ECON 201: Introduction to Macroeconomics
Final Exam
December 6, 2010
NAME: _________________________________
Circle your TA’s name:
Brian
Meysam
Travis
Directions: This test is in two parts, a multiple choice question part and a short-answer
part. Use this page to complete the multiple choice section. Calculators are permitted.
Books, notes, reference materials, etc. are prohibited. Good luck!
Part 1: Referring to the multiple choice questions on the next several pages, choose the
one alternative that best completes the statement or answers the question. Each question
is worth one point. There is no penalty to guessing, so be sure to answer all of them.
Write your answers in the following table using capital letters.
1
11
21
31
41
51
2
12
22
32
42
52
3
13
23
33
43
53
4
14
24
34
44
54
5
15
25
35
45
55
6
16
26
36
46
56
7
17
27
37
47
57
8
18
28
38
48
58
9
19
29
39
49
59
10
20
30
40
50
60
1. Fiscal policy refers to changes in
A) state and local taxes and purchases that are intended to fund local construction
projects.
B) federal, state, and local taxes and purchases that are intended to achieve
macroeconomic policy objectives.
C) federal taxes and purchases that are intended to fund the war on terrorism.
D) the money supply and interest rates that are intended to achieve macroeconomic
policy objectives.
Use the following information to answer questions 2-4.
Countries A and B can produce either berries or fish. If each produces only berries, A can
make 20 pounds while B can make 30 pounds. On the other hand, if each produces fish,
A can make 80 pounds and B can make 60 pounds. Assume the ppf for each country is
linear.
2. Which statement is true?
A) Country A has an absolute advantage in picking berries and B has an absolute
advantage in catching fish.
B) Country B has an absolute advantage in picking berries and A has an absolute
advantage in catching fish.
C) Country B has an absolute advantage in picking berries and catching fish.
D) Country A has an absolute advantage in picking berries and catching fish.
3. Which statement is true?
A) Country B has a greater opportunity cost than A for picking berries.
B) Country B’s opportunity cost for catching fish is less than A's.
C) Country A has a greater opportunity cost than B for picking berries.
D) Country B's opportunity cost for picking berries and catching fish are both greater
than A's.
4. Assume A and B both produce only the good for which they have a comparative
advantage. To which of the following trades would either A or B not agree:
A) 10 berries for 22 fish.
B) 20 berries for 79 fish.
C) 25 berries for 48 fish.
D) 30 berries for 70 fish.
5. The Fed can increase the federal funds rate by
A) selling Treasury bills, which increases bank reserves.
B) buying Treasury bills, which increases bank reserves.
C) selling Treasury bills, which decreases bank reserves.
D) buying Treasury bills, which decreases bank reserves.
6. As written on the chalkboard and defined in lecture, the term “laissez faire” refers to
A) the regulated command economy
B) the unregulated capitalist economy
C) the regulated capitalist economy
D) the unregulated command economy
E) none of the above
7. Which of the following accurately describes the impact of the rule of law on a
country's economic growth rate?
A) Countries with a strong rule of law have faster economic growth.
B) Countries with a weak rule of law have faster economic growth.
C) Countries that enforce property rights through lawsuits have slower economic growth.
D) Countries where favoritism and bribery are common have stronger rates of growth.
8. Which of the following government provisions would help increase the accumulation
of knowledge capital?
A) patents
B) copyrights
C) education subsidies
D) All of the above are correct.
9. The term defined in lecture “zero lower bound” explains why _______ policy may
have __________ effects.
A) fiscal; strong
B) fiscal; weak
C) monetary; strong
D) monetary; weak
10. The money demand curve has a
A) negative slope because an increase in the interest rate decreases the quantity of
money demanded.
B) positive slope because an increase in the interest rate increases the quantity of money
demanded.
C) negative slope because an increase in the price level decreases the quantity of money
demanded.
D) positive slope because an increase in the price level increases the quantity of money
demanded.
11. When measuring GDP, new automobile sales are counted as consumption when the
automobiles are purchased by ________ and as investment when they are purchased by
________.
A) households; businesses
B) households; the government
C) businesses; the government
D) foreign customers outside the United States; households
12. Monthly expenditures for a family of 4 in 2008 averaged $1,400. In 2009, the cost of
the same purchases was $1,500. If 2008 is the base year, what was the CPI in 2009?
