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Econ 002- INTRO MACRO Prof. Luca Bossi December 15, 2010
FINAL SUGGESTED SOLUTIONS
YOUR NAME: ______________________________________
YOUR PENN STUDENT NUMBER: ____________________________
YOUR R.I.’s NAME: ______________________________________
INSTRUCTIONS
The exam is closed book. It is composed of 40 multiple choice questions and three
exercises. All multiple choice questions are worth 1.5 points (so the total is 60 points
for the multiple choice part). The exercises are worth 10 or 15 points each (the total
is 40 points for the exercise part).
ANSWER ALL QUESTIONS. TOTAL POINTS = 100. TOTAL TIME = 120 minutes
Provide your answers on the exam sheet directly. Only the first five pages of the exam will be graded. Read all questions very carefully. Write legibly.
EXAM TAKING POLICY
If you need to use the restroom, or you need a pencil or scratch paper, or some other supply that
we might have, raise you hand and wait for the proctor to come to you. Only one person can be
out of the examination room at a time, and the proctor will hold onto your exam papers while
you are out at the restroom.
NO CELL PHONES. NO IPODS OR SIMILAR DEVICES WITH CALCULATOR
“APPS”. YOU CANNOT CONNECT TO THE INTERNET. USE A UPENN APPROVED
CALCULATOR. NO BOOKS. NO NOTES. NO HELP SHEETS. NO TALKING TO
EACH OTHER. NO ASKING THE PROCTORS ANY QUESTIONS ABOUT THE
EXAM. WRITE IN PENCIL OR IN PEN AS YOU LIKE, BUT IF YOU WRITE IN
PENCIL THERE IS NO POSSIBILITY TO ASK FOR RE-GRADING.
PLEASE WRITE YOUR NAME ON EVERY SINGLE PAGE OF THE EXAM
PLEASE RETURN THE EXAM SPECIFICALLY TO YOUR R.I. WHEN YOU ARE
DONE
PLEASE DO NOT START THIS EXAM UNTIL INSTRUCTED TO DO SO.
GOOD LUCK!
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EXERCISE I
CHOOSE EITHER PART I-A OR I-B AND ANSWER ONE OF THESE QUESTIONS ONLY.
BELOW YOU MUST DECLARE EXPLICITLY WHICH QUESTION YOU ARE SOLVING
AND WANT TO CONSIDER FOR GRADING. IF YOU SOLVE BOTH I-A AND I-B YOU WILL
NOT GET EXTRA CREDITS. IF YOU DO NOT DECLARE WHICH QUESTION YOU ARE
SOLVING YOUR WORST QUESTION WILL BE GRADED.
I DECLARE THAT THE QUESTION I WANT TO BE GRADED IS
I-A
(10 points) Fill in the table below with the direction of the change in
the variables listed in the first row in response to the events in the first column. Your answer can only be one of the three following choices (just one for for each cell): rises, falls or no change. No other answer can be accepted. Please write clearly.
U.S. real interest rate
U.S.
domestic investment
U.S.
net capital outflow
U.S.
real exchange rate of domestic currency
U.S.
trade balance
If the U.S. government budget deficit increases
If the U.S. imposes import quotas
If capital flight from the U.S.
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the real exchange rate to be 140? Does consumption and investment increase or decrease with respect to part a) as a result? With e = 140, r must be 0.2. You know this from the relationship between the real exchange rate and the real interest rate is given by e = 20 + 600r Using Y = C+I+G+NX and setting Y = 900, e = 140 and r = 0.2 solving for G gives: G = 60 So the government spends less to achieve r to 0.2. As a result, consumption and investment are increased. Consumption Before (r = 0.25) C = 300 + 0.5Y – 200r = 300 + 450 -50 = 700 After (r = 0.2) C = 300 + 0.5Y – 200r = 300 + 450 -40 = 710 Investment before (r = 0.25) I = 200 – 300r = 125 Investment After (r = 0.2) I = 200 – 300r = 140
EXERCISE II
You have the following data from the country of Farmland:
Price of Apples Quantity of Apples Price of Oranges Quantity of Oranges Price of Cars Quantity of Cars Price of Olives Quantity of Olives 2008 1 2 2 3 10 2 2 4 2009 2 2 3 4 11 4 3 5 2010 4 5 5 6 12 3 5 6
This country produces Apples, Oranges and Cars. They consume all the fruits that they produce
but they do not consume any car, in fact, they export every year all the cars that they produce.
