Mid-term Exam
Economics 215
Intermediate Macroeconomics
Monday, March 25, 2002
I. Multiple Choice [25 Points]
1. An increase in the expected future technology level will increase the optimal
level of the capital stock. Holding savings constant, this will:
a.
increase the interest rate in a closed economy and increase the current
account in an open economy.
b.
increase the interest rate in a closed economy and reduce the current
account in an open economy.
c.
reduce the interest rate in a closed economy and increase the current
account in an open economy.
d.
reduce the interest rate in a closed economy and reduce the current
account in an open economy.
2. Which of the following statements about saving and the current account are
true:
a.
a temporary increase in current income will lead to an increase in
savings and an increase in the current account.
b.
a temporary increase in current income will lead to an increase in
savings and a reduction in the current account..
c.
an increase in future income will lead to an increase in savings and an
increase in the current account.
d.
an increase in future income and will lead to an increase in savings and
a reduction in the current account.
3. An increase in the money supply will increase aggregate demand. In an
economy in which workers sign wage contracts that specify a nominal wage,
an unexpected increase in aggregate demand will:
a.
lead to an increase in real wages and a surplus of labor
b.
lead to an increase in real wages and a shortage of labor
c.
lead to a reduction in real wages and a surplus of labor
d.
lead to a reduction in real wages and a shortage of labor.
4. A firm has issued a total of 100,000 shares of stock that sell at a market price
of $17. per share. Further, the firm has outstanding debts of $500,000. The
firm owns a factory and various capital equipment that could be purchased for
$2,000,000. According to the q theory, .which of the following statements is
true?
a.
The firm’s q ratio is greater than 1 and the firm should increase its
capital stock.
b.
The firm’s q ratio is greater than 1 and the firm should reduce its
capital stock.
c.
The firm’s q ratio is less than 1 and the firm should increase its capital
stock.
d.
The firm’s q ratio is less than 1 and the firm should decrease its capital
stock.
5. A country has a negative Net International Investment Position. Which of the
following is true?
a.
The present value of the country’s future stream of net exports is
positive and the country’s current account is greater than its net exports.
b.
The present value of the country’s future stream of net exports is
positive and the country’s current account is less than its net exports.
c.
The present value of the country’s future stream of net exports is
negative and the country’s current account is greater than its net exports.
d.
The present value of the country’s future stream of net exports is
negative and the country’s current account is less than its net exports.
II. Calculation Questions [80 points]
1. Income Accounting. [20 points] There are 5 basic categories of goods in the
economy, Consumption (C), Investment (I), Government Consumption (G),
Exports (EX) and Imports (IM). You are given data for the nominal
expenditure on each of these types of goods for the years 1999 and 2000 as
well as the relative price of each of the goods in 1999 relative to 2000, which
is designated the base year.
Nominal
1999
2000
Relative
1999
Expenditure
Prices
PCC
1900
2050
PC
.95
PII
450
300
PI
.9
PGG
500
525
PG
1
PXX
2700
3200
PX
.9
PIMIM
2850
3000
PIM
.95
a. Calculate nominal GDP in 1999 and 2000.
b. Calculate real GDP, real absorption, and real net exports in 1999 and 2000.
c. Calculate the price level, P, in 1999.
d. The one year nominal interest rate, 1+i, was 1.15 in 1999. Calculate the
real interest rate. (Assume the expected inflation rate between 1999 and
2000 was equal to the actual interest rate).
2. Equilibrium Nominal Wage. [20 points] The nominal price level is P = $4
per unit of labor. The labor supply is an increasing function of the real wage
2
W 
rate L = 4   . Normalize the level of capital and technology equal to one,
P
K = T = 1. Assume that the production function is Cobb-Douglas
Q
Q  L MPL  12 . Solve for the nominal wage rate such that there is
L
neither a labor shortage nor a labor surplus. How large will the work force be
at this equilibrium level.
S
3. Investment and the Current Account [25 points] The savings rate in Taiwan
is a constant level S = 1000. The quantity of labor supply is constant at L =
900. The current level of the capital stock is K = 10000. The capital
accumulation equation is K 1  (1  d ) K  I where the d=.1. The production
Q
. Taiwanese firms choose a level of
K
investment to maximize profits. Taiwan is a small open economy.
function is Q  T K  L
MPK 
1
2
a. Calculate the target capital stock for next period, if the technology next
period is T+1 = 1 and the world real interest rate is rW=.05, Calculate
the level of investment necessary to obtain that capital stock and the
current account at that level of investment. .
b. Now, assume the technology next period is T+1 = 1.1 and the world
real interest rate is rW = .05. Calculate the target capital stock,
investment, and the current account.
4. Marginal Propensity to Consume. [10 points] The average household in our
economy begins with a certain amount of financial wealth and lives for T = 2
years. Assume the real interest rate is equal to 1+r = 1.1. If the household
smooths consumption perfectly across time, calculate the marginal propensity
to consume out of wealth. Calculate the MPC if T = 3.