A) 110
B) 107
C) 100
D) 93
13. As written on the chalkboard and defined in lecture, the abbreviation “NINJA” is
most closely related to
A) problems of poor African countries in achieving economic growth
B) subprime housing market
C) debt rating agencies
D) bail-out of large banks
E) None of the above
14. The required reserves of a bank equal its ________ the required reserve ratio.
A) deposits divided by
B) deposits multiplied by
C) loans divided by
D) loans multiplied by
15. When production in an economy grows more quickly than the population in that
economy, which of the following must be occurring?
A) Real GDP is falling.
B) Incomes are growing at a slower rate than the population.
C) Real GDP per capita is rising.
D) Living standards are falling.
16. Household real net worth as defined in the lecture is
A) nominal assets plus nominal liabilities, both multiplied by the price level
B) nominal assets plus nominal liabilities, both divided by the price level
C) nominal assets minus nominal liabilities, both divided by the price level
D) nominal assets minus nominal liabilities, both multiplied by the price level
17. In a small economy in 2009, aggregate planned expenditure was $800 million while
GDP that year was $850 million. Which of the following can explain the difference
between aggregate planned expenditure and GDP that year?
A) Aggregate planned expenditure is always less than GDP in developed countries.
B) Firm investment in inventories was less than planned in 2009.
C) Firm investment in inventories was greater than planned in 2009.
D) Aggregate planned expenditure is always less than GDP in developing countries.
18. An increase in the price level results in a(n) ________ in the quantity of real GDP
demanded because ________.
A) decrease; a higher price level reduces consumption, investment, and net exports.
B) increase; a higher price level reduces consumption, investment, and net exports.
C) decrease; a higher price level increases consumption, investment, and net exports.
D) increase; a higher price level increases consumption, investment, and net exports.
19. In the lecture’s definition of GDP, the phrase “not resold” refers to
A) final goods
B) intermediate goods
C) planned inventory changes
D) unplanned inventory changes
20. Your roommate argues that he can think of no better situation than living in a
deflationary economy, as prices of goods and services would continuously fall. You
disagree and argue that during a deflation, people can be made worse off because
A) the purchasing power of people's incomes would increase.
B) the purchasing power of the currency would decrease.
C) the value of the real interest rate will drop below the nominal interest rate.
D) borrowers will have to pay increasing amounts in real terms over time.
21. In economics, money is defined as
A) the total value of one's assets in current prices.
B) the total value of one's assets minus the total value of one's debts, in current prices.
C) the total amount of salary, interest, and rental income earned during a year.
D) any asset people generally accept in exchange for goods and services.
22. If the probability of losing your job remains ________, a recession would be a good
time to purchase a home because the Fed usually ________ interest rates during this time.
A) low; lowers
B) low; raises
C) high; lowers
D) high; raises
E) low; does not change
23. Which of the following reflects the state of the tax system in the United States today?
A) The tax laws have become increasingly simplified as private citizens have demanded
these changes.
B) The tax laws are used to achieve social policy goals such as energy conservation.
C) The tax laws are used to achieve macroeconomic goals of high employment and
economic growth.
D) Many taxpayers use software or professional tax preparation companies to file
their income taxes.
24. Which of the following is one explanation as to why the aggregate demand curve
slopes downward?
A) Decreases in the price level raise the interest rate and increase consumption spending.
B) Decreases in the price level raise the interest rate and increase investment spending.
C) Decreases in the U.S. price level relative to the price level in other countries lower net
exports.
D) Decreases in the price level raise real wealth and increase consumption spending.
25. Textbook examples of international comparative advantage always show two
countries, each of which specializes in one of two goods. Which of the following is NOT
a reason why countries do not specialize, i.e., both the U.S. and Japan make cars?
A) Increasing opportunity costs of making one product
B) Some goods are not traded
C) Tastes for products differ across countries
D) All of the above
26. If a German firm produces cars in the United States, that production should count
towards
A) U.S. GNP.
B) German GDP.
C) U.S. GDP.
D) both U.S. GNP and German GDP.
27. An unplanned increase in inventories results from
A) an increase in planned investment.
B) a decrease in planned investment.
C) actual investment that is greater than planned investment.
D) actual investment that is less than planned investment.
28. In the classroom chalkboard discussion of the Taylor Rule, the rule was written as an
equation with general coefficients “a” and “b” instead of the specific coefficients “1/2”
and “1/2” used in the textbook. Which of the following would represent a policy of
inflation targeting?
A) “a” is zero
B) “b” is zero
C) “a” plus “b” is zero
D) “a” minus “b” is zero
29. The major shortcoming of a barter economy is
A) the requirement of a double coincidence of wants.
B) it readily allows for specialization and exchange.
C) that goods and services are not traded.
D) that money loses value from inflation.
