Intermediate Macroeconomics 311 (Professor Gordon)

First Mid-Term Examination Fall, 2006

YOUR NAME:

Circle the T.A session you are attending:

Michel Wednesday
Costel Wednesday
Michel Thursday
Costel Thursday

INSTRUCTIONS:
1. The exam lasts 1 hour.
2. The exam is worth 60 points in total: 30 points for the three 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 wont 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!

PART A
Answer multiple choice questions in the space provided below.
USE CAPITAL LETTERS.
1. ____

6. ____

11. ____

16. ____

21. ____

26. ____

2. ____

7. ____

12. ___

17. ____

22. ___

27. _ _

3. ____

8. ____

13. ____

18. ____

23. ____

28. __ _

4. ____

9. ____

14. _ __

19. ____

24. ____

29. ____

5. ____

10. ____

15. ____

20. ____

25. ____

30. __ _

1) If real GDP for 2001 was $1000 billion and nominal GDP was $500, then:
(a)
the implicit GDP deflator for 2001 was 0.5
(b)
the implicit GDP deflator for 2001 was 2
(c)
the implicit GDP deflator for 2001 was 500
(d)
the implicit GDP deflator for 2001 was -500
2) If real GDP in China is growing at a rate of 6.93% percent per year, how long will it
take to double:
(a)
1 year
(b)
10 years
(c)
100 years
(d)
50 years
3) The unemployment rate in 2004:Q1 was 3.5% and the unemployment in 2004:Q4 was
7%. The quarterly growth rate of unemployment was:
(a)
40.1 percent
(b)
10.5 percent
(c)
23.1 percent
(d)
100 percent
4) Autonomous planned spending includes five components of which two are dependent
on the interest rate. These are:
(a)
government spending and autonomous tax revenue
(b)
the demand for exports and the demand for imports
(c)
autonomous consumption and planned investment
(d)
government spending and investment
5) The economy is in equilibrium
(a)
at any point on the IS curve.
(b)
only at the natural level of GDP.
(c)
at any point on the LM curve.
(d)
only at a point that is on both the IS and LM curves
6) Which of the following would shift the LM curve?
(a)
an increase in the tax rate
(b)
an increase in the real money supply
(c)
a reduction in business confidence
(d)
All of these.
7) A change in the multiplier (k) will change the
(a)
slope of the IS curve.
(b)
slope and the position of the IS curve.
(c)
slope of the LM curve.
(d)
position of the LM curve.

8) If there is unplanned inventory accumulation there is excess

(a)
demand for money.
(b)
supply of money.
(c)
demand for commodities.
(d)
supply of commodities.
9) If spending (Ep) is not responsive to changes in the interest rate then the
(a)
LM curve is vertical.
(b)
IS and LM curves are vertical.
(c)
IS curve is vertical.
(d)
IS curve is vertical and the LM curve is horizontal
10) If the marginal leakage rate is 0.2, then a $300 fall in autonomous planned
expenditures will shift the IS curve leftward by the amount of
(a)
$300.
(b)
$1500.
(c)
$75.
(d)
$600.
11) An increase in real GDP causes the demand for real money balances to
(a)
rise.
(b)
fall.
(c)
remain unaffected.
(d)
rise, fall, or remain unaffected depending on the interest rate at the time.
12) The multiplier measures the
(a)
number of steps it takes to move from one equilibrium to another.
(b)
rise in saving resulting from a rise in income.
(c)
marginal propensity to invest.
(d)
rise in GDP resulting from a one dollar rise in planned autonomous expenditures
13) If disposable income increases by $20 and consumption increased by $10, ceteris
paribus, we may conclude that
(a)
the marginal propensity to consume is 0.5.
(b)
the marginal propensity to consume is 0.15.
(c)
the marginal propensity to save is 0.1
(d)
a change in disposable income is induced by a change in consumption.

