Introduction to Macroeconomics (A). Why is it considered necessary to control the rate of inflation? (B). Since the financial/economic crisis,which first manifested itself in 2006/7, the UK rate of inflation has deviated from its bank of England chosen target. Identify these deviations and discuss their possible causes.

Introduction to MacroeconomicsINSTRUCTIONS:
1. The exam lasts 2 hours.
2. The exam is worth 120 points in total: 45 points for the multiple choice questions (Part A), and 75 points for the six analytical problems (Part B).
3. Write your answers for part A (the multiple choice section) in the blanks below. You won’t get credit for circled answers in the multiple choice section. There is no penalty to guessing, so be sure to answer all of them.
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. Calculators are permitted. Books, notes, reference materials, etc. are prohibited.
7. Good luck!
PART A: Multiple Choice Problems. Answer multiple choice questions in the space provided below. PLEASE USE CAPITAL LETTERS.
1
11
21
31
41
2
12
22
32
42
3
13
23
33
43
4
14
24
34
44
5
15
25
35
45
6
16
26
36
7
17
27
37
8
18
28
38
9
19
29
39
10
20
30
40
MC
Q1
Q2
Q3
Q4
Q5
Q6
Total
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Part A. Multiple Choice Questions (45 points)
1. Money is
A) backed by gold in Fort Knox.
B) the same as income.
C) the value of all coins and currency in circulation at any time.
D) anything that is generally accepted as a medium of exchange.
2. The development of money as a medium of exchange has facilitated the expansion of trade because
A) holding money increases people’s income.
B) no other mediums of exchange are available.
C) money eliminates the “double coincidence of wants” problem.
D) holding money increases people’s wealth.
3. The price of bonds and the interest rate are
A) not related.
B) positively related.
C) negatively related.
D) sometimes positively related and other times negatively related, depending on the bond payments.
4. As the interest rate falls, people hold ________ money instead of bonds because the opportunity cost of holding money has ________.
A) more; fallen
B) more; risen
C) less; fallen
D) less; risen
5. The lecture and readings explain the recent rise in food prices by
A) Subsidies to ethanol
B) Economic growth in China
C) Economic growth in the US
D) Quotas on corn imports
E) A) and B)
F) A) and D)
6. An example of a contractionary monetary policy is
A) an increase in the required reserve ratio.
B) a reduction in the taxes banks pay on their profits.
C) a decrease in the discount rate.
D) the Fed buying government securities in the open market.
7. Which of the following sequence of events follows an expansionary monetary policy?
A) r? ? I? ? AE? ? Y?.
B) r? ? I? ? AE? ? Y?.
C) r? ? I? ? AE? ? Y?.
D) r? ? I? ? AE? ? Y?.
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8. A major source of economic growth discussed in the course packet readings but not in the textbook is
A) Ignoring the effects of environmental pollution
B) Saving instead of consuming
C) Accumulating human capital
D) Rural-urban migration
9. The aggregate demand curve shows a ________ relationship between ________ and aggregate output ________.
A) positive; the price level; demanded
B) negative; the price level; supplied
C) negative; the price level; demanded
D) positive; the interest rate; demanded
10. When the general price level rises,
A) investment rises as a result of the real wealth effect.
B) consumption increases as a result of the multiplier effect.
C) investment rises as a result of the multiplier effect.
D) consumption falls as a result of the real wealth effect.
Refer to the information provided in Figure 1 below to answer the three questions that follow.
Figure 1
11. Refer to Figure 1. An aggregate demand shift from AD2 to AD0 can be caused by
A) an increase in the price level.
B) a decrease in the price level.
C) a decrease in money supply.
D) a decrease in taxes.
12. Refer to Figure 1. An aggregate demand shift from AD1 to AD0 can be caused by
A) an increase in the price level.
B) a decrease in the price level.
C) a decrease in government spending.
D) an increase in money supply.
