Econ 1120 – INTRO MACRO – Spring-2012 –March 15, 2012
Make-Up PRELIM #1 (Thursday)
PRINT YOUR NAME:
____________________________________ Your C.U. Netid: _____________
YOUR C.U. STUDENT NUMBER:
____________________________
Check YOUR TA’s NAME:
_____________TA = Xinli Wang (Monday sections)
_____________TA = Wei Quan (Tuesday sections)
_____________TA = Lingwen Zheng (Wednesday sections)
_____________TA = Minwook Kang (Wednesday sections)
_____________TA = Liyuan Cui (Thursday sections)
INSTRUCTIONS:
There are two sections in this exam
 Part I: 15 multiple choice questions @ 3 points each
 Part II: 3 short answer question (20 points) + 2 Newspaper Article questions (35 points)
 ANSWER ALL QUESTIONS. TOTAL POINTS = 100. TOTAL TIME = 90 minutes.
 Prelim1 score weights 30% of final grade.
 Please number each exam book from 1 to 5 and write your ID, name and section TA on the front page of
each book.

Please write down your answers in different exam books with following order.
o Multiple choice questions in exam book1.
o Short Essay 1 in exam book2
o Short Essay 2 in exam book3
o Long Essay 1 in exam book4
o Long Essay 2 in exam book5
AGAIN, please….
1
PRINT YOUR NAME:
____________________________________ Your C.U. Netid: _____________
YOUR C.U. STUDENT NUMBER:
____________________________
_____________TA = Xinli Wang (Monday sections)
_____________TA = Wei Quan (Tuesday sections)
_____________TA = Lingwen Zheng (Wednesday sections)
_____________TA = Minwook Kang (Wednesday sections)
_____________TA = Liyuan Cui (Thursday sections)
GRADING---------------------------------------------------------------------------------------------------------________/45 (mc)_____/10(short essay 1) ______/10(short essay 2) _____/17(long essay 1)____
___/18(long essay 2)
TOTAL: ___________/100
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Part I:
Multiple Choice.
1. If nominal GDP has increased, then we can conclude that:
a)
b)
c)
d)
e)
Everybody in the economy is better off
Price levels are higher
There is more unemployment
All of the above
None of the above
2. GNP in Country X will be larger than GDP if
a) Country X lets immigrants freely enter the country and they send money home
b) Country X lets foreign companies mine gold there.
c) Country X earns profits on stock holdings in country Y
d) All of the above
e) None of the above
3. In a closed economy with a government, which equation should be true at equilibrium?
a) Saving = Investment
b) Saving = Investment + Government Spending
c) Saving = Investment +(Government Spending - Taxes)
d) Saving = Investment + (Government Spending– Taxes) + Net exports
e) None of the above
4. Joe has been out of work for six months and though he keeps looking he hasn’t found a job
yet. He is
a) Now no longer counted as part of the labor force
b) A discouraged worker
c) Frictionally unemployed
d) Counted as unemployed
e) None of the above
5.
Suppose the supply of coffee is inelastic. What can we conclude?
a) A large increase in the demand for coffee will result in a tiny change in the price.
b) A large increase in the demand for coffee will result in a small change in quantity
supplied.
c) The slope of the supply curve of coffee is close to zero.
d) The slope of the supply curve of coffee is equal to 2.
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e)
A small percentage change in the price leads to large percentage change in quantity
demanded.
Please answer question 6 and 7 using the following data about CookieLand.
2009
2010
Quantity Price Quantity Price
3
5
1
2
Raison
2
1
1
5
Oatmeal
4
3
2
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Oatmeal Raison Cookies
And all oatmeal and Raison produced are used to produce the oatmeal raison cookies.
6. The nominal GDP in 2009 is ________; The nominal GDP in 2010 is _______________;
The real GDP of 2009 using 2009 as a base year is__________; The real GDP of 2010 using
2009 as a base year is ___________:
a) 29; 35; 29; 35
b) 29; 35; 29; 12
c) 12; 28; 12; 6
d) 12; 28; 12; 28
e) None of the above
7. Based on the calculation above, would you conclude:
a) The economy is growing fast because the GDP in nominal terms grew dramatically
b) The economy is not in a healthy status since the quantity of output has decreased and
there is also massive inflation
c) The economy is not healthy if we compare the real GDP in 2009 and 2010
d) Both (b) and (c)
e) Both (a) and (b)
8.
