Intermediate Macroeconomics 311 (Professor Gordon)
Final Examination Fall, 2009
YOUR NAME:________________________________
INSTRUCTIONS
1. The exam lasts 2 hours.
2. The exam is worth 120 points in total: 30 points for the multiple choice questions, 60
points for the analytical questions, and 30 points for the essays.
3. Write your answers to Part A (the multiple choice section) in the blanks on page 1.
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.
6. Write your essays with a pen. Write clearly!
7. Good Luck and Happy Holidays!
PART A (45 points)
Choose the ONE alternative that BEST completes the statement or answers the question.
Your answers must be 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.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
43.
44.
45.
PART B (45 points)
Please show your work and write down the formulas you use for partial credit.
Question 1 (5 points)
(a) What monthly rate of inflation causes the price level to increase by a factor of
5 (500 percentage points) over a year? (2 points) (HINT: Use the LN and EXP
formulas from Chapter 9, Problem 2, further examples of which were presented in
lecture on November 11).
Using the log formula:
p = 100*log(5)/12 = 13.4%.
(b) If the rate of monthly inflation is 25%, by what factor would prices have risen
over a year? (3 points)
Let’s call the initial price level P0 and the price level at the end of the year P12
25 = 100*log(P12/P0)/12
P12/P0 = exp(25*12/100) = 20.
Question 2 (10 points)
Consider an economy where inflation expectations are given by the equation
pet = .4 pt-1 + .6 pet-1 .
Also assume that when the log of the output ratio increases by 1 points, inflation
increases by 4 points.
(a) Write down the SP equation, both its general form and its specific form with these
particular parameter assumptions inserted. (2 points)
pt = pet + gŶt-1 + zt = .4pt-1 + .6pet-1 + 4Ŷt-1 + zt
(b) Write down the DG equation (no need to derive anything, just write it down). (1
point)
Ŷ = Ŷ-1 + x̂ - p
(c) Combine the SP and DG equations to express p as a function of pt-1, pet-1, Ŷt-1, x̂ t,
and zt. (2 points) (HINT: Your answer must have p on the left side of the
equation and terms not including current p on the right side, with all the relevant
parameters inserted and solved out.)
p = 0.4p-1 + 0.6pe-1 + 4Ŷ + z = 0.4p-1 + 0.6pe-1 + 4(Ŷ-1 + x̂ - p) + z
5p = 0.4p-1 + 0.6pe-1 + 4Ŷ-1 + 4 x̂ + z
p = 0.08p-1 + 0.12pe-1 + 0.8Ŷ-1 + 0.8 x̂ + z
For the remainder of the problem, assume that in period t=1 the economy has values
given by:
p0 = 3
pe0 = 3
Ŷ0 = 0
(d) Suppose there is no supply shock in period 1 (z1 = 0) and that x̂ 1 = 5. Solve for
period 1 values p1 and Ŷ1. (2 points)
p1 = 0.08(3) + 0.12(3) + 0.8(0) + 0.8(5) + 0 = 4.6
Ŷ1 = 0 + 5 – 4.6 = 0.4
(e) Suppose instead that there is a period 1 supply shock that increases the value of z
from 0 in period 0 to 1 in period 1. Find the period 1 values p1, x̂ 1 and Ŷ1 as well
as the expected period 2 inflation, pe2, if the government adopts an
accommodating policy. (3 points)
Accommodating Policy means Ŷ1 = 0, so from the DG equation p1 = x̂ 1 and
from the SP equation:
p1 = .4(3) + .6(3) + 4(0) + 1 = 4 = x̂ 1
pe2 = .4(4) + .6(3) = 3.4
Question 3 (15 points)
Consider a country whose Central Bank issued 100$ of High-Powered Money (H).
