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PRACTICE Midterm

GLEC
SUMMER 2014
Prof. Max Croce

Important Notes:

You are allowed 2 hours to complete this exam.

All of your answers must be provided in the space allotted below each question. Anything outside
this will not be graded. In all cases the space provided is sufficient for a perfect score.
Information that is incorrect or not pertinent to the question will result in a reduced score.

You may use outside published material as well as class notes to assist you in your answers. You
are not allowed assistance from any individual(s).

Pick the best single answer to the multiple choice questions.

None of the questions are designed to trick you. However some of the questions you have seen
before, but with important details that are different--so do not just put down familiar answers!

Your exam should have ### numbered pages.

GOOD LUCK!

Honor Code Agreement:

I pledge to neither give, nor receive, unauthorized aid for this exam ___________________
signature
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PARTI: MULTIPLE CHOICE (40 points, 4 points for each question).

Put answers on the front page!

1. The CPI index:
A. Is usually highly correlated with the GDP deflator
B. Measures the price of a consumption basket; the GDP deflator, instead, measures the cost of a
basket of locally produced goods
C. Is sensitive to the high volatility of the price of food and energy
D. All of the above
2. Looking at the composition of GDP in the last 50 years, we can claim that:
A. Both in India and the US the consumption share has been converging to about 70%
B. The investment share has a positive trend in India and negative trend in the US
C. Both US and India are net exporters, and their exports represent a large share of GDP
D. The government expenditure share has declined both in India and the US
3. When a country becomes richer:
A. The demand curve of labor shifts to the right (i.e., it expands) because more wealth always
implies higher productivity
B. The demand curve of labor shifts to the left (i.e., it contracts) because more wealth always
implies lower productivity
C. The supply curve of labor shifts to the left (i.e., it contracts) because of income effect: people
require higher wages as their opportunity cost of leisure is higher
D. The supply curve of labor shifts to the right (i.e., it expands) because of substitution effects:
people feel richer and want to work more
4. The skill premium:
A. Refers to the fact that higher-skill workers earn higher wages per hour than lower-skill workers
and is a first-order determinant of inequality
B. In the US it has increased substantially in the last 40 years; in India it has increased
substantially in the last 25 years
C. Is a global phenomenon which economists explain through the technology shift occurred with
the IT revolution
D. All of the above
5. The desired investment level:
A. increases when either the real rate in the economy or the price of equipment increase
B. decreases if expected productivity increases
C. increases if the Effective Tax Rate increases
D. none of the above.

6. The current negative Net-Exports (NX) in India:

A. Implies that the rest of the world (taken together) has negative NX
B. Is historically the largest component of GDP
C. Makes domestic investment greater than domestic savings
D. none of the above
7. Which one of the following statements is true?
A. The total supply of money is smaller than the currency base.
B. Banks can alter the total supply of money through their lending/borrowing activity
C. A central bank can control the total supply of money without caring too much about private
banks activity, especially during credit crises.
D. Bernanke can directly take over private banks.
8. Using our simple model of the money market suppose two things happen:
i. The monetary authorities decrease the money supply, and
ii. Private banks increase their reserves.
Keeping everything else constant, the equilibrium interest rate (R) will
A. Increase.
B. Decrease.
C. Increase as long as the change in the money supply is greater than the change in I.
D. Decrease as long as the change in the money supply is greater than the change in I.
E. It is not possible to determine with the available information.
9. A firm produces AC units for 100M of INR but does not sell them right away. The units are stored
in the company depot. According to national accounting:
A. GDP increases because consumption of durable goods increases
B. GDP increases because there is a positive change in inventories and hence in consumption
C. GDP increases because there is a positive change in inventories and hence in investment
D. None of the above
10. According to the article How the US Lost Out on iPhone Work from The New York Times:
``It isnt just that workers are cheaper abroad. Rather, Apples believe the vast scale of
overseas factories as well as the flexibility, diligence and industrial skills of foreign
workers have so outplaced their American counterparts that Made in USA is no
longer a viable option for most Apple products
This article:
A. Contradicts the concept of international competitive advantages
B. implies that there is consensus on the substantial weakness of electronics manufacturing in Asia
C. Refers to the broader theme of international monetary policy
D. None of the Above

PART II: LABOR MARKET (30 points total)

The Economist article Labour pains (Sep 21st, 2000) has a passage stating that
Economists have put forward [several] explanations for the increase in wage inequality: (1)
technological change (new technology); (2) increased imports from low-wage developing
economies; (3) higher immigration of low-skilled workers most economists reckon that new
technology is by far the most important factor.
In the data, the employment of high-skilled workers has increased, as opposed to the employment of
low-skill workers that has declined. Also, wages for low-skilled workers have declined, and wages for
high skilled workers have risen.
Given this data, what arguments would convince economists that new technology is the most important
factor in explaining an increase wage inequality? What are the counterfactual implications of the other
two hypotheses?
Answer:

PART IV: MONETARY POLICY (30 points total)

As a policy response to the recent financial crisis, the Fed bought bonds and also raised the interest rate
it offered banks on reserves.
(a) How does this policy affect the monetary base? Explain carefully

(b) How might such a policy affect the supply of M2?

(c) What is the likely impact on inflation if banks continue to hold large reserves
with the central bank?

Scratch Sheet

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