If the government multiplier is 5, then the MPC is ________, the tax multiplier equals
_________ and the balanced budget multiplier is ______________( Presuming the economy
has lump-sum tax system.)
a) 0.8; -4; 1
b) 0.2; -4; 1
c) 0.8; 4; Do not know
d) 0.2; 4; Do not know
9. When the planned aggregate expenditure line becomes steeper owing to change of marginal
propensity to consume, we can conclude
a) Government fiscal policy will be less effective
b) Government fiscal policy will be more effective
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c)
d)
Unplanned inventory will increase before as aggregate output is becoming steeper.
(a) and (c)
10. The natural rate of unemployment includes
a) Structural unemployment, frictional unemployment and cyclical unemployment
b) Structural unemployment and cyclical unemployment
c) Structural unemployment and frictional unemployment
d) Frictional unemployment and cyclical unemployment
e) Cyclical unemployment
11. Suppose there is only one bank, Bank A, in a simple economy. Assuming there are no excess
reserves and 10% is the required reserve ratio, the final T-account follows.
Total Reserves
Loans
Total
100
1000
1100
Bank A’s T-account
Demand Deposits
Net Worth
Total
1000
100
1100
If government now increases the required reserve ratio to 20%, and Bank A adjusts its
position only by changing loans, what will the T-account of the Bank look like?
Total Reserves
Loans
Total
a)
b)
c)
d)
e)
Bank A’s T-account
Demand Deposits
Net Worth
Total
Total Reserves= 200, Loans=1100, Demand Deposits=1000, Net Worth=100, and
Total=1300
Total Reserves= 200, Loans=1500, Demand Deposits=1600, Net Worth=100, and
Total=1700
Total Reserves= 100, Loans=500, Demand Deposits=500, Net Worth=100, and
Total=600
Total Reserves= 100, Loans=600, Demand Deposits=600, Net Worth=100, and
Total=700
None of above
12. Following previous question 11, how much does money supply decrease in the end?
a) 100
b) 200
c) 400
d) 500
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e)
None of the above
13. Which of the following activities affects GDP?
a) A drug dealer sells $10000 worth of illegal drugs.
b) You bought a used textbook $50 from Ebay.
c) Apple Inc. issues new shares of stock to finance the construction of a plant in Texas.
d) General Motors buys new equipment to produce cars in Detroit,
e) None of the above.
14. Which of the following is a normative question?
a) Why do gasoline prices decrease after holiday weekends?
b) What will happen to gasoline consumption if excise taxes on gasoline are decreased?
c) To reduce the regressive nature of the gasoline excise tax, should a portion of the
gasoline excise tax paid by low-income individuals be refunded to them to make it fair?
d) How will the price of oil be affected by an earthquake in one of major oil-exporting
countries?
e) None of above
15. If the demand for bagels shifts down because the price of cream cheese goes up we can say
that these two goods are
a) complements
b) substitutes
c) normal goods
d) inferior goods
e) none of the above
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Part II: Short Essays (20 points)
1. Supply and Demand (10 Points)
a) The small country, B-Island has no contract with the outside world. Apples are
currently traded at the price of $3 which is the same as the market equilibrium
price. Please draw the supply and demand curves and indicate the equilibrium
market price. (5 points)
b) The price of apples falls to $2. Draw two graphs illustrating two different ways
this could have occurred (5 points)
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2. Unemployment (10 points)
The following paragraph is cited from the article, What’s Behind the Unemployment Rate
Drop?, from the Wall Street Journal by Ben Casselman on Feb. 20. Please read the
following article and answer the questions.
Whenever the unemployment rate drops, economically savvy observers know to ask a
key question: What happened to the employment-population ratio?
Under the government’s definitions, people only count as unemployed when they’re
actively looking for work. So when the unemployment rate drops, it could mean that
unemployed people found jobs, or it could mean that they gave up looking for work.
The employment-population ratio, which measures how many people are actually
working, is harder to fool.
Today’s jobs report carries good news on both fronts. The unemployment rate fell, and
the employment-population ratio rose. That means the improvement in the labor
market is real — people actually found jobs.
The employment gain wasn’t immediately obvious to some observers because of a
quirk in this month’s report. Every January, the Labor Department readjusts its data to
account for changes in the population. The tweaks are especially significant in years
like this one that take into account a new decennial census.
