ECON 311 - Intermediate Macroeconomics (Professor Gordon)
First Midterm Examination: Fall 2010
Answer sheet
YOUR NAME: _______________________________________
Circle the TA session you attend:
Assaf
Bridget
Juan
Ofer
9AM
9AM
9AM
9AM
3PM
3PM
3PM
3PM
INSTRUCTIONS:
1. The exam lasts 1 hour.
2. The exam is worth 60 points in total: 30 points for the multiple choice questions and 30 points for the two analytical
problems.
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.
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. Only hand in the answer packet.
7. Good luck!
PART A: Multiple Choice Problems
Answer multiple choice questions in the space provided below.
USE CAPITAL LETTERS.
1)
2)
3)
4)
5)
6)
7)
8)
9)
10)
11)
12)
13)
14)
15)
16)
17)
18)
19)
20)
21)
22)
23)
24)
25)
26)
27)
28)
29)
30)
PART B: Analytic Problems
QUESTION 1 (13 points)
An economy produces nuts and bolts. In the following table, prices and production is listed for the years 1999-2001.
Using 2000 as the base year, for each year calculate nominal GDP, real GDP, the GDP deflator and inflation.
1999
2000
2001
1
4
2
3
3
2
8
6
7
5
5
7
23
39
28
Previous Year Prices
n/a
21
49
Current Year Prices
23
39
28
Next Year Prices
47
22
n/a
Current Year Prices as weights
n/a
0.830
1.273
Previous Year Prices as weights
n/a
0.913
1.256
Chain Weighted
n/a
0.870
1.265
rGDP (Base = 2000)
44.8
39
49.3
GDP Deflator
0.513
1
0.568
Inflation Rate
n/a
66.68%
-56.61%
Prices
1. Nuts
2. Bolts
Quantities
1. Nuts
2. Bolts
Nominal GDP
Expenditure in Constant $
rGDP Growth
QUESTION 2 (17 points)
Consider an economy described by the following equations:
C = 500 – 5*r + 0.6*(Y – T)
Ip = 1000 – 20*r
T = 1000 + 0.1*Y
G = 1200,
NX = 900 – 0.04*Y
(M/P)d = 0.2*Y – 10*r
Ms/P = 800
a) Using the above numbers: find autonomous planned spending at a zero interest rate, autonomous planned
spending as a function of interest rate, the multiplier and the equation for the IS curve. (3 points)
Ap = Ca – c*Ta + Ip + G + NXa = 3000 – 25*r
k = 1/((1-c)*(1-t)+t+nx) = 2
The IS curve : Y = k*Ap = 6000 – 50*r
b) Derive the LM curve. (3 points)
Md/P = Ms/P
0.2*Y - 10*r = 800 or Y = 4000 + 50*r
c) Find the equilibrium values of income and interest rate. (Hint: if you found equations for income above,
then calculate the interest rate by combining the IS and LM curves separately; if you found equations for
the interest rate above, then calculate the level of income using the IS and LM curves separately.) (2 points)
6000 – 50*r = 4000 + 50*r
100*r = 2000
r = 20
Y = 4000+50*20 = 5000
d) Calculate tax revenues, consumption (remember to include the effect of interest rate) and savings. What are
the total leakages in this economy? Check your work by showing that it is equal to injections. (2 points)
T = 1000 + 0.1*5000 = 1500,
C = 500 – 5*20 + 0.6*(5000 – 1500) = 2500
S = Y – T – C = 5000 – 1500 – 2500 = 1000
Leakages = S + T = 2500
I = 1000 – 20*20 = 600
G = 1200
NX = 900 – 0.04*5000 = 700
Injections = I + NX + G = 600 + 700 + 1200 = 2500
e) The central bank wants to increase tax revenues to in the economy to 1550. In order to do that, the central
bank decides to change the money supply. What should be the new level of the money supply? (4 points)
The equation for T is T = 1000 + 0.1Y. So in order for T = 1550, we must have Y = 5500. The IS curve does not
change, so Y = 5500 implies
5500 = 6000 – 50*r, so r = 10.
Plugging this in the LM curve
Ms/P = 0.2*Y - 10*r = 0.2*5500 – 10*10 = 1000.