Citizens' cash holdings (dollar bills) amount to 10% (.1) of their deposits while each
commercial bank has to have reserves for 15% (.15) of the volume of deposits.
a) What is the level of deposits? (2 points)
D = H/(c+e) = 100/(.1+.15) = 400
b) What is the level of the Money Supply defined as dollar bills and deposits? (3 points)
M = (1+c)D = 1.1*400 = 440
c) Suppose the Central Bank wants to increase Money Supply to 528. How many extra
units of High-Powered Money do they have to circulate? (4 points)
M = (1+c) H / (c+e)
528 = 1.1 H / .25
H = 120
So they should print 20 extra units of H
d) Assume now that the Central Bank still wants to set the Money Supply to 528 but the
Government forbids them from printing High-Powered Money. What option is left to the
Central Bank? (Hint: restrict your attention to this simplified model where there is
nothing like direct lending or any other exotic policy) (2 points)
Change the reserve requirement
e) Given your suggested policy, which of the parameters of the model would they be
changing? To which new value? (Remember that here H=100 and cannot be changed by
assumption and M=528) (4 points)
M=(1+c) H / (c+e)
528=1.1 * 100 / (.1 + e)
e=.1083 = 10.8%
Question 4 (15 points)
Consider two nations, Richland and Poorland. Both nations have the same CobbDouglass production function, Y=AKbN(1-b). Let Poorland have an economy with
technology level A=18, capital elasticity of production b=(1/3), population growth rate
n=.13, capital depreciation rate d=.07, and savings rate s=.3
(a) Rewrite the production function as a function relating Y/N and K/N. (2 points)
Y/N = A(K/N)b = 2(K/N)(1/3)
(b) Solve for the steady state values of the capital-labor ratio (K/N) and per-capita
GDP (Y/N). (6 points)
s(Y/N) = (n+d)(K/N)
sA(K/N)b = (n+d)(K/N)
(K/N) = [sA/(n+d)]1/(1-b)
(K/N) = [.1*18 /(.2)]3/2=27
(Y/N) = (n+d)(K/N)/s
(Y/N) = (.2)(27)/.1=54
(c) Richland has a per-capita GDP that is triple that of Poorland. Given that Richland
has the same production function as Poorland, the capital-labor ratio in Richland
is what multiple of the capital-labor ratio in Poorland? (In other words, if
Poorland has a capital-labor ratio of K/N= x and Richland has a ratio of K/N= y,
what is y/x?). (3 points)
K R / N R (YR / AN R )1 / b

= (3) 3  27
K P / N P (YP / AN P )1 / b
(d) Compute the marginal products of capital in the two nations. (3 points)
MPK = b(Y/N)/(K/N)
MPKA = (1/3)(54)/(27)=2/3=.6667
MPKb = (1/3)(162)/(729)=2/81=.0247
(e) Judging from your answer in part (d), does the Solow model predict that poor
countries have a higher or lower rate of return on capital? (1 point)
The Solow model predicts a higher rate of return for poor countries. This is one
of the critiques of the Solow growth model.
PART C (30 points)
WRITE YOUR NAME AND ID NUMBER ON YOUR BLUE BOOK. As stated on
the syllabus (p. 3) and in numerous in-class and e-mailed reminders, you must write
your answers in pen not pencil.
This is a single multi-part essay question. You should write in your blue book for 30
minutes.
1. Write a coherent essay on the causes of the 2008-09 recession and on the policy
responses to this event. Your essay should cover the following specific points
a. First, establish the facts. What were similarities in the duration and magnitude
of the 2001 recession and subsequent recovery as compared to the 2008-09 recession and
recovery so far? Include comments on GDP, the GDP gap, labor market variables, and
any other distinguishing features of these two episodes.
b. What were the most important causes of the 2008-09 recession? Include
comments on which causes were the same as in the 2001 recession, and which were
different.
c. In what sense, if any, did monetary or fiscal policy partially contribute to the
causes of the 2008-09 recession?
d. Evaluate the response of monetary policy since early 2008. What were the
similarities and differences between this response and the monetary policy response to
postwar recessions in 2001 and earlier? What aspects would you praise or criticize?
e. Evaluate the response of fiscal policy since early 2008. What aspects would
you praise or criticize?