14) Compare two countries, Slovovia and Earnestia. The two countries have the same
employment rate and the same number of hours per employee, but Slovovia has half the
labor force participation rate of Earnestia. Both countries have productivity of 100 blobs,
which is the name of their common currency. What is the ratio of Slovovias output per
capita to that of Earnestia?
(a)

25

(b)

50

(c)

75

(d)

100

(e)

Not enough information to determine

15) A rise in the income tax rate will

(a)
raise the multiplier and raise equilibrium income.
(b)
lower the multiplier and raise equilibrium income.
(c)
raise the multiplier and lower equilibrium income.
(d)
lower the multiplier and lower equilibrium income
16) From an initial IS-LM equilibrium with normally-sloped IS and LM curves, the
money supply falls. At the new IS-LM equilibrium we have _______ income and a
_______ interest rate.
(a)
higher, higher
(b)
higher, lower
(c)
lower, higher
(d)
lower, lower
17) According to the Economist, which of the following is NOT a reason that 10-year
projections of the Federal budget deficit understate the magnitude of that deficit
(a)
Tax cuts will be renewed when their scheduled expiration occurs
(b)
Congress will eliminate or reduce the influence of the Alternative Minimum Tax
(c)
Congress will eliminate the Medicare prescription drug benefit
(d)
Federal expenditures will grow at the same rate as nominal GDP.
18) If Ep is 2500 and Y is 3000 then
(a)
planned inventory accumulation is 500.
(b)
planned inventory depletion is 500.
(c)
unplanned inventory accumulation is 500.
(d)
unplanned inventory decumulation is 500.

19) In economic models, variables taken as given and not explained by the model are
called ___________ variables.
(a)
exogenous
(b)
endogenous.
(c)
short-run.
(d)
long-run.
20) The 10-year Treasury bond rate was _____ than the Federal funds rate in _____.
(a)
Lower; 2002
(b)
Higher; summer/fall 2006
(c)
Lower, summer/fall 2006
(d)
Lower; 2004
21) Readings attribute the negative US saving rate of 2005-06 to
(a)
Bush tax cuts
(b)
Price increases in the housing market
(c)
Price increases in the stock market
(d)
Iraq war
(e)
(b) and (c)
22) If real GDP has increased, which of the following statements is always true?
(a)
nominal GDP has increased.
(b)
output has increased.
(c)
prices have remained the same.
(d)
output might have decreased if prices have risen enough
23) Suppose exports and imports both rise by $1. GDP
(a)
rises by $2.
(b)
rises by $1.
(c)
remains unchanged.
(d)
falls by $1.
24) An important national income accounting identity has (S+T) equal to
(a)
I +G NX.
(b)
I+G +F
(c)
I +NX.
(d)
I+G+NX

25) Later in the book we will learn that per capita income of the US was $2,564 in 1870
and $40,952 in 2005, whereas per capita income of the UK was $4,135 in 1870 and
$27,540 in 2005. By how much did the annual percentage growth rate of US per capita
income between 1870 and 2005 exceed that in the UK?
(a)

0.35

(b)

0.45

(c)

0.55

(d)

0.65

(e)

0.75

26) We go from Gross to Net Domestic Product by

(a)
adding depreciation to GDP.
(b)
subtracting depreciation from GDP.
(c)
adding indirect business taxes to GDP.
(d)
subtracting indirect business taxes from GDP.
27) We go from personal income to personal disposable income by
(a)
subtracting undistributed profits.
(b)
adding transfer payments.
(c)
subtracting personal income taxes.
(d)
subtracting depreciation.
28) A survey of 200,000 people finds 76,300 employed, 6,640 unemployed, and the
remaining 117,060 not in the labor force. What is the unemployment rate derived from
these numbers?
(a)
8.7 percent
(b)
3.3 percent
(c)
8.0 percent
(d)
5.7 percent
29) Last week the Dow-Jones Industrial Average reached an all-time high, thus raising
consumer wealth. Which of the following does NOT occur as a result of this rise in
wealth?
(a)

Autonomous consumption rises

(b)

The saving rate falls

(c)

The LM curve shifts to the right

(d)

The IS curve shifts to the right

6

30) The article on GDP and GNI claims that Luxembourgs GDP per person is overstated
because
(a)
Much of it consists of profits which are taken out of the economy by foreigners
(b)
Much of it is produced by foreign workers who are not counted in the population
(c)
Tax rates on earnings of Luxembourgs workers are unusually high
(d)
Unplanned inventory accumulation is high, implying that GDP will fall

