ECON 311 - Intermediate Macroeconomics (Professor Gordon)

First Midterm Examination: Fall 2011

Answer sheet
YOUR NAME: _______________________________________
Circle the TA session you attend:

Ofer
Nuri
Juan

9AM

4PM
4PM

9AM

INSTRUCTIONS:
1. The exam lasts 1 hour.
2. The exam is worth 60 points in total: 30 points for the multiple choice questions and 30 points for the two analytical
problems.
3. Write your answers for part A (the multiple choice section) in the blanks below. You wont get credit 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. There is no need to explain your answers for the multiple choice
questions.
6. Good luck!
PART A: Multiple Choice Problems
Answer multiple choice questions in the space provided below.
PLEASE USE CAPITAL LETTERS.

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30)

MC
Q1
Q2
Total

PART A: Multiple Choice Problems

1) The inflation rate is the
A) measure used to calculate the price level.
B) measure used to calculate the cost of borrowing money.
C) percentage increase in the average level of prices.
D) percentage increase in the average level of wages.
Answer: C

2) 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 equilibrium GDP resulting from a one dollar rise in planned autonomous expenditures.
Answer: D

3) "Real money balances" refers to

A) the currency part of the total money supply.
B) the money supply divided by the price level.
C) the money supply times one minus the interest rate.
D) the non-interest-earning part of the money supply.
Answer: B

4) The average output produced per worker is one way of measuring

A) inflation.
B) the interest rate.
C) employment.
D) productivity.
Answer: D

5) 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.
Answer: B

6) The cars produced by Toyota (a Japanese company) in its factory in Kentucky ________ in Japanese GDP.
Distributed profits to Toyotas shareholders _______ in Japanese GNP (assume that Toyotas owners are all
Japanese).
A) count, count
B) count, do not count
C) do not count, count
D) do not count, do not count
Answer: C

7) If a the government of Country Z is running a budget deficit and net exports are zero, then
A) investment is greater than saving.
B) investment and saving are equal.
C) saving is greater than investment.
D) none of the above.
Answer: C

8) If real GDP for a given year is $2400 billion and nominal GDP is $2400 billion,
A) this year is the base year for the GDP deflator.
B) the GDP deflator for this year is 1.25.
C) the GDP deflator for this year is 0.8.
D) the GDP deflator for this year is 1.10.
Answer: A

9) Help in financing our federal budget deficit comes from a ________ amount of net exports, which is called
________.
A) negative, net foreign investment.
B) negative, foreign borrowing.
C) positive, net foreign investment.
D) positive, foreign borrowing.
Answer: B

10) Which of the following is not a reason why an increase in stock market wealth reduces the personal saving
rate
A) Autonomous consumption depends positively on real net worth
B) Autonomous consumption depends negatively on the interest rate
C) Higher stock prices generate capital gains
D) Saving equals disposable income minus consumption
Answer: B

11) Which of the following statements would be true of an economy that can be characterized as being to the
left of the IS curve?
A) There will be a tendency for the level of output to decrease.
B) There will be a tendency for interest rates to fall.
C) There is an excess demand for commodities at the existing interest rate.
D) There is an excess supply of commodities at the existing interest rate.
Answer: C

12) Over the past two decades, the ratio of European to US values are high for
A) hours per capita.
B) unemployment rate.
C) real GDP per capita.
D) labor-force participation rate.
E) B and D.
Answer: B

13) In the IS-LM model, equilibrium income can be affected by

A) monetary policy alone.
B) fiscal policy alone.
C) both fiscal and monetary policy.
D) neither monetary nor fiscal policy
Answer: C

14) An increase in the money supply will

A) decrease the quantity of money held.
B) increase the quantity of money held.
C) shift the LM curve leftward.
D) None of the above.
Answer: B

