was 180, and 2001 real GDP was 188? (1 point)

4.35%

c. (2 points) Suppose the yearly real growth rate is 2%. How long until the real GDP of Macondo is

three times what it is today?

100*LN(3)/2 = 54.9 years

d.

(2 points) Suppose real GDP in Macondo in 2011 is 200 with a growth rate of 2%, and aneighboring country, El Dorado, has a 2011 real GDP of 201 with a growth rate of 2.5%. Will the

GDP of Macondo ever equal that of El Dorado? If so, in how many years?

No

Problem 6. (8 points)

The country of Macondo has a monetary base of $500 million. The Central Bank of Macondo, requires

commercial banks to hold as reserves rr=0.1 (that is, for every unit a bank receives as deposit, it must

keep as reserve 0.1). Assume that commercial banks do keep the reserves, and do not keep excess

reserves.

In Macondo people find useful to keep some cash in their pockets. On average, in this economy you can

observe a currency-to-deposit ratio of c=0.05.


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a.

(2 points) What is the total value of deposits in the banks of Macondo?

D=500/(0.15 + 0.05) = 2500

b. (2 pts) How much is kept as reserves in Macondo?

R = rr D = 0.15 x 2500 = 375

c. ( 2pts) What is the money supply in this republic?

M = C + D = c D + D = 0.05 x 2500 + 2500 = 2625

d. ( 3pts) Now assume that in Macondo there is a money demand as follows:

Where stands for the interest rate. (So, if the interest rate were 4, you would plug 4 to get thedemand for money).

- What is the interest rate present if the money market is in equilibrium? Hint: you already

have the Money supply.- Draw in the space provided a diagram that shows the money market demand and supply, as

well as the equilibrium interest rate.

Solution: − .

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Final Exam 2011 Fall Econ 201 With Solutions