Introduction to MacroeconomicsINSTRUCTIONS: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’t get 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.111213141212223242313233343414243444515253545616263671727378182838919293910203040MCQ1Q2Q3Q4Q5Q6TotalPage 2 of 17Part A. Multiple Choice Questions (45 points)1. Money isA) 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 becauseA) 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 areA) 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; fallenB) more; risenC) less; fallenD) less; risen5. The lecture and readings explain the recent rise in food prices byA) Subsidies to ethanolB) Economic growth in ChinaC) Economic growth in the USD) Quotas on corn importsE) A) and B)F) A) and D)6. An example of a contractionary monetary policy isA) 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?.Page 3 of 178. A major source of economic growth discussed in the course packet readings but not in the textbook isA) Ignoring the effects of environmental pollutionB) Saving instead of consumingC) Accumulating human capitalD) Rural-urban migration9. The aggregate demand curve shows a ________ relationship between ________ and aggregate output ________.A) positive; the price level; demandedB) negative; the price level; suppliedC) negative; the price level; demandedD) positive; the interest rate; demanded10. 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 111. Refer to Figure 1. An aggregate demand shift from AD2 to AD0 can be caused byA) 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 byA) 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.Page 4 of 1713. Refer to Figure 1. Suppose the economy is at Point A, an decrease in government purchases can cause a movement to PointA) E.B) B.C) C.D) D.14. The acronym “ZLB” refers most directly toA) monetary policyB) fiscal policyC) agricultural subsidiesD) environmental pollutionRefer to the information provided in Figure 2 below to answer the two questions that follow.Figure 215. 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, 1929B) The New Deal raised wages and prices in 1933-35C) Policymakers were passive and did nothing in 1929-33D) The New Deal was responsible for the recoveryPage 5 of 1718. 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 ofA) ProductivityB) Embodied technical changeC) Disembodied technical changeD) Human capital19. A course packet article about business cycles concludes thatA) Households should not worry about saving because the government will spendB) Households should not worry about saving because the government should spendC) The government should not worry about spending because households will spendD) The government should not worry about saving because households will spendRefer to the information provided in Figure 3 below to answer the three questions that follow.Figure 320. Refer to Figure 3. Which of the following causes the economy to move from Point A to Point E?A) technological progressB) an increase in the price levelC) an oil embargo that increases the price of oilD) an influx of immigrants21. Refer to Figure 3. Suppose the economy is at Point A, an increase in the price level moves the economy to PointA) 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 PointA) E.B) B.C) C.D) D.Page 6 of 1723. Which of the following are not examples of a fiscal policy stimulus cutting unemployment by half or moreA) Germany 1933-37B) US 2001-06C) US 1940-42D) US 2008-11E) 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 beenA) 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) 7B) 9C) 11D) 13Refer to the information provided in Figure 4 below to answer the three questions that follow.Figure 425. Refer to Figure 4. Suppose the economy is currently at Point A producing potential output Y0. If the government increases spending, the economy moves to Point ________ in the short-run and to Point ________ in the long-run.A) D; EB) B; DC) C; BD) B; CPage 7 of 1727. Refer to Figure 4. For this economy to produce Y1 and sustain it without inflationA) 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 of government spending to GDP being unusually ____________ and the ratio of government revenues to GDP being unusually _____________.A) High, LowB) Low, HighC) High, HighD) Low, LowRefer to the information provided in Figure 5 below to answer the three questions that follow.Figure 529. Refer to Figure 5. Cost-push inflation occurs ifA) 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 Y2.A) greater; lessB) less; lessC) greater; greaterD) less; greater31. 