15) Suppose that in producing a GDP of 3000, goods worth 200 go unsold and are unintentionally added to
business inventories. These goods
A) are not counted in total expenditure.
B) are part of the investment component of expenditure.
C) are nonetheless part of the consumption component of expenditure.
D) are classified as net exports and are subtracted from total expenditures.
Answer: B

16) If disposable income increases by $100 and consumption increased by $85, ceteris paribus, we may
conclude that
A) the marginal propensity to consume is 0.85.
B) the marginal propensity to consume is 0.15.
C) $15 is autonomous consumption.
D) a change in disposable income is induced by a change in consumption.
Answer: A

17) The IS curve represents

A) investment and saving when the commodity markets are in disequilibrium.
B) equilibrium in the commodity markets for every combination of interest rates and output level.
C) the determination of the level of interest rate.
D) the determination of the level of income and output.
Answer: B

18) The article GDPHappiness criticizes GDP for which reason or reasons
A) Including the value of household production
B) Excluding the value of household production
C) Including the construction of prisons and excluding the costs of crime
D) Excluding the construction of prisons and including the costs of crime
E) A) and D)
F) B) and C)
Answer: F

19) If Y = income, G = government spending, T = autonomous taxes, and t = income tax rate, then the
government budget deficit can be expressed as
A) G - T/Y(t).
B) G - T.
C) Y + G - T - ty.
D) G - T - ty.
Answer: D

20) The IS curve shows that higher income levels require ________ interest rates to ensure that income equals
________.
A) higher, planned autonomous spending
B) higher, planned expenditures
C) lower, planned autonomous spending
D) lower, planned expenditures
Answer: D

21) The size of the multiplier depends in part on the

A) level of autonomous expenditures.
B) change in autonomous consumption.
C) level of consumption.
D) marginal propensity to consume.
Answer: D

22) Which of the following is not a reason that the author of an article described Americas 2011 consumers as
zombies.
A) High level of household debt
B) Falling house prices
C) Zero lower bound prevents Fed from reducing interest rate
D) Slow real wage growth
Answer: C

23) The Economist summary of the link between financial crises and property busts makes which of these
policy recommendations
A) End tax deductibility of mortgage interest
B) Enforce minimum down payment requirements
C) Eliminate mortgage-backed securities
D) A) and B)
E) B) and C)
Answer: D

24) If the interest rate were to rise, we expect that

A) autonomous expenditures will rise.
B) the supply of money will fall.
C) the amount of money people want to hold will rise.
D) the amount of money people want to hold will fall.
Answer: D

25) The LM curve is the set of combinations of ________ such that ________.
A) interest rates and real money balances, real income equals real money balances times (1/r)
B) interest rates and real money balances, the money supply is equally demanded
C) real income and real money balances, the production of output is equally demanded
D) real income and interest rates, the production of output is equally demanded
E) real income and interest rates, the money supply is equally demanded
Answer: E

26) A flat IS curve implies that

A) an increase in money supply will change output by a relatively small amount.
B) a decrease in taxes will change output by a relatively large amount.
C) changes in money supply will have large multiplier effects on output.
D) A and B.
Answer: C

27) Monetary policy loses its effectiveness in all of the following situations EXCEPT
A) when the IS curve is vertical.
B) when the LM curve is nearly horizontal.
C) when interest rate controlled by the Fed reaches zero.
D) when the IS curve is horizontal.
Answer: D

28) The "Big Three" concepts of Macroeconomics are

A) profits, liquidity, and sustainability.
B) unemployment rate, inflation, and economic growth.
C) asset rebalancing, markups, and profitability.
D) federal budget, foreign trade, and quantitative easing.
Answer: B
29) A crucial national income accounting identity has (S + T) equal to
A) I + G - NX.
B) I + G + F.
C) I + NX.
D) G + F.
E) I + G + NX.
Answer: E

30) The Economist applies the IS-LM model to answer which of these puzzles?
A) Why long-term bond rates were low while short-term interest rates were rising
B) Why long-term bond rates were high while short-term interest rates were falling
C) Why the 2007-09 recession was so severe
D) Why the 2009-11 recovery has been so weak
Answer: A