This year, the population adjustment makes it look like the employment-population
ratio didn’t change from December to January. In reality, the ratio improved by 0.3
percentage points. The gains were just masked by the population adjustments.
Here’s what happened: According to the Census Bureau, the civilian population
grew by 1.5 million people in 2011. But the growth wasn’t distributed evenly.
Most of the growth came among people 55 and older and, to a lesser degree, by
people 16-24 years old. Both groups are less likely to work than people in their
mid-20s to early 50s. So the share of the population that’s working is actually lower
than previously believed. Taking that into account, the employment-population ratio
went up. The unemployment rate wasn’t affected.
……………………
a) Please list 3 types of people who are not counted in labor force. (5 points)
b) We generally define unemployment rate as:
unemployment rate = unemployed /labor force
According to the Census Bureau, the new finding about population growth will
lead to what direction of change in unemployment, labor force and unemployment
rate? (5 points)
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Part III: Long Essay (35 points)
1. GDP and Aggregate Planned Expenditure (17 points)
The following paragraph is cited from, Will China Break?, by Paul Krugman in New
York Times, Dec. 18, 2011.
……..
The most striking thing about the Chinese economy over the past decade was the way
household consumption, although rising, lagged behind overall growth. At this point
consumer spending is only about 35 percent of G.D.P., about half the level in the United
States.
So who’s buying the goods and services China produces? Part of the answer is, well, we
are: as the consumer share of the economy declined, China increasingly relied on trade
surpluses to keep manufacturing afloat. But the bigger story from China’s point of
view is investment spending, which has soared to almost half of G.D.P.
The obvious question is, with consumer demand relatively weak, what motivated all that
investment? And the answer, to an important extent, is that it depended on an
ever-inflating real estate bubble. Real estate investment has roughly doubled as a
share of G.D.P. since 2000, accounting directly for more than half of the overall rise
in investment. And surely much of the rest of the increase was from firms
expanding to sell to the burgeoning construction industry.
……..
a)
Considering following functions of consumption and aggregate planned
expenditure.
C=10 billion+0.5*(Y-T)
AE≡C+I+G+EX-IM
Please draw the aggregate planned expenditure diagram. (You need to label
slope of each line and the equilibrium output.) (6 points)
What is the multiplier for government spending, budget balanced multiplier and
investment spending multiplier? (6 points)
b)
Given model (a) and Krugman’s argument, please use the diagram of
aggregate planned expenditure to explain how exogenous investment
spending helps GDP (output) growth in China. (5 points)
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2. Monetary Policy and Banking (18 points)
The following paragraphs are selected from New York Times, “European Banks Flock to
2nd Round of Cheap Loans” by Jack Ewing at Feb 28, 2012. Please read them carefully,
and use what we have learned to answer the following questions.
FRANKFURT — In a closely watched display of its firepower, the European Central
Bank on Wednesday allocated to euro zone banks another huge round of the cheap,
three-year loans that have helped avert a banking crisis but have not yet revived lending
to business and households.
Banks asked to borrow €529.5 billion, or $713 billion, compared to €489 billion in
December’s offer of three-year loans. The E.C.B. said that 800 banks put in for loans,
compared to 523 in December, as many smaller lenders took advantage of the central
bank’s broader collateral rules. The E.C.B. wanted to encourage borrowing by
community banks that are likely to lend the money in turn to businesses and
consumers.
Banks could borrow as much as they wanted at the benchmark interest rate of 1 percent,
but had to pledge collateral — typically bonds or other securities that can be bought and
sold. Previously, the E.C.B. lent to banks for a maximum of about a year. The E.C.B.
disclosed the amount that banks requested on Wednesday and will disburse the money
on Thursday.
……………
The loans appeared to have headed off a funding crunch that could have caused
some banks to fail and many others to run short of money to lend into the euro
zone economy. The E.C.B. loans also have helped lower borrowing costs for
countries like Spain and Italy, as many banks borrowed from the E.C.B. at 1
percent interest and bought government bonds paying more than 5 percent. The
yield on the benchmark 10-year Italian government bond fell to below 5.2 percent
Wednesday from 5.35 percent on Tuesday.
“The big problem with the European economy at the moment is that there is a
total lack of confidence in households,” said Peter Westaway, chief economist for
Europe at Vanguard Asset Management in London. “People were afraid the euro would
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break up or something really bad would happen. The very fact that something bad is less
likely is an important step and that will help the real economy.”
