Midterm 2 with Solutions Econ311

Intermediate Macroeconomics 311 (Professor Gordon) closing Examination F every, 2009 YOUR concern________________________________ INSTRUCTIONS 1. The exam lasts 2 hours. 2. The exam is charge 120 takes in total 30 points for the multiple selection questions, 60 points for the analytical questions, and 30 points for the essays. 3. make unnecessary your answers to Part A (the multiple choice section) in the blanks on page 1.You wont get credit entry 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. 6. Write your essays with a pen. Write clearly 7. Good Luck and cheerful Holidays PART A (45 points) Choose the ONE alternative that BEST completes the bid or answers the question. Your answers must be in the space provided below. USE neat LETTERS. PART B (45 points) Please show your work and drop a line mickle the o pe scoreulas you use for partial credit. Question 1 (5 points) (a) What monthly point of fanfargon causes the charge aim to change magnitude by a factor of 5 (500 percentage points) everyplace a twelvemonth? (2 points) (HINT Use the LN and EXP formulas from Chapter 9, Problem 2, gain examples of which were presented in lecture on November 11). Using the log formula p = 100*log(5)/12 = 13. 4%. b) If the ordinate of monthly splashiness is 25%, by what factor would values deport risen over a year? (3 points) Lets call the initial price level P0 and the price level at the end of the year P12 25 = 100*log(P12/P0)/12 P12/P0 = exp(25*12/100) = 20. Question 2 (10 points) Consider an thrift where inflation expectations argon given by the equation pet = . 4 pt-1 + . 6 pet-1 . excessively assume that when the log of the proceeds ratio developments by 1 points, inflation increases by 4 points. a) Write down the SP equation, both its general form and its specific form with these p articular parameter assumptions inserted. (2 points) pt = pet + gYt-1 + zt = . 4pt-1 + . 6pet-1 + 4Yt-1 + zt ) Write down the DG equation (no need to derive anything, just issue it down). (1 point) Y = Y-1 + pic p c) Combine the SP and DG equations to express p as a blend in of pt-1, pet-1, Yt-1,pict, and zt. (2 points) (HINT Your answer must shake off p on the left side of the equation and terms non including current p on the right side, with all the relevant parameters inserted and solved bug out. ) p = 0. 4p-1 + 0. 6pe-1 + 4Y + z = 0. 4p-1 + 0. 6pe-1 + 4(Y-1 + pic p) + z 5p = 0. 4p-1 + 0. 6pe-1 + 4Y-1 + 4pic + z p = 0. 08p-1 + 0. 12pe-1 + 0. 8Y-1 + 0. 8pic + z For the continueder of the problem, assume that in period t=1 the economy has shelters given by p0 = 3pe0 = 3Y0 = 0 ) Suppose there is no supply shock in period 1 (z1 = 0) and that pic1 = 5. Solve for period 1 values p1 and Y1. (2 points) p1 = 0. 08(3) + 0. 12(3) + 0. 8(0) + 0. 8(5) + 0 = 4. 6 Y1 = 0 + 5 4. 6 = 0. 4 e) Suppose kinda that there is a period 1 supply shock that increases the value of z from 0 in period 0 to 1 in period 1. Find the period 1 values p1,pic1 and Y1 as salubrious as the expected period 2 inflation, pe2, if the government adopts an accommodating insurance. (3 points) conform to Policy means Y1 = 0, so from the DG equation p1 =pic1 and from the SP equation p1 = . 4(3) + . 6(3) + 4(0) + 1 = 4 = pic1 pe2 = . 4(4) + . 6(3) = 3. 4 Question 3 (15 points)Consider a country whose substitution Bank issued 100$ of High-Powered capital (H). Citizens cash holdings (dollar bills) amount to 10% (. 1) of their deposits while each commercial bank has to corroborate reserves for 15% (. 15) of the volume of deposits. a) What is the level of deposits? (2 points) D = H/(c+e) = 100/(. 1+. 15) = four hundred b) What is the level of the Money render defined as dollar bills and deposits? (3 points) M = (1+c)D = 1. 1*400 = 440 c) Suppose the profound Bank wants to increase Money Sup ply to 528. How many extra units of High-Powered Money do they have to circulate? (4 points) M = (1+c) H / (c+e) 528 = 1. 1 H / . 25 H = 120 So they should print 20 extra units of H ) assign now that the Central Bank still wants to set the Money Supply to 528 but the Government forbids them from printing High-Powered Money. What option is left to the Central Bank? (Hint restrict your attention to this simplified model where there is cypher like direct lending or any opposite exotic policy) (2 points) Change the reserve requirement e) Given your suggested policy, which of the parameters of the model would they be ever-changing? To which new value? (Remember that here H=100 and cannot be changed by assumption and M=528) (4 points) M=(1+c) H / (c+e) 528=1. 1 * 100 / (. 1 + e) e=. 1083 = 10. 8% Question 4 (15 points) Consider two nations, Richland and Poorland. twain nations have the same Cobb-Douglass toil function, Y=AKbN(1-b). Let Poorland have an economy with engineering scien ce level A=18, capital elasticity of toil b=(1/3), tribe maturation rate n=. 13, capital depreciation rate d=. 07, and savings rate s=. 3 a) Rewrite the work function as a function relating Y/N and K/N. (2 points) Y/N = A(K/N)b = 2(K/N)(1/3) b) Solve for the steady state values of the capital- lying-in ratio (K/N) and per-capita gross domestic product (Y/N). (6 points) s(Y/N) = (n+d)(K/N) sA(K/N)b = (n+d)(K/N) (K/N) = sA/(n+d)1/(1-b) (K/N) = . 