PART B
Question 1 (6 points)
An economy produces only two consumption goods: raquets and tennis balls. Production
and price statistics for these goods in 2004 and 2005 are the following (all prices
expressed in dollars):
2004
Raquets
Tennis balls

Output
100
40

2005
Prices
45
1

Output
130
25

Prices
50
2

A) (2 point) What is the nominal GDP for 2004 and for 2005?
Answer:
2004: GDP= 100*45+40*1=4540
2005: GDP=130*50+25*2=6550
B) (4 points) What is the chain-weighted real GDP for 2005?
Answer:

Fixing Prices of Year 2004

Fixing Prices of Year 2005

Constant dollar Expenditures

2004
2005
100*45+40*1=4540 130*45+25*1= 5875
100*50+40*2=5080 130*50+25*2=6550

The Chain weighted real GDP is (5875/4540 * 6550/5080 ) ^ 1/2 = 1.29 for
year 2005

Question 2 (6 points)
In country ZZ the rate of unemployment is 10%. The total population of ZZ is
100,000,000 people. The people that declared to be in unemployment is 3,000,000.
A) (3 points) what is the number of civilian employment?
0.1= 3,000,000 / (3,000,000 + X)
X= 3,000,000/0.1 3,000,000 = 27,000,000
B) (3 points) Suppose that the population of this country grows at 2% per year. How
many years will it take for total population to double?
S= 100*ln(2)/ 2 = 34.65 The population will double in 35 years aprox.

Question 3 (18 points):

Consider an economy with the following components:
C= 100 -10r + 0.8(Y-T)
T= 250 + 0.2Y
I= 200 15r
G= 1000
NX = 400 0.14Y
Ms/P = 550
d
M /P = 0.5Y- 25r
A) (4 points) Write down the general formula for the IS curve, and then, in particular, for
the given parameter values of this economy.
MLR = s(1-t) + t + nx = 0.2(1-0.2) + 0.2 +0.14 = 0.5
Multiplier= k = 1/0.5 = 2
Ap = 100 0.8(250) + 200 + 1000+ 400 = 1500
b = 10 + 15 = 25
IS: Y = k (Ap -br) = 2( 1500 25r) = 3000 50r

B) (3 points) Write down the general formula for the LM curve, and then, in particular,
for the given parameter values of this economy.
LM: (Ms/P)=(Md/P)= hY- fr
Y = ((Ms/P)+ fr )/h = (550 + 25r)/(0.5)
LM: Y= 1100 + 50r
C) (3 points) Compute the equilibrium levels of Y, r,
Equating the right hand sides of the IS and LM equations,
3000 -50r = 1100 + 50r
1900=100r
r = 19
Using this level of r in either IS or LM equation, we get:
Y=1100 + 50(19) = 2050
D) (2 point) What is the equilibrium level of net exports, and of the Government's
budget? Is the government running a deficit or a surplus?
NX = 400 - 0.14( 2050 ) = 113
Govt budget = T-G = 250 + 0.2(2050) 1000 = -340
The government has a deficit (its revenues are lower than its expenditures)
E) A politician argues that, in order to achieve a balanced government budget, the
Treasury has to change (increase or decrease) the autonomous component of taxes
Ta in the exact amount of the deficit/surplus you found in the previous question.
i) (3 points) Calculate the new equilibrium values for Y and r with the new Ta
proposed by the politician.
The new tax equation is: T= 590 +0.2Y
LM curve doesnt change.
Now the new IS curve:
Ap = 100 0.8(590) + 200 + 1000+ 400 = 1228
IS: Y = k (Ap -br) = 2( 1228 25r) = 2456-50r
The new equilibrium value for r is:
2456-50r = 1100 + 50r
r = 13.56
The new value of Y is:
Y= 1100+ 50(13.56) = 1778

ii) (1 point) Calculate the new government budget. Is it balanced?

Now, T-G = 590+0.2(1778)-1000 = -54.4
The government has still a deficit
iii) (2 points) In no more than 4 lines, provide intuition for your results.
What is going on? Is the politician right?
The politician is wrong, since he is not taking into account the fact that the change in the
autonomous component of taxes implies a smaller level of output in equilibrium, which
then implies less taxes collected from the non autonomous part (the part that depends
on Y of the tax equation).

10