Final exam: Introductory Macroeconomics
Date: 12/14/05
Name:
This exam is worth 200 points.
Part 1: Multiple choice (Each question is worth 3 points)
1. In 1971, a bank worker could process 265 checks in 1 hour. By 1986, with
advanced computer scanners, that figure had risen to 825 checks per hour.
Economists describe this type of activity as
a. exploitation of labor.
b. an increase in labor productivity.
c. comparative advantage.
d. mutual gains from voluntary trade.
2.
3.
4.
A ticket to an Eric Clapton concert costs $45. If you have a ticket, you can
sell the ticket to an acquaintance for $75. To a ticket holder, the opportunity
cost of actually attending the concert is
a. $45.
b. $50.
c. $75.
d. $120.
The removal in 1966 of the requirement that Catholics not eat meat on
Fridays was followed by a 12.5 percent fall in prices of fresh fish. From this
it can be deduced that the
a. demand curve for fish shifted to the left.
b. demand curve shifted to the right.
c. supply curve shifted to the left.
d. supply curve shifted to the right.
Technological change, such as the information technology revolution of the
1990s can shift the aggregate supply curve outward. If, at the same time, the
government is decreasing spending, the most likely outcome of these two
factors is a(n)
a. increase in the price level.
b. decrease in the price level.
c. increase in real GDP.
d. decrease in real GDP.
ANSWER:
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5.
6.
7.
8.
Workers in country A receive an increase in wages of 10 percent at the same
time the inflation rate in country A is 8 percent. Workers in country B
receive an increase in wages of 3 percent and the inflation rate in country B
is 1 percent In which country are workers better off?
a. Country A because their real wages rise by 18 percent.
b. Country A because their real wages rise by 10 percent.
c. Country B because the inflation rate is lower.
d. Neither country because the increase in real wages is the same.
Which period of recent U.S. history shows the lowest rates of productivity
growth?
a. 1948-1973
b. 1973-1995
c. 1995-2000
d. All periods had similar growth rates.
If consumer confidence falls, what happens to the consumption function?
a. It will shift upward.
b. It will shift downward.
c. It will not shift, but people will move downward along the
consumption function.
d. It will not shift, but people will move upward along the consumption
function.
A major Internet service provider decides to spend $70 million to purchase
new server equipment. If the marginal propensity to consume is 0.8, the
eventual change in GDP will be
a. $70 million.
b. $84 million.
c. $90 million.
d. $350 million.
ANSWER:
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9.
10.
11.
12.
A severe hurricane hits Florida, destroying large amounts of the citrus crop.
What is the most likely effect of this on aggregate supply?
a. No effect, the economy will move along the curve to a higher price
level.
b. No effect, the economy will move along the curve to a lower price level.
c. It will increase.
d. It will decrease.
ANSWER:
Suppose that the U.S. personal income tax (which is a percentage tax) was
eliminated and replaced with a fixed tax that raised the exact same amount
of revenue. The multiplier would be
a. larger.
b. unchanged.
c. smaller.
d. incalculable.
ANSWER:
An increase in the reserve ratio would tend to
a. increase excess reserves and raise the money multiplier.
b. decrease excess reserves and decrease the money multiplier.
c. increase excess reserves and decrease the money multiplier.
d. decrease excess reserves and raise the money multiplier.
If the Fed were to increase the money supply at the same time the
government was increasing taxes, we could expect
a. an increase in interest rates and real GDP.
b. a decrease in interest rates and real GDP.
c. a decrease in interest rates but the effect on real GDP is
indeterminant.
d. an increase in interest rates but the effect on real GDP is indeterminant.
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ANSWER:
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ANSWER:
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13.
Which of the following will tend to increase the size of the government
spending multiplier?
a. Higher sensitivity of consumption to the price level
b. Higher marginal tax rates
c. Lower sensitivity of tax revenues to government spending
d. Lower sensitivity of investment to interest rates
ANSWER:
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14. If a budget deficit increases interest rates, it is possible that investment will
a.
b.
c.
d.