1*18 /(. 2)3/2=27 (Y/N) = (n+d)(K/N)/s (Y/N) = (. 2)(27)/. 1=54 c) Richland has a per-capita gross domestic product that is triple that of Poorland. Given hat Richland has the same production function as Poorland, the capital- advertise ratio in Richland is what multiple of the capital-labor ratio in Poorland? (In other words, if Poorland has a capital-labor ratio of K/N= x and Richland has a ratio of K/N= y, what is y/x? ). (3 points) pic d) Compute the borderline products of capital in the two nations. (3 points) MPK = b(Y/N)/(K/N) MPKA = (1/3)(54)/(27)=2/3=. 6667 MPKb = (1/3)(162)/(729)=2/81=. 0247 e) Judging from your answer in part (d), does the Solow model predict that unequal countries have a gamyer or trim rate of bring back on capital? (1 point) The Solow model predicts a higher rate of event for poor countries.This is one of the critiques of the Solow emersion model. PART C (30 points) WRITE YOUR NAME AND ID NUMBER ON YOUR BLUE BOOK. As stated on the computer program (p. 3) and in numerous in-class and e-mailed reminders, you must write your answers in pen not pencil. This is a single multi-part essay question. You should write in your blue retain for 30 minutes. 1. Write a coherent essay on the causes of the 2008-09 box and on the policy reactions to this event. Your essay should cover the pursual specific points a. First, yield the facts. What were similarities in the duration and magnitude of the 2001 break and subsequent recovery as compared to the 2008-09 recession and recovery so far?Incl ude comments on gross domestic product, the gross domestic product gap, labor market variables, and any other distinguishing features of these two episodes. b. What were the most measurable causes of the 2008-09 recession? Include comments on which causes were the same as in the 2001 recession, and which were different. c. In what sense, if any, did monetary or pecuniary policy partially contribute to the causes of the 2008-09 recession? d. Evaluate the response of monetary policy since early 2008. What were the similarities and differences between this response and the monetary policy response to postwar recessions in 2001 and earlier? What aspects would you sycophancy or criticize? e.Evaluate the response of fiscal policy since early 2008. What aspects would you adulation or criticize? Multiple Choice Questions Make sure to write you answers on the blanks on page 1 1. The current cast includes all of the next except A) net exports B) net income from abroad C) net biased tra nsfers D) inappropriate direct investment 2. In what way was the supra bailiwick economy cited as a source of the U. S. housing bubble in 2003-06? A) cheaper prices of merchandise building materials B) support of dollar by hostile central banks C) immigration of skilled immaterial construction workers D) high pay of top executives of foreign investment banks 3.Which of the followers were not cited in the course as a reason for France and other European nations to be reluctant to endorse an Obama-like fiscal stimulus for their own countries? A) high unemployment in Europe B) low fiscal multipliers C) social welfare system D) unemployment policy system 4. Suppose we have an economy in which G = 1100, t = 0. 26, Y = 3800, and YN = 4000. At Y the difference between the actual shortage and morphological deficit is A) 60. B) 112. C) -172. D) -112. E) 52. 5. The trouble of U. S. net exports to improve dramatically in the mid 1980? s notwithstanding the weakening of the dollar su ggests that A) U. S. industries supply of competitive goods was inelastic over the period.B) LDC debt refund schedules and lack of financing kept U. S. exports low. C) NCIs maintained fixed exchange range vis a vis the dollar and U. S. exports low. D) All of the above. 6. In the reading period assignments from the Economist, the join States is faulted relative to Europe and Japan for each of the succeeding(a) reasons except A) labor and capital markets B) primary and secondary education C) personal saving rate D) infrastructure 7. In the reading period article about France, the cut are p chew upd for each of the pursuance reasons except A) infrastructure B) household debt C) output maturation rate D) medical care system 8. The mechanism of ? international crowding-out? s that a government budget deficit ________ the domestic hobby group rate, which makes the dollar ________ expensive for foreigners, which then ________ net exports. A) assembles, less, lowers B) raises, les s, raises C) raises, more(prenominal), lowers D) lowers, less, lowers E) lowers, more, raises 9. Which of the following exploits takes institutionalize as a result of automatic stabilization? A) extra revenue revenues are generated in a boom. B) tax revenues remain constant during a recession. C) leakages increase during a recession, helping to stimulate the economy. D) Both A and C are correct. 10. If the Federal Reserve intervenes in the foreign-exchange markets and buys foreign currencies A) the U. S. oney supply rises and foreign currencies depreciate. B) the U. S. funds supply falls and foreign currencies depreciate. C) the U. S. money supply rises and foreign currencies appreciate. D) the U. S. money supply falls and foreign currencies appreciate. 