Moreover, the habitants of this country love to eat olives but, as they cannot produce them, they
need to import them from overseas.
a) (5 points) Show all the general formulae that you need to use and complete the following
table:
Real GDP Nominal GDP Deflator Inflation 2008 2009 2010
Base year = 2008
b) (5 points) Show all the general formulae that you need to use and complete the following
table:
Cost of the basket CPI Inflation 2008 2009 2010
Equally weighted basket: 1 unit per item. Base year: 2008
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c) (5 points) The money demand of the country is given by : M d= 300 *P^2. Show all the
general formulae that you need to use and complete the following table:
Money Demand using CPI Money Demand using Deflator % Increase/Decrease in a given year from CPI to Deflator 2008 2009 2010
Only produced goods: Apples, Oranges and Cars Base year = 2008 Real GDP Nominal GDP Deflator Inflation 2008 28 28 100 NA 2009 50 60 120 20% 2010 47 86 182.9787234 52%
Only Consumed goods: Olives, Oranges and Apples Equally weighted basket: 1 unit per item. Base year+ Cost of the basket CPI Inflation 2008 5 100 NA 2009 8 160 60% 2010 14 280 75%
Equally weighted basket: 1 unit per item Money using CPI
Money using Deflator Percentage change from CPI to Deflator 2008 3,000,000.00 3,000,000.00 0% 2009 7,680,000.00 4,320,000.00 -43.75% 2010 23,520,000.00 10,044,363.97 -57.29%
EXERCISE III
Consider the Solow model we have seen and studied in class.
Assume that the production function is given by the Cobb-Douglas expression
a) (5 points) Write down the 5 basic equations that characterize the Solow model. Show
your work.
a) The five equations are
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In steady state we know that:
Plug this into the fundamental equation to obtain:
Solving for :
d) (5 points) Now suppose that the government not only taxes as in the previous part of the
exercise, but also offers productive government spending that enhances total production in the
economy. Think of this as the services coming from the roads, general infrastructures, public
schools, police, firemen etc.. This being the case, the new production function for our economy
becomes:
with
and.
And where is government spending.
If the government is running a balanced budget every period, is it possible for taxes to be output enhancing? (Hint: Use the information given to express output as a function of taxes and draw your
conclusions). Show your work.
If the government is running a balanced budget then
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Substitute this into the production function:
Solve for
In order for taxes o be output enhancing it must be that
But since you are told that and , this is never possible.
If you do not believe this simple argument and you want a mathematical proof, take logs of the
inequality
It becomes:
However:
since and so we need in order for the inequality to be satisfied, but
this is never possible since and and.
WRITE THE LETTER OF YOUR CHOICE FOR THE MULTIPLE CHOICE QUESTIONS
HERE; ONLY THIS THIS PAGE WILL BE GRADED FOR THE MC PART.
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Suppose the government deficit increases, but the interest rate remains the same. Which of the following things might have happened simultaneously to keep interest rates the same? a. The government reduces the amount that people may put into savings accounts on which the interest is tax exempt. b. Because they are optimistic about the future of the economy, firms desire to borrow more to purchase physical capital. c. Consumers decide to decrease consumption and work more. d. All of the above could explain why the interest rate would be unchanged.
Suppose a country imposes new restrictions on how many hours people can work. If these restrictions reduce the total number of hours worked in the economy, but all other factors that determine output are held fixed, then a. productivity and output both rise. b. productivity rises and output falls. c. productivity falls and output rises. d. productivity and output fall.
An increase in the price level causes the aggregate quantity of goods and services demanded to decrease because a. Wealth rises, interest rates rise, and the dollar appreciates. b. Wealth rises, interest rates fall, and the dollar depreciates. c. Wealth falls, interest rates rise, and the dollar appreciates. d. Wealth falls, interest rates fall, and the dollar depreciates.
Suppose a fall in stock prices makes people poorer. The decrease in wealth would induce people to a. decrease consumption, shown as a movement to the left along a given aggregate demand curve. b. decrease consumption, shifting the aggregate demand curve to the left. c. increase consumption, shown as a movement to the right along a given aggregate demand curve. d. increase consumption, shifting the aggregate demand curve to the right.
