ECON 311 - Intermediate Macroeconomics (Professor Gordon)
First Midterm Examination: Fall 2009
Answer sheet
YOUR NAME: _______________________________________
Circle the TA session you attend:
Assaf
Ryan
Ricky
9AM
9AM
9AM
3PM
3PM
3PM
INSTRUCTIONS:
1. The exam lasts 1 hour.
2. The exam is worth 60 points in total: 30 points for the multiple choice questions and 30 points for the two analytical
problems.
3. Write your answers for part A (the multiple choice section) in the blanks below. 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. There is no need to explain your answers for the multiple choice
questions.
6. Only hand in the answer packet.
7. Good luck!
PART A: Multiple Choice Problems
Answer multiple choice questions in the space provided below.
USE CAPITAL LETTERS.
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PART B: Analytic Problems
QUESTION 1 (10 points)
The following is a table of real GDP values for countries A and B from the last 50 years:
Year
1960
1968
1978
1988
1998
2008
A
332
580
852
1003
1307
1679
B
658
908
1207
1549
1952
2270
All amounts are in Billion $.
a) Calculate the annual growth rate for the two economies between the years 1960-1968. Which economy had a
larger growth rate? (3 points)
100* ln(580/332)/8 = 6.97
100* ln(908/658)/9= 4.02
Country A has a higher growth rate
b) Calculate country A's growth rate for the years 1960-2008. What would the real GDP be in 2010 if real GDP grew
at the average rate you just computed over the period 2009-2010? (3 points)
100* ln (1679/332)/48=3.38 (1 point)
X = 1679 * EXP(3.38*2/100) (2 points)
c) Assume that real GDP in country B grew at a constant rate (3% per year) from 1960 onwards. When (which year)
would it reach double its initial value? (2 points)
70/3=23.33
1960+23= 1983
d) Would it have tripled by now (49 years later to be precise)? (show the calculation) (2 points)
LN(3) = 1.098. 1.098/.03 = 36.6 years to triple, so it would triple by 1997.
QUESTION 2 (20 points)
Consider an economy described by the following equations:
C = 2000 – 10*r + 0.85*(Y – T)
Ip = 1500 – 20*r
T = 400 + 0.2*Y
G = 1640,
NX = -400 – 0.18*Y
(M/P)d = 0.5*Y – 20*r
Ms/P = 4000
a) Using the above numbers: find autonomous planned spending at a zero interest rate, autonomous planned
spending as a function of interest rate, the multiplier and the equation for the IS curve. (3 points)
Ap = Ca – c*Ta + Ip + G + NXa = 4400 – 30*r
k = 1/((1-c)*(1-t)+t+nx) = 2
The IS curve : Y = k*Ap = 8800 – 60*r
b) Derive the LM curve. (3 points)
Md/P = Ms/P
0.5*Y - 20*r = 4000 or Y = 8000 + 40*r
c) Find the equilibrium values of income and interest rate. (Hint: if you found equations for income above,
then calculate the interest rate by combining the IS and LM curves separately; if you found equations for
the interest rate above, then calculate the level of income using the IS and LM curves separately.) (2 points)
8000+40*r = 8800 – 60*r
100*r = 800
r=8
Y = 8000+40*8 = 8320
d) Calculate tax revenues, consumption (remember to include the effect of interest rate) and savings. What are
the total leakages in this economy? Check your work by showing that it is equal to injections. (2 points)
T = 400 + 0.2*8320 = 2064,
C = 2000 – 10*8 + 0.85*(8320 – 2064) = 7237.6
S = Y – T – C = 8320 – 2064 – 7237.6 = -981.6
Leakages = S + T = -981.6 + 2064 = 1082.4
I = 1500 – 20*8 = 1340
G = 1640
NX = -400 – 0.18*8320 = -1897.6
Injections = 1340+1640-1897.6 = 1082.4
e) The government determines the desired level of income in the economy to be Y = 8,500. The government
decides to change the money supply in order to achieve this goal. How should the real money supply be
changed? (4 points)
The IS curve doesn’t change: Y = 8800 – 60*r = 8500  r = 5.