…………………
a)
According to the article, what the ECB (European Central Bank) has done is
probably not making use of the conventional tools that Central Bank generally
applies. What are 3 conventional tools that central banks usually use to affect the
money market? (3 points)
b)
Here we tentatively consider making loans to banks as buying bond issued by banks.
Please use a diagram to illustrate how the money market of the Euro Zone will be
affected .(7 points)
c)
However, in reality, the ideal result may not happen. Describe at least two
conditions which will diminish the effectiveness of the monetary policy mentioned
above? (8 points)
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Answer:
Short Essay 1:
Supply and Demand
(a) he small country, B-Island has no contract with the outside world. Apples are
currently traded at the price of $3 which is the same as the market equilibrium
price. Please draw the supply and demand curves and indicate the equilibrium
market price.
Answer:
Quantity
Supply
Equiibrium
price, $3
Demand
Price
(b)The B-Island government decides to join the world market where the apple price
is $2. Then, what would the domestic price of apples in an open market? What are
the changes in domestic consumers’ and producers’ surpluses? Indicate the surplus
areas in the supply/demand diagram.
Answer: After the economy is open, the domestic apply price becomes $1. There is
an increase in consumer’s surplus but a decrease in producer’s surplus.
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Q
Consumer
surplus
Supply
Equiibrium
price, $3
World
price, $1
Demand
Producer
surplus
Price
(the lower price on the Y-axis should be $2 instead of $1)
Long Essay 3:
a.) People serving in military, people studying in school and inmates in prison.
b.) Given growth is the result of increase in people order 55 and people from 16-24, labor
force tends to decrease with high possibility owing to those people are probably either
retired or in high school and college. If those people are not included in the labor force,
they are also not counted as unemployment. Hence the unemployment rate can be the
same or decreases. (Student will have credit if he/she answers the same, since the article
already told this.)
Unemployment rate decreases. Let’s use U to denote the unemployment population and
L to denote labor force. The original unemployment ratio = U/L. (L>U)
Adjustment is
made after data of Census Bureau such that new ratio is (U-x)/(L-x)
It is trivial to show that U/L >(U-x)/(L-x). Therefore unemployment rate decreases and
improves. (This question is a bit open; TA should grade basing on student’s reasoning
logic.)
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Long essay 1
(a)
(it is OK if students do not mark intercept, (10billion - 0.9T+I+G+EX-IM)
The government multiplier =1/(1-0.5)=2. Budget balance multiplier =2-1=1, Investment
spending multiplier =1/(1-0.5)=2
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(b)
There is an advanced model to explain China’s economy. At burgeoning stage of
developing countries, investment is probably the function of income. People keep
investing after they earn the money. If we let consumption function constant and make
I= i+0.5*(Y), the new model can explains why investment plays so significant portion in
china GDP. (However, the circular flow is not about consumption anymore but about
investment. The investment finally goes to equipment and land, producing goods for C
and EX)
Though in theory we can let C and I both function of Y and make a better analysis, we
only teach student simple model.) Therefore, in the exam, I still maintain our simple
model, assuming consumption the function of income.)
According the model in (a) and Krugman’s argument, the GDP growth mainly attribute to
investment spending, as demonstrated in the figure above.
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Long essay 2
a.) Open market operation, discount rate, and required reserve ratio.
b.)
Given more initial loans from central bank, commercial banks have more money
available to make loan out to the business and individual. Through money circulation of
banks, this increases the money supply on monetary market and lowers the interest rate.
(c ) There are possible situations that may decrease the effectiveness of monetary policy.
(This is an open question; student will have credit if he/she gives logical reasoning.)
1.) Banks may feel uncertain about business environment so that they keep reserve on hand
instead of lending money out. More reserve on hand secures them when crisis happens. In
this scenario, banks actually have high excessive reserve and have no money creation.
2.) Those loans are not going to business but to refinance the government debt. If the owners
of old debt, which expires soon, are foreigners, and they withdraw money out from EU zone
after debt repayment, then there is no money creation.
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3.) Finally, there are investment incentives problem. If people worry about the business
environment, the investment curve may shift to left, and this won’t increase investment
much, even interest rate decreases. So given this scenario, the monetary policy is not
effective.
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