15.
fall, leading to a larger capital stock.
fall, so that there is a smaller capital stock.
rise, because investment is directly related to interest rates.
rise, because investment is more attractive when interest rates are
higher.
In what way do policy makers have to face a trade-off between inflation and
unemployment?
a. The cost of reducing inflation by restrictive fiscal and monetary
policies is a temporary increase in unemployment.
b. The cost of reducing inflation by restrictive fiscal and monetary policies
is a permanent increase in unemployment.
c. The cost of reducing unemployment by expansionary fiscal and
monetary policies is virtually nonexistent.
d. The cost of reducing unemployment by expansionary fiscal and
monetary policies involves higher inflation during recessions.
ANSWER:
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ANSWER:
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16. Which of the following is most likely to result in inflation?
a.
b.
c.
d.
Aggregate demand and aggregate supply grow at the same rate.
Neither aggregate demand nor aggregate supply grow at all.
Aggregate supply grows more rapidly than aggregate demand.
Aggregate demand grows more rapidly than aggregate supply.
ANSWER:
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17.
18.
If two countries each are currently producing two goods, and each begins to
specialize in the good in which it has a comparative advantage, what will
happen to total (world) output?
a. It will increase.
b. It will decrease.
c. It will be unchanged in both countries.
d. It will rise in one country and fall in the other, but the total is
unchanged.
If Argentina has a large amount of farmland and Great Britain has many
factories,
a. the two nations have no reason to trade.
b. Argentina will be willing to trade but Great Britain will not.
c. Great Britain will be willing to trade but Argentina will not.
d. the two nations can engage in mutually advantageous trade.
ANSWER:
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ANSWER:
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19. Everything else being equal, one can expect the euro to appreciate relative
to the dollar if
a. Americans decrease their travel to Germany.
b. the Germans add to their holdings of U.S. Treasury bills.
c. Americans purchase land in Germany and build factories.
d. American exports to Germany increase.
20.
In an open economy, the government deficit is 400 and investment exceeds
saving by 300, so in equilibrium the trade deficit (IM – X) must be
a. 100.
b. 200.
c. 300.
d. 700.
ANSWER:
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ANSWER:
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Part 2: Free-response questions
Question 1 (40 points)
Consider the market for jumping beans. Q is the quantity of jumping beans (in
bushels) that are demanded and P is the price of jumping beans. Consumers want
to consume more jumping beans when the price is lower and producers want to
make more jumping beans when the price is higher.
Demand: Q = 100 – 10P
Supply: Q = 25 + 5P
A) Find the equilibrium price and quantity of jumping beans. (10 points)
Equilibrium means that demand = supply
100 – 10P = 25 + 5P
15P = 75  P = 5
B) Now suppose the government wants to ensure that producers of jumping
beans get at least $8 for a bushel of jumping beans. To make that possible, the
government agrees to buy whatever amount consumers don’t want to buy at a
price of $8. How many bushels does the government have to buy? (10 points)
If P = 8: Demand = 20 and Supply = 65
Consumers are only willing to buy 20 bushels of the 65 that are produced, so the
government has to buy 45 bushels.
C) Now suppose that the government changes its mind. Instead of making the
law in part B), it decides to impose a tax of $2 on each bushel. This means that
the price that consumers pay is $2 higher than the price that producers receive.
Solve for the equilibrium price that consumers pay and quantity. (10 points)
Consumers now have to pay a price of P + 3.
The new equilibrium is given by: 100 – 10(P+3) = 25 + 5P
70 – 10P = 25 + 5P  45 = 15P  P = 3 (Consumers pay a price of $6)
Supply will be 25 + 5*3 = 40
D) In this example, the demand curve is downwards sloping; people demand
fewer jumping beans when the price is higher. What would it mean if the demand
curve was vertical? Discuss in terms of how sensitive consumers demand is to
changes in price. (10 points)
It would mean that consumers demanded the same amount no matter what the
price is. This would mean that consumers’ demand for jumping beans would be
completely insensitive to changes in the price for jumping beans.