Table 1 2009 Labor Data for Wrexington Number of adults 20, Number of adults who are paid employees 8, Number of adults who work in their own businesses 1, Number of adults who are unpaid workers in a family member’s business 1, Number of adults who were temporarily absent from their jobs because of an earthquake
Number of adults who were waiting to be recalled to a job from which they had been laid off
Number of adults who do not have a job, are available for work, and have tried to find a job within the past four weeks
Number of adults who do not have a job, are available for work, but have not tried to 780
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find a job within the past four weeks Number of adults who are full-time students 3, Number of adults who are homemakers or retirees 3,
Refer to Table 1. How many people were employed in Wrexington in 2009? a. 9, b. 10, c. 11, d. 11,
Refer to Table 1. How many people were in Wrexington’s labor force in 2009? a. 11, b. 12, c. 13, d. 20,
Refer to Table 1. What was Wrexington’s labor-force participation rate in 2009? a. 55 percent b. 63 percent c. 66.9 percent d. 87.3 percent
The sticky wage theory of the short-run aggregate supply curve says that when the price level rises more than expected, the real wage a. rises, so employment rises. b. rises, so employment falls. c. falls, so employment rises. d. falls, so employment falls.
In 1931, President Herbert Hoover was paid a salary of $75,000. Government statistics show a consumer price index of 15.2 for 1931 and 207 for 2007. President Hoover’s 1931 salary was equivalent to a 2007 salary of about a. $5507. b. $1,021,382. c. $1,140,000. d. $15,525,000.
Which of the following shifts short-run aggregate supply right? a. an increase in the price level b. an increase in the minimum wage c. a decrease in immigration from abroad. d. a decrease in the price of oil
Suppose the economy is initially in long-run equilibrium and aggregate demand rises. In the long run prices a. and output are higher. b. and output are lower. c. are higher and output is the same. d. are the same and output is lower.
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Which of the following is consistent with the catch-up effect? a. The United States had a higher growth rate before 1900 than after. b. After World War II the United States had lower growth rates than war-ravaged European countries. c. Although the United States has a relatively high level of output per person, its growth rate is rather modest compared to some countries. d. All of the above are correct.
A typical worker in Italy can produce 24 units of product in an 8 hour day, where a typical worker in Poland produces 25 units of product in a 10 hour day. We can conclude that a. worker productivity in Poland is higher than in Italy because productivity for the Polish worker is 250 units of product and 192 units of product for the Italian worker. b. productivity for the Polish worker is 3 units per hour and 2 1/2 units per hour for the Italian worker. c. the standard of living will be higher in Italy than in Poland. d. there will be no difference between the standard of living in Italy and Poland.
An Italian company opens a pasta company in the U.S. The profits from this pasta company are included in a. both U.S. and Italian GNP. b. both U.S. and Italian GDP. c. U.S. GDP and Italian GNP. d. U.S. GNP and Italian GDP.
A few years ago, based on concepts similar to those used to estimate U.S. employment figures, the Canadian adult population was 24 million, the labor force was 16 million, and the number of people employed was 14 million. According to these numbers, the Canadian labor-force participation rate and unemployment rate were about a. 67 percent and 8.3 percent. b. 67 percent and 12.5 percent. c. 58 percent and 8.3 percent. d. 58 percent and 12.5 percent.
During a presidential campaign, the incumbent argues that he should be reelected because nominal GDP grew by 12 percent during his 4-year term in office. You know that population grew by 4 percent over the period and that the GDP deflator increased by 6 percent during the past 4 years. You should conclude that real GDP per person a. grew by more than 12 percent. b. grew, but by less than 12 percent. c. was unchanged. d. decreased.
There will be structural unemployment if a. some wages are kept above the equilibrium level. b. some people choose not to work at the equilibrium wage. c. some wages are below the equilibrium level. d. All of the above could be correct.
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Which list contains only actions that increase the money supply? a. lower the discount rate, raise the reserve requirement ratio b. lower the discount rate, lower the reserve requirement ratio c. raise the discount rate, raise the reserve requirement ratio d. raise the discount rate, lower the reserve requirement ratio
If real GDP doubles and the GDP deflator doubles, then nominal GDP will a. stay the same. b. double. c. triple. d. quadruple.
25) Risk-averse people will choose different asset portfolios than people who are not risk averse.
Over a long period of time, we would expect that
a. every risk-averse person will earn a higher rate of return than every non-risk averse
person.
b. every risk-averse person will earn a lower rate of return than every non-risk averse
person.
c. the average risk-averse person will earn a higher rate of return than the average
non-risk averse person.
d. the average risk-averse person will earn a lower rate of return than the average
non-risk averse person.