PART B: Analytic Problems

QUESTION 1 (10 points)
An economy produces chairs and tables. In the following table, prices and production is listed for the years 1999-2001.
Using 2000 as the base year, for each year calculate nominal GDP, real GDP, the GDP deflator and inflation.
1999

2000

2001

3*2+5*2=16

5*2+4*5=30

7*4+7*3=49

Previous Year Prices

n/a

5*2+4*2=18

7*2+7*5=49

Current Year Prices

16

30

49

3*2+5*5=31

5*4+4*3=32

n/a

Current Year Prices as weights

n/a

30/31=0.967

49/32=1. 531

Previous Year Prices as weights

n/a

18/16=1.125

49/30=1.633

Chain Weighted

n/a

1.043

1.581

Level of Real GDP (Base = 2000)

30/1.043=28.75

30

47.44

GDP Deflator

16/28.75=0.556

49/47.44=1.032

Inflation Rate

n/a

58.61%

3.22%

Prices

1. Chairs
2. Tables
Quantities

1. Chairs
2. Tables
Nominal GDP
Expenditure in Constant $

Next Year Prices

Real GDP index, Earlier Year=1

QUESTION 2 (20 points)

Consider an economy described by the following equations:
C = Ca + 0.75(Y-T),
Ca = 1870-30r,
Ip = 2280-70r,
G = 3000,
NX=-1200-0.1Y,
T = 760+0.2Y

(M/P)d = 0.5*Y 24*r

Ms/P = 4760
(a) Using the above numbers: find autonomous planned spending at a zero interest rate, autonomous planned spending as
a function of interest rate, the multiplier and the equation for the IS curve. (3 points)
k=1/(0.25*(1-0.2)+0.2+0.1)=2
Ap =1870-30r -0.75*760+ 2280-70r+3000-1200=5380-100r
Y=10760-200r
(b) Derive the LM curve. (3 points)
0.5Y-24r=4760, so Y=9520+48r
(c) Find the equilibrium values of income and interest rate. (2 points)
9520+48r = 10760-200r
248r = 1240
r=5
Y=9520+48*5=9760. If we use the IS instead, Y=10760-200*5=9760.
(d) Calculate tax revenues, consumption (remember to include the effect of interest rate) and saving. What are the total
leakages in this economy? Check your work by showing that it is equal to injections. (2 points)
T = 760+0.2*9760 = 2712
C = 1870-30*5+0.75*(9760-2712) = 7006
I = 2280-70*5=1930
NX=-1200-0.1*9760=-2176
Injections = 1930+3000-2176=2754
Leakages = S+T=Y-C=9760-7006=2754
(e) The government determines the desired level of income in the economy to be Y = 9880. The government decides to
change autonomous net taxes in order to achieve this goal. How should autonomous net taxes be changed? (4 points)
The LM curve does not change. Then Y=9880=9520+48r, so r=7.5.
The new IS curve satisfies Y=9880=2*(Ap'-200*7.5)=2Ap'-1500. Thus Ap'=5690.
Thus Ta must be reduced by enough to raise Ap by 310. Since c=0.75, Ta must be cut by -310/0.75 = -413.33.
The answer is Ta = -413.33. Therefore, setting Ta=720-413.33=346.66 will achieve the desired outcome.

(f) Without calculating, in what direction do investment and net exports change? (2 points)
Since r increases and Y increases, investment decreases and net exports decrease.

(g) Go back to the original values (without the changes in questions (e-f)). Suppose that the government determines the
desired level of income in the economy to be Y = 9880. The government decides to change the money supply in order to
achieve this goal. How should the money supply be changed? (4 points)
The IS curve does not change. Then Y=9880=10760-200r, so r=4.4
The new LM curve satisfies M/P=0.5Y-24r=0.5*9880-24*4.4=4834.4