Name: _________________________
Student ID: _________________________
Economics 215
Intermediate Macroeconomics
Thursday, March 24, 2005
Midterm Exam
Write all of your final answers on the exam sheet at the place marked. The time of the
exam is 9:00AM-10:20AM.
Multiple Choice (5 points each)
1. Two countries have identical Cobb-Douglas production functions and identical
levels and growth rates of technology. Country A has a higher investment rate
than country B. Both countries have identical levels of population growth and
identical depreciation rates. Along the balanced growth path, we should see that at
any point in time,
a. Country A has a higher level of capital productivity than Country B, and
Country B has a higher level of labor productivity than Country A.
b. Country A has a lower level of capital productivity than Country B, and
Country B has a higher level of labor productivity than Country A.
c. Country A has a higher level of capital productivity than Country B, and
Country B has a lower level of labor productivity than Country A.
d. Country A has a lower level of capital productivity than Country B, and
Country B has a lower level of labor productivity than Country A.
Answer _____________
2. Over the period, 1980-2000, we observed a structural change in the Hong Kong
economy. We have seen
a. an increase in the share of GDP produced in the manufacturing sector and
an increase of the share produced in the services sector.
b. an increase in the share of GDP produced in the manufacturing sector and
a decrease of the share produced in the services sector.
c. a decrease in the share of GDP produced in the manufacturing sector and
an increase of the share produced in the services sector.
d. a decrease in the share of GDP produced in the manufacturing sector and a
decrease of the share produced in the services sector.
Answer _____________
3. Assume that there is a persistent increase in money growth, so inflation increases
and expectations of inflation in the future also go up. Assuming the neo-classical
dichotomy, we should see:
a. a faster growth rate of the exchange rate and a higher level of velocity
b. a faster growth rate of the exchange rate and a lower level of velocity
c. a slower growth rate of the exchange rate and a higher level of velocity
d. a slower growth rate of the exchange rate and a lower level of velocity
Answer _____________
4. Two countries have identical Cobb-Douglas production functions and identical
levels and growth rates of technology. Both countries have identical levels of
population growth and identical investment rates. Due to poor weather, country A
has a higher capital depreciation rate than country B.
a. Country A will have faster labor productivity growth than Country B at
any given level of capital productivity along the transition path and
Country A will have higher capital productivity than Country B on the
balanced growth path.
b. Country A will have faster labor productivity growth than Country B at
any given level of capital productivity along the transition path and
Country A will have lower capital productivity than Country B on the
balanced growth path.
c. Country A will have slower labor productivity growth than Country B at
any given level of capital productivity along the transition path and
Country A will have higher capital productivity than Country B on the
balanced growth path.
d. Country A will have slower labor productivity growth than Country B at
any given level of capital productivity along the transition path and
Country A will have lower capital productivity than Country B on the
balanced growth path.
Answer _____________
Short Answer & Calculations
5. [6 points] A research finds that the level of Total Factor Productivity in Hong
Kong is higher than that in Singapore. Name three reasons that could, in theory,
explain this fact.
i.
ii.
iii.
6. [7 points] The following chart shows the annual level and logarithms of real GDP
per Capita in South Korea measured in billions of Won (Constant 2000 prices)
from 1990 to 2000. Calculate the average continuous growth rate of output in the
years 1991-2000.
Billion Won
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Y
₩320,696.40
₩350,819.90
₩371,433.00
₩394,215.80
₩427,868.20
₩467,099.20
₩499,790.00
₩523,035.00
₩487,184.00
₩533,399.00
₩578,665.00
(2000 prices)
ln(Y)
12.678
12.768
12.825
12.885
12.967
13.054
13.122
13.167
13.096
13.187
13.268
Average Growth Rate of Output, 1991-2000 ______________
7. [7 points] Suppose that an economy has two goods, radios and haircuts. Radios
cost US$10 in the United States and haircuts cost US$10. In Thailand, radios cost
$270 Baht and haircuts cost $135 baht. Assume that in both Thailand and the
USA, radios represent 50% of spending and haircuts represent 50% of spending.
Assume that radios are traded internationally and the law of one price holds for
radios. What is Thailand’s nominal and real exchange rate?
e = ___________________
re = ___________________
8. [5 points] Assume that we can represent the aggregate production function of an
1
2
economy in Cobb-Douglas form Yt  Kt 3 (Qt Lt ) 3 . The growth rate of the capitallabor ratio is 6% (gk = .06) and the growth rate of labor productivity is 3% (gy =
.03). What is the growth rate of TFP?
gTFP ___________________
Long Answer
9.
[15 points] Assume that the marginal product of labor is given by MPL 
100
L
and that labor supply is fixed L = 100.
a. Assume that the firm has zero management costs and the wage is
determined in competitive markets. What is the equilibrium real wage?
Real Wage ________________
b. Assume that the firm faces management costs which are decreasing in the
36
c
36


real wage rate c(W )  .5 
. What is the
2
P
W
W
W
P
P
P
efficient wage? What is the unemployment rate when the wage is set at the
efficiency wage rate?
 
Efficiency Wage _______________
Unemployment Rate _______________
10. [20 points] Assume that the production function is of the form of
I
 .2 ), a
Y
depreciation rate of 10%, (d = .1), a population growth of 3% (n = .03), and
technology growth of 2% (gQ = .02).
1
1
Yt  Kt 2 (Qt Lt ) 2 . The country has an investment rate of 20% (i.e. s 
a. What is the level of TFP in this economy when Q = 1?
TFP __________________
b. How high must capital productivity be in this economy to generate 4%
growth in labor productivity along the transition path?
Capital Productivity ___________________
c. What is the steady-state capital productivity level?
Steady State Capital Productivity ____________________
d. Calculate the real wage rate and the capital-labor ratio on the balanced
growth path when Q = 90
Real Wage _______________
Capital/Labor Ratio ________________
Graphical Answers
11. [10 points] A bank institutes a new ATM system that allows savers to easily
convert interest-paying bonds into cash that can be used for transactions. This
reduces the amount of cash that savers want to hold at any given interest rate,
thereby increasing velocity at any given interest rate. Show how this event will
affect the nominal exchange rate given a flexible exchange rate system. Explain in
4 sentences or less.
M
e
12. [10 points] An economy passes a new law recognizing collective bargaining. This
law is expected to make it harder to fire workers. Draw a graph showing the
effects on the equilibrium unemployment rate and on the equilibrium efficiency
wage rate. Explain in 4 sentences or less.
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ur