11. Activists-believe that AD is unstable because A) personal line of credit and consumer attitudes and expectations shift. B) monetary policy is variable. C) fiscal policy publications are unpredictable. D) Both B and C are c orrect. 12. Assuming constant wages implies that A) an increase in the price of goods raises profits and SAS is vertical. B) a decrease in the price of goods lowers profits and SAS is horizontal.C) an increase in the price of goods lowers profits and SAS is vertical. D) an increase in the price of goods raises profits and SAS is positively sloped. pic 13. Consider the above figure with vestibular sense initially at E0. If the money supply is increase and prices are flexible, in the short mellow prices and output pull up stakes ___. In the commodious run output and prices entrust ___. A) be as at E2 return to E0. B) be as at E1 be as at E2. C) be as at E2 be as at E3 D) be as at E2 be as at E1. E) be as at E1 be as at E3. 14. According to the readings, a common feature of the cracking Depression and the recent economic crisis was A) mortgage credit B) deposit insurance C) unemployment rate D) monetary policy 15.The sources of the current problems of running monetary policy are often cited as A) Quantitative easing B) Zero lower bound C) Excess bank reserves D) A) and B) E) B) and C) 16. An acceleration of nominated gross domestic product growth from, say 4% to 6% will A) permanently raise the rate of inflation. B) temporarily lower the rate of inflation. C) expire veritable gross domestic product unaffected in the long run. D) Both A and C. 17. The short-run Phillips turn out gives A) the actual short-run level of significant GDP and inflation. B) all realizable combinations of real GDP and inflation, for a given set of expectations. C) all contingent combinations of real GDP and inflation, for fully adjusted expectations. D) the response of real GDP and inflation to supply shocks. 18.The Fed is criticized for the one-way option regarding asset bubbles. The critique is that the Fed __________ when asset prices increase and __________ when asset prices decrease A) raises disport judge lowers interest judge B) leaves interest rates unvarying lea ves interest rates unchanged C) raises interest rates leaves interest rates unchanged D) leaves interest rates unchanged lowers interest rates E) lowers interest rates raises interest rates 19. Which of the following was not a source of the Great Moderation, check to the textbook? A) growth rate rule for money supply B) financial deregulation in late 1970s, early 1980sC) magnitude of supply shocks after early 1980s D) government military spending 20. In the short-run, the fix of an adverse supply shock is to A) reduce real GDP and leave the inflation rate unchanged if the growth of nominal GDP stiff the same. B) reduce real GDP and leave the inflation rate unchanged if the growth of nominal GDP is reduced enough. C) maintain the same level of real GDP and reduce the inflation rate if the growth if nominal GDP is increased enough. D) All of the above. 21. According to the textbook, the main losers due to the redistributive effect of the postwar inflation in the United States were A) households. B) corporations. C) government. D) A) and B) 22. Disgruntled? workers who quit their jobs to come ? a more reasonable boss? are experiencing A) involuntary unemployment. B) match unemployment. C) cyclical unemployment. D) turnover unemployment. 23. Policy solutions to mismatch unemployment include A) fiscal policies to raise the AD curve B) monetary policies to raise the AD curve C) policies other than fiscal and monetary policies D) accommodative policies to deal with supply shocks 24. Over a year, the money supply in a nation grew by 6 percent, while velocity rose by 2 percent and real GDP rose by 3 percent. This results in an inflation over the year of ________ percent. A) 5 B) 11 C) 1D) 7 25. The the Feds valued easing after mid-2008 is not described by A) increased open-market purchases of treasury securities B) increased open-market purchases of sequestered securities C) increased open-market purchases of corporate stock D) A) and B) E) A) and C) 26. Which of the following increased by the largest percentage between mid-2007 and mid-2009? A) excess bank reserves B) M2 C) dynamic money D) total bank reserves E) M1 pic 27. Initially, the economy is at point G in the figure above. An increase in per capita savings from s0 to s1 will in the short run result in ________ and in the long run result in ________.A) excess per capita saving more fast growth in per capita output B) excess per capita saving less fast growth in per capita output C) more rapid growth in per capita output more rapid growth in per capita output D) more rapid growth in per capita output no change in the long run rate of growth in per capita output 28. Which of the following will not affect steady state per capita income in the Solow growth theory? A) The savings rate. B) The initial capital stock. C) The population growth rate. D) The production function. 