Multiple Choice Questions
Make sure to write you answers on the blanks on page 1!
1. The current account includes all of the following except:
A) net exports
B) net income from abroad
C) net unilateral transfers
D) foreign direct investment
2. In what way was the international economy cited as a source of the U. S. housing
bubble in 2003-06?
A) cheaper prices of imported building materials
B) support of dollar by foreign central banks
C) immigration of skilled foreign construction workers
D) high pay of top executives of foreign investment banks
3. Which of the following were not cited in the course as a reason for France and other
European nations to be reluctant to endorse an Obama-like fiscal stimulus for their
own countries?
A) high unemployment in Europe
B) low fiscal multipliers
C) social welfare system
D) unemployment insurance system
4. Suppose we have an economy in which G = 1100, t = 0.26, Y = 3800, and YN = 4000.
At Y the difference between the actual deficit and structural deficit is
A) 60.
B) 112.
C) -172.
D) -112.
E) 52.
5. The failure of U.S. net exports to improve dramatically in the mid 1980ʹs despite the
weakening of the dollar suggests that
A) U.S. industries supply of competitive goods was inelastic over the period.
B) LDC debt repayment schedules and lack of financing kept U.S. exports low.
C) NCIs maintained fixed exchange rates vis a vis the dollar and U.S. exports low.
D) All of the above.
6. In the reading period assignments from the Economist, the United States is faulted
relative to Europe and Japan for each of the following reasons except:
A) labor and capital markets
B) primary and secondary education
C) personal saving rate
D) infrastructure
7. In the reading period article about France, the French are praised for each of the
following reasons except
A) infrastructure
B) household debt
C) output growth rate
D) medical care system
8. The mechanism of ʺinternational crowding-outʺ is that a government budget deficit
________ the domestic interest rate, which makes the dollar ________ expensive for
foreigners, which then ________ net exports.
A) raises, less, lowers
B) raises, less, raises
C) raises, more, lowers
D) lowers, less, lowers
E) lowers, more, raises
9. Which of the following effects takes place as a result of automatic stabilization?
A) extra tax revenues are generated in a boom.
B) tax revenues remain constant during a recession.
C) leakages increase during a recession, helping to stimulate the economy.
D) Both A and C are correct.
10. If the Federal Reserve intervenes in the foreign-exchange markets and buys foreign
currencies
A) the U.S. money supply rises and foreign currencies depreciate.
B) the U.S. money supply falls and foreign currencies depreciate.
C) the U.S. money supply rises and foreign currencies appreciate.
D) the U.S. money supply falls and foreign currencies appreciate.
11. Activists-believe that AD is unstable because
A) business and consumer attitudes and expectations shift.
B) monetary policy is variable.
C) fiscal policy effects are unpredictable.
D) Both B and C are correct.
12. Assuming constant wages implies that
A) an increase in the price of goods raises profits and SAS is vertical.
B) a decrease in the price of goods lowers profits and SAS is horizontal.
C) an increase in the price of goods lowers profits and SAS is vertical.
D) an increase in the price of goods raises profits and SAS is positively sloped.
13. Consider the above figure with equilibrium initially at E0. If the money supply is
increased and prices are flexible, in the short run prices and output will ___. In the
long run output and prices will ___.
A) be as at E2; return to E0.
B) be as at E1; be as at E2.
C) be as at E2; be as at E3
D) be as at E2; be as at E1.
E) be as at E1; be as at E3.
14. According to the readings, a common feature of the Great Depression and the recent
economic crisis was
A) mortgage credit
B) deposit insurance
C) unemployment rate
D) monetary policy
15. The sources of the current problems of running monetary policy are often cited as
A) Quantitative easing
B) Zero lower bound
C) Excess bank reserves
D) A) and B)
E) B) and C)
16. An acceleration of nominal GDP growth from, say 4% to 6% will
A) permanently raise the rate of inflation.