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 pricesA) 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.Page 8 of 1732. A rightward shift in the aggregate demand curve generates a ________ inflation and ________ output.A) demand-pull; higherB) cost-push; lowerC) demand-pull; lowerD) cost-push; higher33. The Federal Reserve’s policy to “lean against the wind” means thatA) 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 representsA) 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; implementationB) implementation; responseC) recognition; responseD) implementation; recognition36. The time interval taken for information to be communicated was reduced by the greatest magnitude by the invention of:A) The telephoneB) The internetC) The telegraphD) The personal computer37. The lecture diagnosis of the weakness of the 2010-11 economic recovery was …A) Weakness of monetary policyB) Weakness of fiscal policyC) The double hangoverD) (A) and (C)E) (B) and (C)38. The economic impact of ________ during expansionary periods is to moderate growth.A) positive demand shocksB) tax cutsC) automatic stabilizersD) implementation lags39. An example of automatic stabilizers isA) government spending rising during an expansion.B) government spending falling during a recession.C) deficit targeting.D) taxes rising in an expansion.Page 9 of 1740. Which of the following concepts discussed in lecture but not in the book explain why many poor countries remain so poor?A) Physical capitalB) Political capitalC) Human capitalD) Embodied technical change41. Diminishing returns to a factor implies that with capital fixedA) 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; 1B) increases; 3C) increases; 8D) decreases; 443. Which of the following is NOT an investment in human capital?A) older workers return to school to update their skillsB) the Ferris Advertising Agency replaces its secretaries’ typewriters with personal computersC) the Precision Tool Company teaches all its workers how to repair all the machines in the factoryD) local governments begin providing free hepatitis vaccinations to any resident who wants one44. 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 patternA) A negative slopeB) A positive slopeC) A horizontal slopeD) The convergence theory makes no prediction about the slope on that diagram45. In Econ 201 during Fall 2011, the example of the Netherlands was introduced in relation to which topic?A) AgricultureB) Economic growthC) UnemploymentD) Monetary policyPage 10 of 17Part B: Short Answer Questions (75 points)PROBLEM 1: (15 points): 1 point per blankComplete 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%.112113Percentage Change (LN formula)PriceQuantityPriceQuantity125mm Railguns7900287004Quafe5045044250Nominal GDP1. 38,3002. 45,8003. 17.88%Real GDP in 2009 prices4. 38,3005. 44,1006. 14.10%Real GDP in 2010 prices7. 37,2008. 45,8009. 20.80%GDP Deflator with base year 200910010. 103.8511. 3.78%GDP Deflator with base year 201012. 102.9610013. -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%Page 11 of 17PROBLEM 2: (8 points): point value specifiedAnswer the following questions using the following table.Real GDP per capitaAnnual growth rateAmarr11001.3%Dodixie9002.1%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)? _______________ 123.802. (2 points) At the given growth rates, how many years will it take for Dodixie to match Amarr’s real GDP per capita? _______________ 25.083. (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? _______________ 21.83Page 12 of 17PROBLEM 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 Quantity14(1 point) Equilibrium Price48(1.5 points) Consumer Surplus294(1.5 points) Producer Surplus1962. Suppose the government provides a subsidy of $15 per unit. Complete the following table:(1 points) Quantity17(1.5 points) Price Paid (by consumers)39(1.5 points) Price Received (by producers)54(1.5 points) Consumer Surplus433.5(1.5 points) Producer Surplus289(1.5 points) Total Subsidy Cost255(1.5 points) Deadweight Loss22.5Page 13 of 17PROBLEM 4. (23 points)The following table summarizes some macroeconomic quantities of a country called Utopia:Planned investment:I = 200Government purchases:G = 400Exports:EX = 100Imports (as a function of Y):IM =Autonomous taxes:TA = 200Autonomous 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 ????-?? ?? ??-?????? +?? ?? ??Page 14 of 17c. (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 this economy?Solution:Ap = a – b Ta + I +G + EX = 50 – 0.8 (200) +200+400+100 = 590Ap =Solution:Y * = Multiplier x Ap = 3 x 590= 1770Y * =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 =Page 15 of 17A 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:?Y = Multiplier x ?G = 3 x (-100)= -300?Y =Solution:?T = t ?Y= (1/24) x (-300)= – 12.5?T =Solution:?C = b x (?(Disposable Income))= b x (?Y – ?T) = 0.8(-300+12.5) = – 230?C =Solution:?S1 = S0 + ?Y – ?C – ?T = 249.25 +(-300) – (-230) – (-12.5)= 249.25 -300 +230+12.5 = 191.75 (2 points)?Gov. Surplus1 = (Gov. Surplus )0 + ?T – ?G= -126.25 + (-12.5) – (-100) = -38.75 (2 points)? IM1 = m (Y0+ ?Y)= 0.1 (1770+(-300))= 147 (2 points)S 1 =Gov. Surplus 1 =IM1 =Page 16 of 17PROBLEM 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 2011 real GDP?200b. (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 yearsd. (2 points) Suppose real GDP in Macondo in 2011 is 200 with a growth rate of 2%, and a neighboring 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?NoProblem 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.Page 17 of 17a. (2 points) What is the total value of deposits in the banks of Macondo?D=500/(0.15 + 0.05) = 2500b. (2 pts) How much is kept as reserves in Macondo?R = rr D = 0.15 x 2500 = 375c. ( 2pts) What is the money supply in this republic?M = C + D = c D + D = 0.05 x 2500 + 2500 = 2625d. ( 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 the demand 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: – .