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13. Refer to Figure 1. Suppose the economy is at Point A, an decrease in government purchases can cause a movement to Point
A) E.
B) B.
C) C.
D) D.
14. The acronym “ZLB” refers most directly to
A) monetary policy
B) fiscal policy
C) agricultural subsidies
D) environmental pollution
Refer to the information provided in Figure 2 below to answer the two questions that follow.
Figure 2
15. Refer to Figure 2. The money demand curve will shift from to , if
A) the level of aggregate output increases.
B) the interest rate decreases.
C) the price level decreases.
D) the inflation rate increases.
16. Refer to Figure 2. If the money demand curve shifts from to ,
A) planned investment will increase and aggregate output will increase.
B) planned investment will decrease and aggregate output will decrease.
C) planned investment will increase and aggregate output will decrease.
D) planned investment will decrease and aggregate output will increase.
17. Which of the following is not attacked by the Economist article as a “myth” about the Great Depression?
A) The Great Depression started with the stock market crash of October, 1929
B) The New Deal raised wages and prices in 1933-35
C) Policymakers were passive and did nothing in 1929-33
D) The New Deal was responsible for the recovery
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18. The Economist article the “secret sauce” discusses a concept called “Total Factor Productivity” As explained in lecture, this is the same as the textbook’s concept of
A) Productivity
B) Embodied technical change
C) Disembodied technical change
D) Human capital
19. A course packet article about business cycles concludes that
A) Households should not worry about saving because the government will spend
B) Households should not worry about saving because the government should spend
C) The government should not worry about spending because households will spend
D) The government should not worry about saving because households will spend
Refer to the information provided in Figure 3 below to answer the three questions that follow.
Figure 3
20. Refer to Figure 3. Which of the following causes the economy to move from Point A to Point E?
A) technological progress
B) an increase in the price level
C) an oil embargo that increases the price of oil
D) an influx of immigrants
21. Refer to Figure 3. Suppose the economy is at Point A, an increase in the price level moves the economy to Point
A) E.
B) B.
C) C.
D) D.
22. Refer to Figure 3. During the 1990s, many firms in the United States were investing in new capital. If the economy was originally at Point A, this would have caused a movement to Point
A) E.
B) B.
C) C.
D) D.
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23. Which of the following are not examples of a fiscal policy stimulus cutting unemployment by half or more
A) Germany 1933-37
B) US 2001-06
C) US 1940-42
D) US 2008-11
E) A) and B)
F) B) and D)
24. If a decrease in net taxes in the United States resulted in a very large increase in aggregate output and a very small increase in the price level, then the U.S. economy must have been
A) on the very steep part of the short-run aggregate demand curve.
B) on the very flat part of the short-run aggregate demand curve.
C) on the very flat part of the short-run aggregate supply curve.
D) on the very steep part of the short-run aggregate supply curve.
25. If an economy like China’s has growth in real per-capita real GDP of 10% per year, the level of its per-capita GDP will triple in __ years
A) 7
B) 9
C) 11
D) 13
Refer to the information provided in Figure 4 below to answer the three questions that follow.
Figure 4
25. Refer to Figure 4. Suppose the economy is currently at Point A producing potential output Y0. If the government increases spending, the economy moves to Point ________ in the short-run and to Point ________ in the long-run.
A) D; E
B) B; D
C) C; B
D) B; C
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27. Refer to Figure 4. For this economy to produce Y1 and sustain it without inflation
A) potential output must increase.
B) the government must implement an expansionary fiscal policy.
C) the government must implement an expansionary monetary policy.
D) the price of oil must increase.
28. The large government deficit experienced by the U. S. during 2010-11 was due to the ratio of government spending to GDP being unusually ____________ and the ratio of government revenues to GDP being unusually _____________.
A) High, Low
B) Low, High
C) High, High
D) Low, Low
Refer to the information provided in Figure 5 below to answer the three questions that follow.
Figure 5
29. Refer to Figure 5. Cost-push inflation occurs if
A) the aggregate supply curve shifts from AS1 to AS0.