30. According to a course packet reading, which of the following countries stands out for
achieving rapid economic growth despite adopting protectionist policies?
A) South Korea
B) Hong Kong
C) United Kingdom
D) Germany
31. Spending on the war in Iraq is essentially categorized as government purchases. How
do increases in spending on the war in Iraq affect the aggregate demand curve?
A) They will move the economy up along a stationary aggregate demand curve.
B) They will move the economy down along a stationary aggregate demand curve.
C) They will shift the aggregate demand curve to the left.
D) They will shift the aggregate demand curve to the right.
Use the following table to answer questions 32-34.
32. Suppose the economy is in a recession and the Fed pursues an expansionary monetary
policy. Using the static AD-AS model in the figure above, this would be depicted as a
movement from
A) A to B.
B) B to C.
C) C to B.
D) A to E.
E) C to D.
33. Suppose the economy is in short-run equilibrium above potential GDP, the
unemployment rate is very low, and wages and prices are rising. Using the static AD-AS
model in the figure above, the correct Fed policy for this situation would be depicted as a
movement from
A) A to B.
B) B to C.
C) C to B.
D) A to E.
E) C to D.
34. Suppose actual GDP equals potential GDP and the Fed lowers its target for the
federal funds rate. Using the static AD-AS model in the figure above, this situation would
be depicted as a movement from
A) B to C.
B) B to A.
C) C to B.
D) E to A.
E) C to D.
35. According to a course packet reading, the most notable difference between economic
policies in the Netherlands and in the U. S. during the recent recession and global crisis is
A) The Netherlands had a much smaller decline in the output gap
B) The Netherlands had a larger increase in unemployment
C) The Netherlands had generous unemployment compensation for laid-off workers
D) The Netherlands had subsidies for workers working shorter hours
36. The CPI in 1990 was 131, and the CPI in 2008 was 215. If you earned a salary of
$40,000 in 1990, what would be a salary with equivalent purchasing power in 2008?
A) $52,400
B) $65,649
C) $86,000
D) $105,649
37. If the marginal propensity to consume is 0.75, the marginal propensity to save is
A) 0.25.
B) 0.5.
C) 1.
D) 3.
38. Which of the following is not a reason why low-income countries might experience
low economic growth?
A) The country has endured extended periods of war.
B) The country fails to enforce a rule of law.
C) The country has a good education system.
D) The country has a low rate of saving and investment.
39. The interest rate that banks charge other banks for overnight loans is the
A) prime rate.
B) discount rate.
C) federal funds rate.
D) Treasury bill rate.
40. The labor force is the sum of
A) employed workers and discouraged workers.
B) employed workers and unemployed workers.
C) employed workers and individuals not looking for work.
D) employed workers and the working age population.
E) unemployed workers and the working age population.
41. A chalkboard lecture introduced which of the following symbols to summarize a
more comprehensive theory of economic growth than is provided in the textbook?
A) K/L, H/L
B) A, B, K/L, H/L
C) P, G, R/L, H/L
D) P, G, B, R/L
42. As reviewed in lecture, the most important differences between the 2007-09
recession, with the weak 2009-10 recovery, as compared to the previous major recession
of 1980-82, were which of the following?
A) Higher peak unemployment rate in 2007-09 than in 1980-82
B) More negative minimum output gap in 2007-09 than in 1980-82
C) Higher percentage of long-term unemployed in 2007-09 compared to 1980-82
D) More forced part-time employment in 2007-09 than in 1980-82
E) A) and D)
43. Using the money demand and money supply model, an open market purchase of
Treasury securities by the Federal Reserve would cause the equilibrium interest rate to
A) increase.
B) decrease.
C) not change.
D) increase if the economy is in a recession.
Use the following table to answer questions 44-46.
44. Ceteris paribus, an increase in the price level would be represented by a movement
from
A) AD1 to AD2.
B) AD2 to AD1.
C) point A to point B.
D) point B to point A.
45. Ceteris paribus, an increase in interest rates would be represented by a movement
from
A) AD1 to AD2.
B) AD2 to AD1.
C) point A to point B.
D) point B to point A.
46. Ceteris paribus, an increase in personal income taxes would be represented by a
movement from
A) AD1 to AD2.
B) AD2 to AD1.
C) point A to point B.
D) point B to point A.
47. The course packet article “Refresher on the 1930s” claims that it refutes “myths of the
Great Depression.” Which of the following is not one of the myths that it refutes?