Real Money Supply should increase to 1000.
f) In the previous question, was the money supply expanded or contracted? Explain in words how that lead
to more tax revenue. (3 points)
The money supply expanded. The increase in the money supply lowered interest rates, leading to increased
investment. This increased demand and resulted in more production and thus more income and more tax
revenue.
PART A: Multiple Choice Problems
1. Securitization refers to which aspect of the macro business cycle of 2001-2009?
A) Housing mortgates
B) Dot.com stock market bubble
C) Zero lower bound
D) Yield curve
E) Difference of interest rates between ten-year bond rate and fed funds rate
2. Which of the following is included in the GDP?
A) the current services flowing from the housing stock
B) the estimated value of drugs sold illegally
C) the estimated value of leisure time
D) transfer payments such as Social Security and veterans' benefits
E) private purchases of used assets
Answer: A
3. Suppose the Bureau of Labor Statistics interviews 200,000 people in its monthly survey; 95,000
are not in the labor force, 85,000 are employed, 5,000 are unemployed, and 15,000 are in the
armed forces. What is the unemployment rate the BLS announces.
A) 5.88 percent
B) 2.50 percent
C) 5.56 percent
D) 4.76 percent
E) 5.00 percent
Answer: C
4. If the government of a Country is running a budget deficit and net exports are zero, then
A) investment is greater than saving.
B) investment and saving are equal.
C) saving is greater than investment.
D) none of the above.
Answer: C
5. The cars produced by the Japanese company Toyota in its factory in Kentucky ________ in U.S.
GDP and ________ in U.S. GNP.
A) count, count
B) count, do not count
C) do not count, count
D) do not count, do not count
Answer: B
6. Actual real GDP this year is expected to exceed last year's by two percent, while the annual
growth rate of natural real GDP is three percent. This is enough to lead us to expect that this
year's unemployment rate will be
A) below last year's and below the natural rate of unemployment.
B) below last year's but still above the natural rate of unemployment.
C) below last year's.
D) above last year's.
E) above last year's and above the natural rate of unemployment.
Answer: D
7. The explosion of the Fed Balance Sheet between 2008 and 2010 mainly took the form of:
A) Currency
B) Required Reserves
C) Excess Reserves
D) Government Securities
E) A) and D)
8. What is the most important message that you got out of the course packet readings on Ch 1-4?
A) A negative output gap raises inflation
B) The magic equation does not work in an open economy with imports
C) Not every American is meant to own a home
D) A positive output gap reduces inflation
E) An increase in household net worth raises the saving rate
9. If total planned spending (Ep) exceeds GDP, we expect that
A) inventories will be falling.
B) inventories will be rising.
C) GDP will be falling.
D) government expenditures must be rising.
Answer: A
10. At every point on the IS curve, the level of income on the horizontal axis equals
A) planned autonomous spending.
B) planned autonomous spending times the multiplier.
C) planned autonomous spending divided by the multiplier.
D) the real money supply.
Answer: B
11. The IS curve shows that higher income levels require ________ interest rates to ensure that
income equals ________.
A) higher, planned autonomous spending
B) higher, planned expenditures
C) lower, planned autonomous spending
D) lower, planned expenditures
Answer: D
12. Suppose that in an economy the current interest rate of 8 percent causes a planned investment
of $300 billion. Should the interest rate fall to 7 percent, the $300 billionth dollar of investment
spending now generates a ________ rate of profit, which puts ________ pressure on
investment.
A) positive, downward
B) positive, upward
C) negative, downward
D) negative, upward
Answer: B
13. A mass-production bagel factory is considering the purchase of a flash freezer to improve the
quality of the raw dough it provides supermarket bakeries. The freezer costs $750,000 and
would increase business revenues by $48,000 a year after all expenses besides interest are paid.
If the interest rate is 7.8 percent, what is the freezer's annual profit rate?
A) 7.8 percent.
B) 1.4 percent.
C) -1.4 percent.
D) 5.9 percent.
E) -5.9 percent.
Answer: C
14. When interest rate rise consumers will
A) compare loan payments with the desirability of goods in the future and increase
consumption.
B) compare loan payments with the desirability of goods today and increase consumption.
C) wait to borrow funds when interest rates fall.
D) none of above.
Answer: C
15. Improved stability of the US economy since 1985 is referred to as:
A) Great Moderation.
B) Great Depression.