B) the economy moves from Point A to Point B on aggregate supply curve AS1.
C) the aggregate supply curve shifts from AS1 to AS2.
D) the economy moves from Point A to Point C on the aggregate supply curve AS1.
30. Refer to Figure 5. Assume the economy is at Point A. Higher oil prices shift the aggregate supply curve to AS2. If the government decides to counter the effects of higher oil prices by increasing government spending, then the price level will be ________ than P2 and output will be ________ than Y2.
A) greater; less
B) less; less
C) greater; greater
D) less; greater
31. Refer to Figure 5. Assume the economy is currently at Point A on aggregate supply curve AS1. An increase in inflationary expectations that causes firms to increase their prices
A) moves the economy to Point C on aggregate supply curve AS1.
B) moves the economy to Point B on aggregate supply curve AS1.
C) shifts the aggregate supply curve to AS2.
D) shifts the aggregate supply curve to AS0.
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32. A rightward shift in the aggregate demand curve generates a ________ inflation and ________ output.
A) demand-pull; higher
B) cost-push; lower
C) demand-pull; lower
D) cost-push; higher
33. The Federal Reserve’s policy to “lean against the wind” means that
A) the Fed slows money growth as the economy slows.
B) the Fed lowers taxes as the economy slows.
C) the Fed increases money growth as the economy slows.
D) the Fed raises required reserves as the economy slows.
34. The recognition lag of stabilization policy represents
A) the time that it takes for the economy to adjust to the new conditions after a new policy is introduced.
B) the time that is necessary to put the desired policy into effect.
C) the time needed for the Federal Reserve Board to meet.
D) the time that it takes for policy makers to recognize a change in the economy.
35. In general, fiscal policy has a longer ________ lag than monetary policy but shorter ________ lag.
A) response; implementation
B) implementation; response
C) recognition; response
D) implementation; recognition
36. The time interval taken for information to be communicated was reduced by the greatest magnitude by the invention of:
A) The telephone
B) The internet
C) The telegraph
D) The personal computer
37. The lecture diagnosis of the weakness of the 2010-11 economic recovery was …
A) Weakness of monetary policy
B) Weakness of fiscal policy
C) The double hangover
D) (A) and (C)
E) (B) and (C)
38. The economic impact of ________ during expansionary periods is to moderate growth.
A) positive demand shocks
B) tax cuts
C) automatic stabilizers
D) implementation lags
39. An example of automatic stabilizers is
A) government spending rising during an expansion.
B) government spending falling during a recession.
C) deficit targeting.
D) taxes rising in an expansion.
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40. Which of the following concepts discussed in lecture but not in the book explain why many poor countries remain so poor?
A) Physical capital
B) Political capital
C) Human capital
D) Embodied technical change
41. Diminishing returns to a factor implies that with capital fixed
A) as labor increases, labor productivity eventually decreases.
B) as output increases, labor increases.
C) as labor increases, output decreases.
D) as labor increases output always increases.
42. A company uses 100 workers and 30 units of capital to produce 500 units of output. If this company increases its capital to 50 units and, as a result, its output increases by 300 units, the productivity of labor ________ to ________ units per worker.
A) increases; 1
B) increases; 3
C) increases; 8
D) decreases; 4
43. Which of the following is NOT an investment in human capital?
A) older workers return to school to update their skills
B) the Ferris Advertising Agency replaces its secretaries’ typewriters with personal computers
C) the Precision Tool Company teaches all its workers how to repair all the machines in the factory
D) local governments begin providing free hepatitis vaccinations to any resident who wants one
44. The convergence theory suggests that a diagram plotting the ratio of a country’s level of real GDP per capita in 1960 on the horizontal axis relative to the US, and its growth rate from 1960 until now on the vertical axis, should display the following pattern
A) A negative slope
B) A positive slope
C) A horizontal slope
D) The convergence theory makes no prediction about the slope on that diagram
45. In Econ 201 during Fall 2011, the example of the Netherlands was introduced in relation to which topic?
A) Agriculture
B) Economic growth
C) Unemployment
D) Monetary policy
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Part B: Short Answer Questions (75 points)
PROBLEM 1: (15 points): 1 point per blank
Complete the blanks using the following table. Round all values to the nearest two decimal places, including percentages. That is, answers should look like 13,300.72 or 29.87%.