A) The 1929 stock market crash caused the Great Depression
B) The Fed caused the Great Depression by tightening money in 1928-29
C) Government policy was passive in 1929-32
D) New Deal programs ended the Great Depression over the five years after 1933
E) C) and D)
Use the following scenario to answer questions 48-50.
Imagine that Kristy deposits $10,000 of currency into her checking account deposit at
Bank A and that the required reserve ratio is 20%.
48. As a result of Kristy's deposit, Bank A's reserves immediately increase by
A) $2,000.
B) $8,000.
C) $10,000.
D) $50,000.
49 As a result of Kristy's deposit, Bank A's required reserves increase by
A) $2,000.
B) $8,000.
C) $10,000.
D) $50,000.
50. As a result of Kristy's deposit, checking account deposits in the banking system as a
whole (including the original deposit) could eventually increase up to a maximum of
A) $8,000.
B) $10,000.
C) $50,000.
D) $100,000.
51. Gross domestic product in the economy is measured by the
A) total number of goods and services produced in the economy.
B) dollar value of all final goods and services produced in the economy.
C) total number of goods produced in the economy.
D) total number of services produced in the economy.
52. Which of the following would be classified as fiscal policy?
A) The federal government passes tax cuts to encourage firms to reduce air pollution.
B) The Federal Reserve cuts interest rates to stimulate the economy.
C) The federal government cuts taxes to stimulate the economy.
D) States increase taxes to fund education.
53. Which of the following is not blamed for the 2007-09 recession in the course packet
readings?
A) Government encouragement of home ownership
B) Bush tax cuts
C) Bond rating agencies
D) Fed interest rate policy in 2002-04
E) Fed regulation of bank leverage
54. A country with no trade and no borrowing and lending relationships with other
countries is known as a(n)
A) planned economy.
B) market economy.
C) open economy.
D) closed economy.
55. Planned aggregate expenditure is equal to
A) planned consumption spending.
B) consumption spending plus planned investment spending.
C) planned investment spending.
D) consumption spending plus planned investment spending plus government
purchases plus net exports.
56. “Wagner’s Law” featured in a course packet reading was related to a tendency of a
particular concept to change over a long historical time period
A) Increase in tax rates
B) Decrease in tas rates
C) Increase in government transfer payments
D) Decrease in government transfer payments
E) Increase in government budget deficit
57. Tax cuts on business income increase aggregate demand by increasing
A) business investment spending.
B) consumption spending.
C) government spending.
D) wage rates.
58. Suppose real GDP is $12.6 trillion and potential GDP is $12.4 trillion, and suppose
the value of the multiplier is greater than 1. To move the economy back to potential
GDP, Congress should
A) lower government purchases by an amount less than $200 billion.
B) lower government purchases by $200 billion.
C) raise taxes by $200 billion.
D) lower taxes by $200 billion.
E) raise taxes by an amount more than $200 billion.
59. The appendix to Chapter 15 of the textbook converts which of the following from
autonomous to a variable that depends on income?
A) Government spending
B) Exports
C) Imports
D) Tax revenues
E) A) and C)
F) C) and D)
60. If the marginal propensity to save is 0.25, then a $10,000 decrease in disposable
income will
A) increase consumption by $7,500.
B) increase consumption by $2,500.
C) decrease consumption by $7,500.
D) decrease consumption by $2,500.
Short Answer (60 points)
Problem 1. (30 points)
The government of Ireland has a budget deficit (G > T) and is planning to reach a
balanced budget for the next year. In what follows we want to investigate two different
policy scenarios: decreasing G or increasing T. Assume the following quantities:
Planned investment
200
Government purchases
450
Exports
150
Imports
100
Autonomous taxes
400
A. If you know C = 1330 when Y = 2000, and C = 1730 when Y = 2500, what is the
level of autonomous consumption? What is MPC? (4 points)
C= 50 + 0.8 ( Y – 400 ) => Aut C = 50; MPC = 0.8
B. What is the level of autonomous aggregate expenditure (1 point)
AAE = 50+200+450+150-100-0.8*400=430
C. What is the value of the multiplier? (1 point)
1/(1-MPC) = 5
D. Calculate equilibrium output (2 points)
Y* = 430 * 5 = 2150
E. What is the level of the government surplus and of domestic private saving given
these values (2 points)
T – G = -50
S = Y – C – T = 2150 – 1450 – 400 = 300
Policy One: Decreasing G
Suppose the government decides to decrease G by 50 to meet its goal.
