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Econ 100B
Macroeconomic Analysis
Professor Steven Wood
Spring 2013
Problem Set #1
Due: February 12, 2013 in class at 2:10 p.m.
(The grace period ends promptly at 2:20:01 p.m.)
Place your completed problem set in the box near the entrance.
Please sign the following oath:
The answers on this problem set are entirely my own work. I neither copied from the work of others nor allowed others
to copy from my work.
_______________________________________
Signature
Any problem set turned in without a signature will be assigned a grade of zero.
Problem Set Instructions
1.
You MUST complete your problem set on this template.
2.
Your answers to the multiple choice questions MUST be computer highlighted.
3.
Graphs and equations MAY be drawn by hand. When drawing diagrams, clearly and accurately label all axis,
lines, curves, and equilibrium points.
4.
Explanations MUST be word-processed. Your explanations should be succinct and to the point.
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A. Multiple Choice Questions (15 points). Computer highlight the best answer (3 points each).
1.
Which statement is true of an exogenous variable in an economic model?
a.
b.
c.
d.
e.
2.
In a country with unusually high tax rates, one might expect that:
a.
b.
c.
d.
e.
3.
Less than 0.01
Around 0.25
Around 0.33
Around 0.40
Exactly 144.0
If a U.S. citizen deposits $10,000 in a foreign bank and the foreign bank uses the $10,000 to buy dollardenominated assets in the U.S., then:
a.
b.
c.
d.
e.
5.
GDP might be understated because its citizens might flee the country.
GDP might be overstated because the government might raise its spending.
After tax income should be much higher than that of countries with lower tax rates.
GDP might be overstated because the government might avoid running budget surpluses.
GDP might be understated because its citizens might avoid reporting some of their income.
Suppose that an economy’s output is given by Y = AK0.3L0.7 where Y equals $12 trillion, K equals $27 trillion,
and L equals 64 million. Given this information, what is the closest approximation of total factor productivity,
A?
a.
b.
c.
d.
e.
4.
It is often a policy variable.
Its value is explained within the model.
Its value within the model cannot be changed.
It has no direct relation to the endogenous variables.
All of the above.
The U.S. has experienced a net capital inflow.
The U.S. has experienced a net capital outflow.
The foreign economy has experienced a net capital outflow.
The foreign economy has experienced an increase in net exports.
None of the above.
If the world real interest rate were to rise above the rate at which national saving and domestic investment
would be equal then:
a.
b.
c.
d.
Investment would be greater than saving so the economy would be running a trade deficit.
Saving would be greater than investment so the economy would be running a trade deficit.
Investment would be greater than saving so the economy would be running a trade surplus.
Saving would be greater than investment so the economy would be running a trade surplus.
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B. Analytical Question (35 points). Answer the following question based on the standard models of analysis developed in class. The information in the various
parts of the question is sequential and cumulative.
1.
Production Functions, Labor Markets, and a Small Open Economy. In 1979, the Cuban economy was in general equilibrium, the supply of labor was a
positive function of the real wage, and the supply of capital was fixed.
a.
Based only on this information, use a Production Function diagram (on the left) and a Labor Market diagram (on the right) to clearly and
accurately show Cuba’s initial (1) level of economic output, (2) employment, and (3) the real wage rate. These diagrams should be drawn in
BLACK.
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b.
Provide an economic explanation of what you have shown in your diagrams above.
c.
In 1980, Cuba relaxed its emigration policy, leading 20% of the labor force to leave the island. The
workers who left were primarily low-skilled workers. Any effects from emigration on economic
output are greater than any effects from a change in average skill levels on economic output. Based
only on this additional information, clearly and accurately show the effects of this emigration on
Cuba’s (1) level of economic output, (2) employment, and (3) the real wage rate on your diagrams
above. These effects should be drawn in RED.
d.
Provide an economic explanation of what you have shown in your diagrams above. Discuss what
happens to Cuba’s (1) level of economic output, (2) employment, (3) the real wage rate, and (4) real
rental cost of capital. Be sure to explain why this takes place.
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e.
In 1979, Cuba was a small open economy with perfect capital mobility and a trade surplus. Based
only on this information, use a Desired Saving – Desired Investment diagram to clearly and
accurately show Cuba’s initial (1) real interest rate, (2) desired saving, (3) desired investment, and
(4) net export balance. This diagram should be drawn in BLACK.
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f.
Provide an economic explanation of what you have shown in your diagram above.
g.
In 1980, Cuba relaxed its emigration policy, leading 20% of the labor force to leave the island. The
workers who left were primarily low-skilled workers. Any effects from emigration on economic
output are greater than any effects from a change in average skill levels on economic output. Based
only on this additional information, clearly and accurately show the effects of this emigration on
Cuba’s (1) real interest rate, (2) desired saving, (3) desired investment, and (4) net export balance in
your diagram above. These effects should be drawn in RED.
h.
Discuss what happens to Cuba’s (1) real interest rate, (2) desired saving, (3) desired investment, and
(4) net export balance. Be sure to explain why this takes place.
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