YOUR NAME: _______________________________
TA: (circle one) David or Zahra Section: (circle one) 9:00am or 3:00pm
1.
The exam lasts 1 hour.
2.
The exam is worth 60 points in total: 30 points for the two analytical questions, and 30 points for the multiple choice.
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 spaces provided
5.
GOOD LUCK!
Answer multiple choice questions in the space provided below.
USE CAPITAL LETTERS.
6. _ _ __ 11. _ _ __ 21. _ _ __ 1. _ _ __
2. _ _ __ 7. _ _ __ 12. _ _ __ 22. _ _ __
3. _ _ __
4. _ _ __
8. _ _ __ 13. _ _ __ 23. _ _ __
9. _ _ __ 14. _ _ __ 24. _ _ __
5. _ _ __ 10. _ _ __ 20. _ _ __ 30.

    
 
    
1) If total planned spending (E(p)) exceeds GDP, we expect that
A) inventories will be rising.
B) GDP will be falling.

C) inventories will be falling.
D) government expenditures must be rising.
2) A change in the multiplier (k) will change the
 
A) slope of the IS curve.
B) position of the LM curve.
C) slope of the LM curve.
D) slope and the position of the IS curve.
3) In the simple Keynesian model of the determination of income, the price level is assumed to be
A) endogenous and to remain constant.
B) exogenous and to remain constant.
C) exogenous and to gradually change.
D) endogenous and to gradually change.
4) The multiplier measures the
A) rise in saving resulting from a rise in income.
B) marginal propensity to invest.
C) rise in equilibrium GDP resulting from a one dollar rise in planned autonomous expenditures.
D) number of steps it takes to move from one equilibrium to another.
5) Which of the following would NOT be included in total final product (GDP)?
A) welfare payments
B) a used office building purchased by a high-tech firm
C) semiconductors that are bought by a firm in Hong Kong
D) both A and B
6) An increase in the money supply will raise equilibrium GDP if the
A) IS curve is not vertical.
B) position of the LM curve depends on the level of real money balances.
C) position of the IS curve depends on the level of real money balances.
D) IS curve is negatively sloped.

7) If nominal GDP increases, which of the following will always take place?
A) prices will have increased but output will have fallen or remained the same.
B) both output and prices will have increased.
C) output will have increased but prices will have fallen or remained the same.
D) none of the above
8) GDP can be measured by the
A) total market value of final goods and services produced in the economy.
B) total value of all intermediate goods produced in the economy.
C) total value of all sales in the economy.
D) net national product plus investment.
9) The size of the multiplier depends in part on the
A) level of autonomous expenditures.
B) change in autonomous consumption.
C) marginal propensity to consume.
D) level of consumption.
10) An increase in the marginal propensity to import will
A) lower the multiplier and reduce equilibrium income.
B) raise imports and raise equilibrium income.
C) raise the multiplier and reduce equilibrium income.
D) lower imports and raise equilibrium income.
11) As used in this text, "autonomous" variables are
A) determined only by income levels.
B) the same as endogenous variables.
C) completely independent of income, although they can be explained by movements in other variables.
D) spontaneous variables that are completely unpredictable.
12) Which of the following would cause the IS curve to shift?
A) a change in the multiplier
B) an increase in autonomous tax revenue
C) a change in business or consumer confidence
D) All of these would shift the IS curve.

13) Comparing Britain and Ireland, we would expect
A) Ireland’s GDP/GNP ratio to be higher than the same ratio for Britain
B) Ireland’s GNP/GDP ratio to be higher than the same ratio for Britain
C) Britain’s “payments of factor income to the rest of the world” to be higher than Ireland’s
D) A) and C)
14) The shift of the U. S. government budget from surplus to deficit between 2000 and 2003 was offset by
A) A decline of investment relative to saving
B) A decline in saving relative to investment
C) A decline in net exports
D) A) and C)
15) A change in interest rates ________, while a change in income ________ the real money demand schedule.
A) has a large effect on; has no effect on
B) shifts; moves along
C) decreases; increases
D) moves the economy along; shifts
16) If business firms are more optimistic during the expansion phase of the business cycle, they
A) raise their expected rates of return on projects and investment decreases.
B) lower their expected rates of return on projects and investment increases.
C) lower their prices and increase investment.
D) raise their expected rates of return on projects and investment increases.
17) Suppose that steel produced this year is used to produce a car sold next year. The value of the steel ________ included in GDP this year as ________.
A) is; an adjustment to inventories
B) is not; an adjustment to inventories
C) is; an intermediate good
D) is not; an intermediate good
18) The decline in household saving in Japan between 2000 and 2003 was offset by
A) An increase in government saving, a decline in corporate saving, and a decline in corporate investment
B) A reduction in government saving, an increase in corporate saving, and an increase in corporate investment
C) An increase in government saving, an increase in corporate saving, and an increase in corporate investment
D) A reduction in government saving, an increase in corporate saving, and a decline in corporate investment