F. By how much will the equilibrium output change? (2 points)
5*(-50) = -250
G. By how much will consumption change? (2 points)
0.8*(-250) = -200
H. What are the new levels of domestic private saving, public saving, and investment? (6
points)
S = Y – C – T = (2150 – 250) – (1450 – 200) – 400 = 250 (2 points)
T-G = 400-(450-50) = 0 (2 points)
I = 200 (2 points)
Policy Two: Increasing T
Now suppose the government decides to increase taxes by 50 instead.
I. By how much will the equilibrium output change? (2 points)
5*(-0.8*(50)) = -200
J. By how much will consumption change? (2 points)
MPC * (∆Y - ∆T) = 0.8*(-200 - 50) = -200
K. What are the new levels of domestic private savings, T-G, and investment? (6 points)
S = Y – C – T = (2150 – 200) – (1450 – 200) – (400+50) = 250 (2 points)
T-G = (400+100)-450-50 = 0 (2 points)
I = 200 (2 points)
Problem 2. (12 points)
In the United States, domestic demand for bicycles is given by the equation P = 750 –
2Q, and domestic supply is given by P = 75 + Q.
A. How many bicycles will be consumed in equilibrium? What is the corresponding
price? (2 points)
Q = 225, P = 300
B. Now suppose the U.S. market is opened to free trade, and the world price for bicycles
is $200. How many bicycles are produced domestically? How many are consumed
domestically? (2 points)
Qs = 125, Qd = 275
C. In this trade economy, consumer surplus is ____75625________, producer surplus is
____7812.5_________, and dead weight loss is ______0__________. (3 points)
D. If the U.S. government imposes a tariff of $50 per bicycle, domestic consumption is
_____250__________, the number of imports is _____75__________, consumer surplus
is ______62500_________, producer surplus is _____15312.5_____________, and dead
weight loss is _____1875_______, in equilibrium. (5 points)
Problem 3. (10 points)
Assume the country of Pumiceland has a monetary base of $120 million. The central
bank requires banks to hold rr = 0.1 in reserves (and they do). Furthermore, people like to
have cash-on-hand, such that the currency-to-deposit ratio is c = 0.05.
A. What is the total value of deposits at banks in Pumiceland? (2 points)
D = 120 / (0.1 + 0.05) = 800
B. What is the value of reserves at banks in Pumiceland? (1 point)
R = rr * D = 0.1 * 800 = 80
C. How much currency is in circulation? (1 point)
C = B – R = 120 – 80 = 40 or C = 0.05*800 = 40
D. What is the money supply in Pumiceland? (1 point)
M = C + D = 840
Or M = (1+c)/(c+rr) * B = (1.05/0.15) * 120 = 840
Now assume for the rest of the problem that money demand is given by MD = 1200 – 80i.
where i is the interest rate. So if the interest rate is 4, then you would plug in i = 4.
E. If the central bank of Pumiceland wants to achieve an interest rate of 2.75, what must
the money supply be? (1 point)
M = 1200 – 80(2.75) = 980
F. In order to achieve that interest rate, the central bank must set the monetary base to
what amount? (2 points)
M = (1.05/0.15) B = 7B implies
B = (1/7)M = (1/7)*980 = 140
G. Alternatively, the central bank can alter the required reserve ratio without changing
the monetary base. What required reserve ratio will make the interest rate equal 2.75?
Round to the ten thousandths! That’s four decimal places! (2 points)
M = (1.05 / (0.05 + rr)) B
980 = (1.05 / (0.05 + rr)) 120
rr = 1.05 * (120/980) – 0.05 = 0.0786
Problem 4. (8 points)
Again consider the country of Pumiceland.
A. If nominal GDP in 2011 in Pumiceland is 54 and the GDP deflator is 108, what is
2011 real GDP? (1 point)
50
B. What is the % change (LN) in real GDP if 2011 real GDP is 60 and 2012 real GDP is
64? (1 point)
6.45%
C. Suppose the growth rate is -4%. How long until the GDP of Pumiceland is half what it
is today? (2 points)
100*LN(0.5/1)/4 = 17 years
D. Suppose real GDP in Pumiceland in 2010 is 70 with a growth rate of 10%, and a
neighboring country, Lavaland, has a 2010 real GDP of 150 with a growth rate of 11%.
Will the GDP of Pumiceland ever equal that of Lavaland? If so, in how many years? (2
points)
No
E. Again, suppose real GDP in Pumiceland in 2010 is 70 with a growth rate of 10%, and
a neighboring country, Lavaland, has a 2010 real GDP of 150 with a growth rate of -1%.
Will the GDP of Pumiceland ever equal that of Lavaland? If so, in how many years? (2
points)
Yes; s = 6.93 years