Plugging this in the LM curve
Ms/P = Md/P = 0.5*Y - 20*r = 4150.
Real Money Supply should increase to 4150.
f) Without calculating, in what direction do taxes, investment and net exports change? (3 points)
Since r decreases and Y increases, I and T unambiguously increase. NX unambiguously decreases.
g) After changing the money supply (as you found in 2e), the government wants to use fiscal policy to bring
the income level (Y) back to its original value (the one you found in 2c). What should the new value of G
be? (4 points)
We found in 2(e): Y = 8500, r = 5. Now we want Y = 8320 as before. Since we are using fiscal policy, the LM
curve remains as in 2(e):
0.5*Y – 20*r = 4150
0.5*8320 – 20*r = 4150  r = 0.5
The IS curve (with the additional government spending) is then
Y = k*(Ap’ + G – 30*r)
8320 = 2*(4400+ G – 30*0.5)
8320 = 8800 + 2*G – 30  G = -225,
Government spending must decrease to 1640-225 = 1415.
PART A: Multiple Choice Problems
Choose the one alternative that best completes the statement or answers the question.
Figure 1-1
1) In figure 1-1 (above) the demand for money is greater than the supply of money at
A. point A
B. points A and B.
C. point D
D. points B, E and C.
E. points A and E
2) In Figure 1-1, the commodity market is in equilibrium
A) at points E and D.
B) at points A, B, E, and C.
C) at points B, C, and E.
D) only at point E.
E) at points A and E.
3) Over the past two decades, the ratio of European to US values are high for
A) hours per capita.
B) unemployment rate.
C) real GDP per capita.
D) labor-force participation rate.
E) B and D.
4) Saving is positive for all levels of disposable income
A) above autonomous consumption.
B) above where the consumption function intersects the vertical axis.
C) above zero.
D) above where the consumption line intersects the 45-degree line.
E) below where the consumption line intersects the 45-degree line.
5) In the simple Keynesian model of the determination of income, planned investment is
A) an endogenous parameter.
B) explained by the model of income determination.
C) autonomous and thus an exogenous parameter.
D) None of the above.
6) The "velocity" of money is
A) the money supply multiplied by the price level.
B) the real money supply divided by the real GDP.
C) the ratio of real GDP to the real money supply.
D) the money supply divided by the price level.
7) Ann is waiting to be recalled after a layoff. Bill also has no job at the moment and is not searching for one.
Who is officially "unemployed"?
A) Ann
B) Bill
C) Ann and Bill
D) neither Ann nor Bill
8) Which of the following is steep in recessions and flat or negatively sloped in expansions?
A) Consumption Function.
B) Saving Function.
C) Yield Curve.
D) Net Export Function.
E) B and D.
9) As income rises following an increase in autonomous net exports, tax revenue will ________ and investment
will ________.
A) fall; fall
B)
fall; rise
C) rise; fall
D) rise; rise
10) In the IS-LM model, equilibrium income can be affected by
A) monetary policy alone.
B) fiscal policy alone.
C) both fiscal and monetary policy.
D) neither monetary nor fiscal policy.
11) In the article "Capitalist Fools", the author (Joseph E. Stiglitz, Nobel laureaute) blames all of the following
for the financial crisis except:
A) tearing down the walls between commercial and investment banking
B) the tax cuts enacted during the administration of George W. Bush
C) the role of rating agencies in the early 2000 accounting scandals
D) the belief that markets are self-adjusting
E) low requirements for down payments on mortgages
12) Emerging markets share of world GDP is ______ when measured by ______
A) higher; PPP exchange rates instead of market exchange rates.
B) higher; market exchange rates instead of PPP exchange rates.
C) equal; either exchange rate.
D) lower; PPP exchange rates instead of market exchange rates.
13) We go from Gross to Net Domestic Product by
A) subtracting depreciation from GDP.
B) subtracting indirect business taxes from GDP.
C) adding indirect business taxes to GDP.
D) adding depreciation to GDP.
14) In the consumption function, suppose Ca = 60, c = 0.75, Y = 3000, and T = 800. Consumption expenditure is
A) 1590.
B) 1510.
C) 1710.
D) 2245.
E) 2910.