B) temporarily lower the rate of inflation.
C) leave real GDP unaffected in the long run.
D) Both A and C.
17. The short-run Phillips Curve gives
A) the actual short-run level of real GDP and inflation.
B) all possible combinations of real GDP and inflation, for a given set of
expectations.
C) all possible combinations of real GDP and inflation, for fully adjusted
expectations.
D) the response of real GDP and inflation to supply shocks.
18. The Fed is criticized for the “one-way option” regarding asset bubbles. The criticism
is that the Fed __________ when asset prices increase and __________ when asset
prices decrease
A) raises interest rates; lowers interest rates
B) leaves interest rates unchanged; leaves interest rates unchanged
C) raises interest rates; leaves interest rates unchanged
D) leaves interest rates unchanged; lowers interest rates
E) lowers interest rates; raises interest rates
19. Which of the following was not a source of the Great Moderation, according to the
textbook?
A) growth rate rule for money supply
B) financial deregulation in late 1970s, early 1980s
C) magnitude of supply shocks after early 1980s
D) government military spending
20. In the short-run, the impact of an adverse supply shock is to
A) reduce real GDP and leave the inflation rate unchanged if the growth of nominal
GDP remains the same.
B) reduce real GDP and leave the inflation rate unchanged if the growth of
nominal GDP is reduced enough.
C) maintain the same level of real GDP and reduce the inflation rate if the growth if
nominal GDP is increased enough.
D) All of the above.
21. According to the textbook, the main losers due to the redistributive effect of the
postwar inflation in the United States were
A) households.
B) corporations.
C) government.
D) A) and B)
22. ʺDisgruntledʺ workers who quit their jobs to find ʺa more reasonable bossʺ are
experiencing
A) involuntary unemployment.
B) mismatch unemployment.
C) cyclical unemployment.
D) turnover unemployment.
23. Policy solutions to mismatch unemployment include
A) fiscal policies to raise the AD curve
B) monetary policies to raise the AD curve
C) policies other than fiscal and monetary policies
D) accommodative policies to deal with supply shocks
24. Over a year, the money supply in a nation grew by 6 percent, while velocity rose by 2
percent and real GDP rose by 3 percent. This results in an inflation over the year of
________ percent.
A) 5
B) 11
C) 1
D) 7
25. The the Fed’s quantitative easing after mid-2008 is not described by
A) increased open-market purchases of Treasury securities
B) increased open-market purchases of private securities
C) increased open-market purchases of corporate stock
D) A) and B)
E) A) and C)
26. Which of the following increased by the largest percentage between mid-2007 and
mid-2009?
A) excess bank reserves
B) M2
C) high-powered money
D) total bank reserves
E) M1
27. Initially, the economy is at point G in the figure above. An increase in per capita
savings from s0 to s1 will in the short run result in ________ and in the long run result
in ________.
A) excess per capita saving; more rapid growth in per capita output
B) excess per capita saving; less rapid growth in per capita output
C) more rapid growth in per capita output; more rapid growth in per capita output
D) more rapid growth in per capita output; no change in the long run rate of
growth in per capita output
28. Which of the following will not affect steady state per capita income in the Solow
growth theory?
A) The savings rate.
B) The initial capital stock.
C) The population growth rate.
D) The production function.
29. The Solow growth model predicts that nations that are initially poor should have
A) slower growth rates than nations that are rich.
B) faster growth rates than nations that are rich.
C) growth rates equal to those of nations that are rich.
D) negative growth rates.
30. Two readings in the course packet for Chapter 11 cite a particular technological
innovation for improved economic growth in poor tropical countries. This is:
A) television
B) internet
C) mobile phones
D) new drugs to fight malaria
31. Several structural changes that occurred over the past two decades were a theme of
lectures. Which of the following was not one of these changes?