Question 2 (40 points)
The table below describes Macronesia’s economy. Below is a series of questions
relating to the Macronesian economy described in the table.
GDP
Consumption (C) Gov. spending (G) Investment (I) Net exports (X-IM)
300
200
-100
1000
640
300
200
-100
1100
720
300
200
-100
1200
800
300
200
-100
1300
880
300
200
-100
1400
960
300
200
-100
1500
1040
A) Suppose the marginal propensity to consume is 0.80. Fill in the chart with
the values of consumption at the different income levels. (5 points)
B) Find total demand in Macronesia. (5 points)
Total demand
GDP
1000
1100
1200
1300
1400
1500
1040
1120
1200
1280
1360
1440
C) What is equilibrium output in Macronesia? (5 points) _____1200____
D) Graph total demand below. Label the demand line D0 and label the
equilibrium E0. (5 points)
Total demand / supply
1500
$6
1400
$5
Price (per barrel)
1300
$4
1200
$3
1100
$2
$1
1000
0
800 1100
1000
1,200 1200
1,600 1300
2,000 1400
2,400 1500
2,800 3,200
Quantity (in barrels)
GDP
E) Suppose that the government increases spending to 400. What is equilibrium
output now if this is the only variable that changes? To answer this question, you
should not need to use table. Use your understanding of the multiplier to answer
the question. (10 points)
The multiplier is 1/(1-.8) = 5
So output will go up by 500, to 1200.
F) Given what you know about the connection between investment and the
interest rate, will output go actually go up by more or less than the amount that
you calculated in part E), which assumed that investment did not change?
Explain in two short sentences. (10 points)
Output will go up by less than 500, because money demand will shift out, which
will cause the interest rate to increase. As a result, investment will fall, offsetting
some of the positive effect of government spending on output.
Question 3 (20 points)
You are president of Macroland, a country that is struggling with a very high
budget deficit. Output growth is relatively low, though.
A) Suppose that you can work with the chairman of the central bank. Together,
you can change government spending, taxes, and the money supply. The two of
you want to lower the budget deficit without increasing unemployment. What
combination of policies could achieve this goal? (10 points)
Increase the money supply and decrease government spending. Decreasing G will
cause the budget deficit to fall. Increasing the money supply can offset the
negative effect of lower G on output.
B) Suppose that the combination of policies succeeds: the deficit falls and output
stays the same. What will this combination of policies do to the interest rate?
Illustrate on the graph below that shows money supply and money demand, by
shifting any curve that needs to be shifted. (10 points)
S
D
D
S
Interest rate
Ii i0
0
n
t
e
r
e
s
t
r
a
D
S
Quantity
S
of
Quantity of Money
Money
DD
Question 4 (20 points)
Suppose that we have an economy that starts at the natural rate of unemployment
and that inflation is 8%. The natural rate of unemployment is 5%. Start by
analyzing the effects of an increase in foreign countries’ demand for the goods
that we produce.
A) Show what this increase in foreign demand for our goods does to the AS-AD
picture in the US. (10 points)
S0
Price
level
D0
Output
B) Circle one of the choices for each of the two questions below. (5 points each)
Before the increase in foreign demand, unemployment in the US was 5%. Then
unemployment falls to 3% because of the higher demand for the goods we
produce. Suppose that inflation in the US after unemployment falls to 3% is one
of the three numbers below. Which possibility makes the most sense?
6%
8%
10%
After US unemployment falls to 3%, the economy gradually returns to normal.
After unemployment has gone back from 3% to 5%, inflation is one of the five
numbers below. Which possibility makes the most sense?
4%
6%
8%
10%
12%