15) Which of the following is higher now (summer/fall 2009) than at any previous time in the postwar era?
A) Official Unemployment rate
B) Labor -force participation rate
C) Share of labor force forced to work part-time instead of full-time
D) A and C
16) Total expenditures as discussed by Gordon are
A) C + I + S + NX.
B) C + I + G + NX.
C) C + S + T + NX.
D) C + I + G + (Y-T).
17) The three functions of money are
A) store of value, unit of account, to regulate the economy.
B) store of value, medium of exchange, payment specie.
C) store of value, unit of account, bank settlement.
D) store of value, unit of account, medium of exchange.
18) Assume that all taxes are lump-sum, net exports = 0, and the marginal propensity to consume is 0.8. Then,
if investment and taxes were each to fall by $100 million, the equilibrium level of income would
A) rise by $100 million.
B) fall by $500 million.
C) rise by $500 million.
D) fall by $100 million.
19) As part of the process of deleveraging,
A) consumption grew faster than disposable income during 2003-06.
B) consumption grew slower than disposable income during 2003-06.
C) consumption will grow faster than disposable income during 2009-11
D) consumption will grow slower than disposable income during 2009-11
E) B and D
20) Since business firms will undertake a project whose rate of return exceeds the present level of interest rates,
when interest rates
A) fall planned investment falls, ceteris paribus.
B) rise planned investment does not change.
C) rise planned investment rises, ceteris paribus.
D) rise planned investment falls, ceteris paribus.
21) Which of the following is a way to finance a budget deficit?
A) Decreased domestic investment.
B) Increased private saving.
C) Decreased foreign investment.
D) All of the above.
22) Suppose that nominal GDP were $1200 billion in 1990 and $2000 billion in 1995. The implicit GDP deflator
was 1.00 in 1990 and 1.50 in 1995. From this we can infer that, between 1990 and 1995
A) real GDP rose by about 11%.
B) real GDP remained constant.
C) prices rose by 66%.
D) nominal GDP rose by 33%.
23) If disposable income increases by $100 and consumption increased by $85, ceteris paribus, we may
conclude that
A) $15 is autonomous consumption.
B) the marginal propensity to consume is 0.85.
C) the marginal propensity to consume is 0.15.
D) a change in disposable income is induced by a change in consumption.
24) In the simple circular flow model containing just households and business firms, all income is received by
households in exchange for
A) product.
B) wages.
C) consumer expenditures.
D) labor services.
25) Stock market gains from 1995 to 2000 contributed to the rise of real GDP above natural real GDP because
A) the stock market gains had a positive wealth effect on consumption.
B) the stock market gains had a positive wealth effect on saving.
C) capital gains from the stock market are included in GDP.
D) capital gains taxes reduce the amount of saving measured.
E) B and D.
Figure 1-2
26) Employing Figure 1-2 above, autonomous consumption expenditures are ________, and the marginal
propensity to consume is ________.
A) 200; 0.75 B) 0; 1
C) 200; 0.60 D) 500; 1
27) The term "twin deficits" refers to
A) Exports and imports deficits.
B) Saving and investment deficits.
C) Government budget and trade deficits.
D) Production and expenditure deficit.
28) A restaurant purchases a package of sandwich buns for 50 cents. The buns are ________ good in this case,
and thus its purchase ________ a transaction that is included in GDP.
A) an intermediate, is
B) a final, is not
C) a final, is
D) an intermediate, is not
29) Which of the following terms is not emphasized in the lectures and course packet readings about the
causes of the 2007-2009 financial crisis?
A) Derivatives
B) Securitization
C) Fiscal policy
D) Foreclosures
E) NINJA
30) "Real money balances" refers to
A) the money supply divided by the price level.
B) the currency part of the total money supply.
C) the non-interest-earning part of the money supply.
D) the money supply times one minus the interest rate.
Multiple Choice Answers
1) C
2) E
3) B
4) D
5) C
6) C
7) A
8) C
9) C
10) C
11) E
12) A
13) A
14) C
15) C
16) B
17) D
18) D
19) D
20) D
21) D
22) A
23) B
24) D
25) A
26) C
27) C
28) D
29) C
30) A