29. The Solow growth model predicts that nations that are initially poor should have A) laggard growth rates than nations that are rich. B) fast-breaking growth rates than nations that are rich. C) growth rates equal to those of nations that are rich. D) negative growth rates. 30.Two readings in the course packet for Chapter 11 cite a particular scientific innovation for improved economic growth in poor tropical countries. This is A) television B) internet C) mobile phones D) new drugs to fight malaria 31. Several structural changes that occurred over the past two decades were a theme of lectures. Which of the following was not one of these changes? A) greater importance of structural unemployment and less importance of frictional unemployment B) smaller response of core inflation to oil price shocks C) large decline of employment to declines in output in recessions D) larger increase of productivity to increase in output in recoveries E) More reliance on wage flexibility rather than layoffs in 2008-09 recession 32.In the Cobb-Douglas production function Y=AKbL1-b, the variable A has s everal different names. Which of the following is not one of them? A) autonomous growth factor. B) infrastructure. C) multifactor productivity. D) residual. 33. The formula for the growth rate of multifactor productivity is A) a = y + bk + (1 b)n. B) y = a + bk + bn. C) a = y bk (1 b)n. D) y = a b/k(1 b)n. 34. Which of the following does not affect multifactor productivity? A) a tax on low-efficiency firms B) a higher saving rate C) Environmental regulation. D) Technological progress. 35. Relative growth rates of the standard of living in the United States and Europe betoken that workers in ________ have chosen to ? spend? _______ of their higher productivity on leisure rather than on consumption of market goods and services. A) Europe, a pregnant part B) the United States, a significant part C) Europe, almost no(prenominal) D) the United States, almost all 36. Which of the following would cause labor? s share of national income to decrease? A) Labor productivity increases less quickly than the real wage rate. B) Labor productivity increases more rapidly than the real wage rate. C) Labor productivity has increased at the same rate as the real wage rate. D) Labor? s share of national income is not affected by the relative growth rates of labor productivity and the real wage rate. 37.Once monetary policy is dedicated to supreme the level of nominal GDP, then fiscal policy can be used to A) call for the overall level of interest rates, with a high budget surplus implying a high level of interest rates. B) choose the overall level of interest rates, with a high budget deficit implying a high level of interest rates. C) reign the rate of inflation, with a high budget surplus implying a faster rate of inflation. D) control the rate of inflation, with a high budget deficit implying a faster rate of inflation. 38. A major side-effect of a stimulative fiscal policy is that it will A) discriminate in favor of housing. B) crowd out private expenditures.C) in crease the natural rate of unemployment. D) permanently raise the rate of inflation. 39. Which of the following was a policy of Roosevelts New Deal which is not a part of the Obama stimulus package? A) tax reductions B) infrastructure improvements C) Direct hitch to stop financial institutions from failing D) Federal government direct hiring of the dismissed 40. The Barro-Ricardo Equivalence Theorem assumes all of the following except A) Individuals value the welfare of their heirs as much as their own welfare. B) Interest rates will remain constant. C) All individuals have children D) Markets for consumer housing and durable goods are perfect. 41.Which of the following will cause the date that the Social Security trust fund runs out of money to be pushed further into the future? A) A decrease in the rate of real GDP growth. B) An increase in the population growth rate. C) A decrease in the growth of the real wage. D) All of the above. 42. A fixed money-supply rule will have the g reatest stabilizing effect on output when A) money imply is unstable and commodity demand is stable. B) both money and commodity demand are unstable. C) both money demand and commodity demand are stable. D) the velocity of money is unstable. 43. M1 is a definition of money largely confined to which function(s) of money? A) unit of account B) store of valueC) medium of exchange D) B and C. 44. In the falsifiable ecesis of the theory of the political business cycle discussed in lecture, which of the following variables metrical over the year before the election has been the best predictor of the outcomes of presidential elections? A) the unemployment rate B) the inflation rate C) the growth rate of per capita real GDP D) the level of the federal government fiscal deficit 45. In the empirical validation of the theory of the political business cycle discussed in lecture, which of the following elections is a clear outlier as violating that empirical evidence? A) 1932 B) 1936 C) 1972 D) 1992 E) 2000