112
113
Percentage Change (LN formula)
Price
Quantity
Price
Quantity
125mm Railguns
7900
2
8700
4
Quafe
50
450
44
250
Nominal GDP
1. 38,300
2. 45,800
3. 17.88%
Real GDP in 2009 prices
4. 38,300
5. 44,100
6. 14.10%
Real GDP in 2010 prices
7. 37,200
8. 45,800
9. 20.80%
GDP Deflator with base year 2009
100
10. 103.85
11. 3.78%
GDP Deflator with base year 2010
12. 102.96
100
13. -2.91%
14. What is the percentage growth rate in chain-weighted GDP? _______________ 17.45%
15. What is the inflation rate according to the chain-weighted GDP deflator? _______________
-0.43%
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PROBLEM 2: (8 points): point value specified
Answer the following questions using the following table.
Real GDP per capita
Annual growth rate
Amarr
1100
1.3%
Dodixie
900
2.1%
1. (1 point) At the given growth rates, how many years will it take for Amarr’s real GDP per capita to quintuple (increase fivefold)? _______________ 123.80
2. (2 points) At the given growth rates, how many years will it take for Dodixie to match Amarr’s real GDP per capita? _______________ 25.08
3. (2 points) At what annual growth rate must Dodixie grow in order to catch-up with Amarr in exactly 20 years? _______________ 2.30%
4. (1 point) At what annual growth rate must Amarr grow to ensure Dodixie never catches up? _______________ 2.1%
5. (2 points) Suppose Dodixie can bomb Amarr and cause it to suffer two years of zero growth before resuming normal growth of 1.3%. How many years will it take for Dodixie to match Amarr’s real GDP if Amarr is bombed? _______________ 21.83
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PROBLEM 3. (15 points) Complete the following blanks.
Suppose supply is given by P = 20 + 2Qs.
Suppose demand is given by P = 90 – 3Qd.
1. For this closed free market, complete the following table:
(1 point) Equilibrium Quantity
14
(1 point) Equilibrium Price
48
(1.5 points) Consumer Surplus
294
(1.5 points) Producer Surplus
196
2. Suppose the government provides a subsidy of $15 per unit. Complete the following table:
(1 points) Quantity
17
(1.5 points) Price Paid (by consumers)
39
(1.5 points) Price Received (by producers)
54
(1.5 points) Consumer Surplus
433.5
(1.5 points) Producer Surplus
289
(1.5 points) Total Subsidy Cost
255
(1.5 points) Deadweight Loss
22.5
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PROBLEM 4. (23 points)
The following table summarizes some macroeconomic quantities of a country called Utopia:
Planned investment:
I = 200
Government purchases:
G = 400
Exports:
EX = 100
Imports (as a function of Y):
IM =
Autonomous taxes:
TA = 200
Autonomous consumption:
a = 50
– Let denote the marginal propensity to consume of the country.
– In Utopia there is an income tax: let be the income tax ratio.
– Let be the imports-to-income ratio of this economy,
a. (2 points) Show the Multiplier of Utopia, as a function of and .
b. (1 points) Assume, for the remaining of problem 3, the following:
What is the numerical value of the Multiplier of this economy?
Multiplier ????-?? ??-?? +??
Multiplier ????-?? ?? ??-?????? +?? ?? ??
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c. (2 ponts) What is the level of autonomous planned expenditure of Utopia?
d. (2 points) Calculate the equilibrium output of Utopia.
e. (4 points) What is the level of government surplus, and of domestic private savings (S) in this economy?