A) greater importance of structural unemployment and less importance of
frictional unemployment
B) smaller response of core inflation to oil price shocks
C) larger decline of employment to declines in output in recessions
D) larger increase of productivity to increase in output in recoveries
E) More reliance on wage flexibility rather than layoffs in 2008-09 recession
32. In the Cobb-Douglas production function Y=AKbL1-b, the variable A has several
different names. Which of the following is not one of them?
A) autonomous growth factor.
B) infrastructure.
C) multifactor productivity.
D) residual.
33. The formula for the growth rate of multifactor productivity is:
A) a = y + bk + (1 - b)n.
B) y = a + bk + bn.
C) a = y - bk - (1 - b)n.
D) y = a - b/k(1 - b)n.
34. Which of the following does not affect multifactor productivity?
A)
B)
C)
D)
a tax on low-efficiency firms
a higher saving rate
Environmental regulation.
Technological progress.
35. Relative growth rates of the standard of living in the United States and Europe
indicate that workers in ________ have chosen to ʺspendʺ ________ of their higher
productivity on leisure rather than on consumption of market goods and services.
A) Europe, a significant part
B) the United States, a significant part
C) Europe, almost none
D) the United States, almost all
36. Which of the following would cause laborʹs share of national income to decrease?
A) Labor productivity increases less rapidly than the real wage rate.
B) Labor productivity increases more rapidly than the real wage rate.
C) Labor productivity has increased at the same rate as the real wage rate.
D) Laborʹs share of national income is not affected by the relative growth rates of
labor productivity and the real wage rate.
37. Once monetary policy is dedicated to controlling the level of nominal GDP, then
fiscal policy can be used to
A) choose the overall level of interest rates, with a high budget surplus implying a
high level of interest rates.
B) choose the overall level of interest rates, with a high budget deficit implying a
high level of interest rates.
C) control the rate of inflation, with a high budget surplus implying a faster rate of
inflation.
D) control the rate of inflation, with a high budget deficit implying a faster rate of
inflation.
38. A major side-effect of a stimulative fiscal policy is that it will
A) discriminate in favor of housing.
B) crowd out private expenditures.
C) increase the natural rate of unemployment.
D) permanently raise the rate of inflation.
39. Which of the following was a policy of Roosevelt’s New Deal which is not a part of
the Obama stimulus package?
A) tax reductions
B) infrastructure improvements
C) Direct intervention to stop financial institutions from failing
D) Federal government direct hiring of the unemployed
40. The Barro-Ricardo Equivalence Theorem assumes all of the following except:
A) Individuals value the welfare of their heirs as much as their own welfare.
B) Interest rates will remain constant.
C) All individuals have children
D) Markets for consumer housing and durable goods are perfect.
41. Which of the following will cause the date that the Social Security trust fund runs out
of money to be pushed further into the future?
A) A decrease in the rate of real GDP growth.
B) An increase in the population growth rate.
C) A decrease in the growth of the real wage.
D) All of the above.
42. A fixed money-supply rule will have the greatest stabilizing effect on output when
A) money demand is unstable and commodity demand is stable.
B) both money and commodity demand are unstable.
C) both money demand and commodity demand are stable.
D) the velocity of money is unstable.
43. M1 is a definition of money largely confined to which function(s) of money?
A) unit of account
B) store of value
C) medium of exchange
D) B and C.
44. In the empirical validation of the theory of the political business cycle discussed in
lecture, which of the following variables measured over the year before the election
has been the best predictor of the outcomes of presidential elections?
A) the unemployment rate
B) the inflation rate
C) the growth rate of per capita real GDP
D) the level of the federal government fiscal deficit
45. In the empirical validation of the theory of the political business cycle discussed in
lecture, which of the following elections is a clear outlier as violating that empirical
evidence?
A) 1932
B) 1936
C) 1972
D) 1992
E) 2000