19) The yield curve exhibits
A) The yield on stocks vs. the yield on bonds
B) The yield on stocks vs. the yield on Treasury bills
C) The yield on bonds vs. the yield on Treasury bills
D) The yield on Treasury bills vs. the yield on bank accounts
20) Autonomous planned spending is a function of the
A) interest rate.
B) marginal propensity to save.
C) marginal propensity to consume.
D) tax rate.
21) An increase in autonomous taxes
A) increases consumption by that amount times the marginal propensity to consume.
B) decreases autonomous planned spending by an equal amount.
C) increases autonomous planned spending by an equal amount.
D) decreases saving by that amount times the marginal propensity to save.
22) A fall in the government's budget deficit will lower
A) saving and GDP.
B) equilibrium GDP and consumption.
C) consumption and saving.
D) All of the above are correct.
23) If disposable income increases by $100 and consumption increased by $85, ceteris paribus, we may conclude that
A) a change in disposable income is induced by a change in consumption.
B) the marginal propensity to consume is 0.15.
C) $15 is autonomous consumption.
D) the marginal propensity to consume is 0.85.
24) In the 2001 U. S. recession
A) The stock market boosted autonomous consumption while falling income reduced induced consumption
B) The stock market reduced autonomous consumption while housing refinance boosted induced consumption
C) Housing refinance boosted autonomous consumption while falling income reduced induced consumption
D) Housing refinance boosted induced consumption while the stock market reduced autonomous consumption

25) Assuming that there are NO income taxes, if both autonomous taxes, and government expenditures were to rise by $100 million, we would expect equilibrium GDP to
A) rise by $100 million.
B) remain unaffected because leakages have changed by the same amount.
C) rise by less than $100 million.
D) rise, but by a multiple of $100 million.
26) The LM curve is the set of combinations of ________ such that ________.
A) interest rates and real money balances, real income equals real money balances times (1/r)
B) interest rates and real money balances, the money supply is equally demanded
C) real income and interest rates, the production of output is equally demanded
D) real income and interest rates, the money supply is equally demanded
E) real income and real money balances, the production of output is equally demanded
27) The Bank of China holds more than $300 billion U. S. dollars in international reserves.
Why is this?
A) China buys dollars to stimulate Chinese exports to the U. S.
B) China needs dollars to buy imports from the U. S.
C) China has a high marginal propensity to save
D) China needs to expand its money supply in order to reduce poverty in China
28) When an economy is in equilibrium
A) there is no savings nor investment.
B) government tax revenues equal planned government expenditures.
C) planned expenditures exceed production and income.
D) production and income equal planned expenditures.
29) The value of steel sold to an automobile producer is ________ directly included in the
GDP because ________.
A) sometimes; the automobile may not be sold in the current period
B) sometimes; the steel is sometimes not resold in the current period
C) never; to do so is to double count the value of the steel
D) always; it was produced during the current period
30) The article “Saving Comes Back into Vogue” (Item 3-4) predicts that the 2001-2002 increase in U. S. household saving will be short-lived because
A) The 2000-2002 decline in the stock market is over
B) Alan Greenspan has reduced the Federal funds rate
C) President Bush has reduced taxes
D) A) and C)

PART B
   
An economy produces only two consumption goods – Freedom fries and hamburgers.
Production and price statistics for these goods in 1990 and 1994 are the following:
1990 1994
Output Prices ($) Output Prices ($)
F. fries 12 5 10 9
Hamburgers 4 10 10 3
Prices and quantities for the years not shown in the table are missing.
A) (4 points) Calculate the chain-weighted real-GDP growth-rate between 1990 and 1994.
This is just an approximation of the true value, as you can use only prices and quantities in
1990 and 1994.
B) (3 points) What is the net annual growth rate in percentage points corresponding to your answer in A) ?
Missing data are now available.
C) (3 points) The table reports the year-to-year chain weighted real-GDP growth-rates between 1990-1994.
1990-1991
Net G-Rates in % points
-5%
1991-1992
1992-1993
+10%
+5%
1993-1994 +3%
What is the chain weighted real-GDP growth rate between 1990-1994?

   
Consider the following economy:
C=1000 - 50r + 0.6 (Y-T)
T=100 + 0.2Y
I=200 - 10r
G=1000
NX=400-0.15Y
M S /P=600
(M/P) D =0.2Y-30r
A) (5 points) Write down the IS/LM equations for this economy.
B) (5 points) Find the equilibrium Y, and r.
C) (2 points) Calculate whether the budget is in surplus or deficit in equilibrium.