Solution:
Ap = a – b Ta + I +G + EX = 50 – 0.8 (200) +200+400+100 = 590
Ap =
Solution:
Y * = Multiplier x Ap = 3 x 590= 1770
Y * =
Solution:
T = Ta +t Y = 273.75
?Gov. Surplus = T – G = 273.75 – 400 = -126.25 (2 points)
C = a + 0.8 ((1-1/24)Y) – 0.8 Ta = 1247
?S = Y – C – T = 1770 – 1247 – 273.75 = 249.25
(2 points)
Gov. Surplus =
S =
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A change in government expenditure policy:
For the remaining of problem 3 (that is, for items (g), (h), (i) and (j)), assume what follows: the ruler of Utopia, Sir T. More, is considering to reduce the government expenditure to G1=300.
f. (2 points) By how much will the equilibrium output change?
g. (2 points) By how much will tax revenue change?
h. (2 points) By how much will consumption change?
i. (6 points) What would be the new levels of Domestic Private Savings, Government Surplus, and Imports?
Solution:
?Y = Multiplier x ?G = 3 x (-100)= -300
?Y =
Solution:
?T = t ?Y= (1/24) x (-300)= – 12.5
?T =
Solution:
?C = b x (?(Disposable Income))
= b x (?Y – ?T) = 0.8(-300+12.5) = – 230
?C =
Solution:
?S1 = S0 + ?Y – ?C – ?T = 249.25 +(-300) – (-230) – (-12.5)
= 249.25 -300 +230+12.5 = 191.75 (2 points)
?Gov. Surplus1 = (Gov. Surplus )0 + ?T – ?G
= -126.25 + (-12.5) – (-100) = -38.75 (2 points)
? IM1 = m (Y0+ ?Y)
= 0.1 (1770+(-300))= 147 (2 points)
S 1 =
Gov. Surplus 1 =
IM1 =
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PROBLEM 5. (6 points)
Now consider the country of Macondo.
a. (1 point) If nominal GDP in 2011 in Macondo is 216 and the GDP deflator is 108, what is 2011 real GDP?
200
b. (1 point) What was the % change (LN) in real GDP between years 2000 and 2001, if 2000 real GDP was 180, and 2001 real GDP was 188? (1 point)
4.35%
c. (2 points) Suppose the yearly real growth rate is 2%. How long until the real GDP of Macondo is three times what it is today?
100*LN(3)/2 = 54.9 years
d. (2 points) Suppose real GDP in Macondo in 2011 is 200 with a growth rate of 2%, and a neighboring country, El Dorado, has a 2011 real GDP of 201 with a growth rate of 2.5%. Will the GDP of Macondo ever equal that of El Dorado? If so, in how many years?
No
Problem 6. (8 points)
The country of Macondo has a monetary base of $500 million. The Central Bank of Macondo, requires commercial banks to hold as reserves rr=0.1 (that is, for every unit a bank receives as deposit, it must keep as reserve 0.1). Assume that commercial banks do keep the reserves, and do not keep excess reserves. In Macondo people find useful to keep some cash in their pockets. On average, in this economy you can observe a currency-to-deposit ratio of c=0.05.
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a. (2 points) What is the total value of deposits in the banks of Macondo?
D=500/(0.15 + 0.05) = 2500
b. (2 pts) How much is kept as reserves in Macondo?
R = rr D = 0.15 x 2500 = 375
c. ( 2pts) What is the money supply in this republic?
M = C + D = c D + D = 0.05 x 2500 + 2500 = 2625
d. ( 3pts) Now assume that in Macondo there is a money demand as follows:
Where stands for the interest rate. (So, if the interest rate were 4, you would plug 4 to get the demand for money).
– What is the interest rate present if the money market is in equilibrium? Hint: you already have the Money supply.
– Draw in the space provided a diagram that shows the money market demand and supply, as well as the equilibrium interest rate.
Solution: – .