C) Automatic Stabilizer.
D) Fiscal Discretion.
Answer: A
16. Which of the following determinants of autonomous consumption explains the increase in the
personal saving rate from 2006 to 2010?
A) Interest Rates
B) Housing bubble
C) Household indebtedness
D) Government indebtedness
E) B) and C)
F) C) and D)
17. The Smith family reading in the course packet illustrates best which macroeconomic concept
A) The zero lower bound
B) The multiplier effect
C) Ineffectiveness of monetary policy
D) Ineffectiveness of fiscal policy
E) A) and D)
18. A rise in the income tax rate will
A) raise the multiplier and raise equilibrium income.
B) lower the multiplier and raise equilibrium income.
C) raise the multiplier and lower equilibrium income.
D) lower the multiplier and lower equilibrium income.
Answer: D
19. Assume that all taxes are lump-sum, net exports = 0, and the marginal propensity to consume
is 0.8. Then, if planned investment and taxes were each to fall by $100 million, the equilibrium
level of income would
A) rise by $100 million.
B) fall by $100 million.
C) rise by $500 million.
D) fall by $500 million.
Answer: B
20. An increase in the money supply will raise equilibrium GDP if the
A) IS curve is negatively sloped.
B) IS curve is not vertical.
C) position of the IS curve depends on the level of real money balances.
D) position of the LM curve depends on the level of real money balances.
Answer: A
21. Suppose the government increases its expenditures by $100 million and finances the resulting
deficit by selling bonds. Then the LM curve will
A) shift rightward.
B) shift leftward.
C) become steeper.
D) none of these.
Answer:
D
22. A change in the interest rate will generally affect the
A) level of investment.
B) level of consumption.
C) the amount of money people want to hold.
D) all of these.
Answer:
D
23. At all points below the current LM curve,
A) the supply of output exceeds output demand.
B) the supply of output falls short of output demand.
C) the supply of money falls short of money demand.
D) the supply of money exceeds money demand.
Answer: C
24. Which of the following statements are true?
A) the smaller the responsiveness of money demand to a change in the interest rate, the
steeper the LM curve.
B) the smaller the responsiveness of money demand to a change in income, the flatter the LM
curve.
C) If money demand is not responsive to a change in the interest rate, the LM curve will be
horizontal.
D) Both A and B
Answer:
D
25. From an initial IS-LM equilibrium with normally-sloped IS and LM curves, the money supply
falls. At the new IS-LM equilibrium we have some combination of a ________ income and a
________ interest rate.
A) higher, higher
B) higher, lower
C) lower, higher
D) lower, lower
Answer: C
26. “Crowding-out” occurs in the IS-LM model as rising government spending requires a
________ in the interest rate in order to ________ the demand for money at the new
equilibrium, thus ________ planned private investment.
A) rise, keep constant, lowering
B) rise, raise, lowering
C) rise, lower, raising
D) fall, keep constant, raising
E) fall, raise, lowering
Answer: A
27. Suppose we have normally-sloped IS and LM curves intersecting at point A. Then a monetary
policy change shifts the LM curve to the right. Directly below point A we find a point on the
new LM curve that shows us
A) where the new IS-LM equilibrium occurs.
B) how much the interest rate must fall to raise planned expenditures to the new equilibrium
income.
C) how much the interest rate must fall to by itself raise the demand for money by as much as
the money supply has decreased.
D) how much income must rise to by itself raise the demand for money by as much as the
money supply has increased.
E) how much the interest rate must fall to by itself lower the demand for money by as much
as the money supply has decreased.
Answer: C
28. Which of the following, according to the lecture, best describes the difference between the
economic situation in 2010 as contrasted with late 1982?
A) Higher interest rates
B) Higher long-term unemployment
C) Higher unemployment rate
D) A) and C)
E) B) and C)
29. According to the lecture, the phrase the “99’ers” refers to which macroeconomic concept?
A) The dot-com boom of the late 90s
B) The government surplus of the late 90s
C) Increased income inequality at the 99th percentile
D) 99 weeks of unemployment compensation
E) C) and D)
30. If the level of interest rates paid on time deposits rise, ceteris paribus, individual will
A) reduce their real money balances.
B) first reduce then increase their real money balances.
C) increase their real money balances.
D) hold the same amount of money.
Answer: A