26) When the government attempts to cut the economic pie into more equal slices,
a. it is easier to cut the pie, and therefore the economy can produce a larger pie. b. the government can more easily allocate the pie to those most in need. c. the pie gets smaller, and there will be less pie for everyone. d. the economy will spend too much time cutting and loses the ability to produce enough pie for everyone.
27) Velocity in the country of Nemedia is always stable. In 2001, the money supply was $100 billion and
real GDP was $300 billion. In 2002, the money supply increased by 10 percent, real GDP increased by 5 percent and nominal GDP equaled $660 billion. By how much did the price level increase between 2001 and 2002? a. 10 percent b. 9.5 percent c. 4.75 percent d. There is not enough information to answer the question. For 2001 we know: M=100, Y= For 2002 we know: M=110, Y=315, PY=660 so it follows that P315=660 so P=2.095 in 2002. Also from the quantity theory we know that MV=PY then we can find that V=6 in 2002. We are told that V is stable so V=6 also in 2001. Applying the quantity theory to 2001 we know that 1006=P300 so P=2 in
- So P=2 in 2001 and P=2.095 in 2002. The increase in the price level was 4.75%.
- GDP is defined as the market value of all final goods and services produced a. by the citizens of a country, regardless of where they live, in a given period of time; this definition focuses on GDP as a measure of total income.
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r = the interest rate (expressed as a fraction) T = the number of years We need to use the equation that is suggested in the text and adapt it to our exercise. So in this case we have PV=30, FV=1, r is the variable that we need to find T =2006-1912= So we need to solve the following equation for r 30,000=1,000*(1+r)^ 30=(1+r)^ At this point there are two options:
- Your calculator allows you to take
in which case you obtain r = 3.6%
If your calculator does not allow you to do that, instead. Then taking ln on both sides of the equation and using the properties of the ln: ln(30)=94*ln(1+r) ln(1+r) = 3.401 / 94 = 0. Now to get rid of the ln operator we need to use the Natural Logarithm Base (e) so the equation becomes: (1+r) = exp(0.0361)= 1. So r = 0. Or r = 3.6% The average growth rate of Smallville between 1912 and 2006 has been 3.6%.
According to the rule of 70, if the interest rate is 7 percent, how long will it take for the value of a savings account to grow by a factor of 64? a. about 28 years b. about 70 years c. about 660 months d. about 720 months about 720 months. In order to double it would take = 70/7 = 10 years. To grow by a factor of 64 the savings account has to double for 6 consecutive times. Therefore 10x6=60 years. These are equivalent to 720 months
Table 2 Bank of Tampa Assets Liabilities Reserves $100 Deposits $1, Loans $
Refer to Table 2. If the Bank of Tampa has loaned out all the money it wants given its deposits, then its reserve ratio is a. 1% b. 5% c. 10% d. 20%
Refer to Table 2. If the Fed requires banks to hold 5 percent of deposits as reserves, how much in excess reserves does the Bank of Tampa now hold? a. $ b. $
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c. $ d. $
Which of the following is included in the supply of dollars in the market for foreign-currency exchange in the open-economy macroeconomic model? a. A retail outlet in Russia wants to buy semi-conductors from a U.S. manufacturer. b. A U.S. bank loans dollars to Blair, a U.S. resident, who wants to purchase a new house in the United States. c. A U.S. based mutual fund wants to purchase bonds issued by an Italian corporation. d. All of the above are correct.
If the U.S. put an import quota on vacuum cleaners, it would a. raise U.S. net exports of vacuum cleaners and raise net exports of other U.S. goods. b. lower U.S. net exports of vacuum cleaners and raise net exports of other U.S. goods. c. raise U.S. net exports of vacuum cleaners and lower net exports of other U.S. goods. d. lower U.S. net exports of vacuum cleaners and lower net exports of other U.S. goods.
You put money in an account and earn a real interest rate of 6 percent, inflation is 2 percent, and your marginal tax rate is 20 percent. What is your after-tax real rate of interest? a. 4.8 percent b. 3.2 percent c. 2.8 percent d. None of the above is correct.
When the money market is drawn with the value of money on the vertical axis, if the price level is above the equilibrium level, there is an a. excess demand for money, so the price level will rise. b. excess supply of money, so the price level will fall. c. excess supply of money, so the price level will rise. d. excess demand for money, so the price level will fall.