D) (5 points) Now suppose the government decides to increase G from 1000 to 1200. What is the new equilibrium Y and r?
E)(3 points) What is the change in the equilibrium I as G increases from 500 to 1000? Why does it either increase or decrease?

311 INTERMEDIATE MACROECONOMICS FALL 2003
SOLUTIONS TO THE FIRST MIDTERM
PART A
9) C
10) A
11) C
12) D
13) A
14) D
5) D
6) D
7) D
8) A
1) C
2) D
3) B
4) C
15) D
24) C
25) A
26) D
27) A
28) D
29) B
30) A
16) D
17) A
18) D
19) C
20) A
21) D
22) D
23) D

PART B
   
An economy produces only two consumption goods – Freedom fries and hamburgers.
Production and price statistics for these goods in 1990 and 1994 are the following:
1990 1994
Output Prices ($) Output Prices ($)
F. fries 12 5 10 9
Hamburgers 4 10 10 3
Prices and quantities for the years not shown in the table are missing.
A) (4 points) Calculate the chain-weighted real-GDP growth-rate between 1990 and 1994.
This is just an approximation of the true value, as you can use only prices and quantities in
1990 and 1994.
Growth(prices1994)=(10*9+10*3)/(12*9+4*3)=120/120=1
Growth(prices1990)=(10*5+10*10)/(12*5+4*10)=150/100=1.5
CW-Growth=Sqrt[1.5]=1.225
B) (3 points) What is the net annual growth rate in percentage points corresponding to your answer in A) ? g=100*Ln[1.225]/4=5.07%
Missing data are now available.
C) (3 points) The table reports the year-to-year chain weighted real-GDP growth-rates between 1990-1994.
1990-1991
Net G-Rates in % points
-5%
1991-1992
1992-1993
+10%
+5%
1993-1994 +3%
What is the chain weighted real-GDP growth rate between 1990-1994?
CW-Growth=1*.95*1.1*1.05*1.03=1.1302

   
Consider the following economy:
C=1000 - 50r + 0.6 (Y-T)
T=100 + 0.2Y
I=200 - 10r
G=1000
NX=400-0.15Y
M S /P=600
(M/P) D =0.2Y-30r
A) (5 points) Write down the IS/LM equations for this economy.
In goods market equilibrium Y = E p
E p
= 1000-50r+0.6(Y-100-0.2Y)+200-10r+1000+400-0.15Y
= 2540-60r+0.33Y
Y= E p
=2540-60r+0.33Y
Ö Y=1/0.67(2540-60r) (IS curve)
Another way to get the IS curve is to find k=1/0.67 and Ap=2540-60r, then use Y=k*Ap.
In money market equilibrium M S /P=(M/P) D
600=0.2Y-30r
Ö Y=1/0.2(600+30r) (LM curve)
B).(5 points) Find the equilibrium Y, and r.
Solving IS and LM curves simultaneously for Y and r gives,
1/0.67(2540-60r)=1/0.2(600+30r)
Ö r=3.302
Then substituting in the LM equation gives
Y=1/0.2(600+30(3.302))=3495
You could also have used the formulas in the text for finding the equilibrium Y and r.
C) (2 points) Calculate whether the budget is in surplus or deficit in equilibrium.
Budget Surplus=T-G=100+0.2Y-1000=0.2Y-900=-200.94
So there is a budget deficit of 200.94
D) (5 points) Now suppose the government decides to increase G from 1000 to 1200. What is the new equilibrium Y and r?

Only the IS equation changes.
From goods market clearing condition we have
Y=2740-60r+0.33Y
Ö Y=1/0.67(2740-60r)
(Remember Ap=2540-60r+200=2740-60r, k is the same; use Y=k*Ap to find new IS)
LM is same as before. Solve the IS and LM simultaneously for equilibrium Y and r to get
1/0.67(2740-60r)=1/0.2(600+30r)
Ö r=4.548
Substituting in the LM equation to get Y,
Y=1/0.2(600+30(4.548))=3682.2
E) (3 points) What is the change in the equilibrium I as G increases from 1000 to 1200? Why does it either increase or decrease?
I(G=1000)=200-10(3.302)=166.98
I(G=1200)=200-10(4.548)=154.52
One other way students attempted this was by using
Change in I=-10*Change in r which also gives the correct answer.
So equilibrium investment falls by 12.46 as G increases.
Investment falls because a rise in G causes interest rates to rise in the money market.
When interest rates increase the opportunity cost of investment is greater and equilibrium investment falls, or is crowded out.