Macroeconomics Midterm Exam - Version B, Drake University, Fall 2005 - Prof. William M. Bo, Exams of Introduction to Macroeconomics

Download Macroeconomics Midterm Exam - Version B, Drake University, Fall 2005 - Prof. William M. Bo and more Exams Introduction to Macroeconomics in PDF only on Docsity! Principles of Macroeconomics (Econ 001) Signature: Drake University, Fall 2005 William M. Boal Printed name: MIDTERM EXAMINATION #3 VERSION B "Long-Run Economic Growth and Inflation" October 31, 2005 INSTRUCTIONS: This exam is closed-book, closed-notes. Simple calculators are permitted, but graphing calculators or calculators with alphabetical keyboards are NOT permitted. Numerical answers, if rounded, must be correct to at least 3 significant digits. Point values for each question are noted in brackets. Maximum total points are 100. I. Multiple choice: Circle the one best answer to each question. [2 pts each, 34 pts total] (1) In August, at the beginning of this semester, we were in the _______ quarter of 2005. a. first. b. second. c. third. d. fourth. (2) According to the aggregate production function, potential GDP is determined by all of the following except a. technology. b. the size of the labor force. c. the size of the capital stock. d. total spending. (3) Real GDP grows faster in the long run, the higher the fraction of total spending on a. government purchases. b. net exports. c. consumption. d. investment. (4) Suppose the capital stock at the beginning of 2005 was $9 trillion. Also suppose that during 2005, gross investment is $1.5 trillion and depreciation is $1.2 trillion. Then the capital stock at the beginning of 2006 will be a. $9.3 trillion. b. $10.2 trillion. c. $10.5 trillion. d. $12.7 trillion. (5) Investment spending is a. negatively related to the real interest rate. b. unrelated to the real interest rate. c. positively related to the real interest rate. d. cannot be determined from information given. (6) If the interest rate falls in the United States, net exports rise because a. exporters can borrow money more easily. b. the dollar appreciates. c. the dollar depreciates. d. consumers decrease their total spending. (7) If a person does not have a job, and last looked for work two weeks ago, that person would be classified by the Bureau of Labor Statistics as a. employed. b. unemployed. c. out of the labor force. d. cannot be determined from information given. (8) "Job rationing" theories of unemployment predict that unemployment could be reduced if a. workers were notified of plant closings in advance. b. government helped match unemployed workers with employers. c. wages were increased. d. wages were reduced. (9) Since 1700, long-run growth rates of real GDP per capita in the fastest-growing countries have a. remained about zero. b. remained constant, though positive, from one century to the next. c. decreased from one century to the next. d. increased from one century to the next. Principles of Macroeconomics (Econ 001) Drake University, Fall 2005 Midterm Examination #3 Version B Page 2 of 7 (10) A country experiences faster "embodied" technical change, the a. larger the existing stock of capital already in place. b. more workers ("bodies") are available to use it. c. faster new plant and equipment are built, installed, and put to use. d. more training workers receive. (11) "Human capital" means a. education and training of workers. b. retirement savings plans for workers. c. people-friendly businesses. d. ergonomically designed equipment. (12) Suppose a new idea for making office work more efficient is so broad and general that it cannot be patented. This new idea is a. a nonexcludable good. b. a nonrival good. c. a private good. d. a transfer. (13) The three essential functions of money include all of the following except a. store of value. b. unit of account. c. method for reducing government deficits. d. medium of exchange. (14) When banks keep reserves on deposit with the Federal Reserve, those funds earn an interest rate a. of zero. b. slightly below the market rate. c. equal to the market rate. d. greater than the market rate. (15) According to the quantity equation, if the money supply grows more slowly than the growth rate of real GDP, the inflation rate will be a. positive. b. negative (deflation). c. zero. d. cannot be determined from information given. (16) If the money supply grows rapidly, the likely consequence is a. high unemployment. b. rapid growth of real GDP. c. hyperinflation. d. a fall in the real interest rate in the long run. (17) Most economists believe that a higher rate of inflation will, in the long run, bring a. a lower rate of unemployment. b. no change in the rate of unemployment. c. a higher rate of unemployment. d. cannot be determined from the information given. (4) [Interest rate and GDP shares: 10 pts] Suppose the government provides tax incentives for businesses to spend money on computer hardware and software. Use the spending allocation model to answer the following questions. [Hint: Use the graphs below for scratch work.] a. Does the long-run real interest rate increase, decrease, or remain constant? b. Does the share of consumption spending (C/Y) increase, decrease, or remain constant? c. Does the share of investment spending (I/Y) increase, decrease, or remain constant? d. Does the share of net exports (X/Y) increase, decrease, or remain constant? e. Does the long-run growth rate of real GDP increase, decrease, or remain constant? (5) [Malthusian model: 12 pts] The diagram below shows a Malthusian model of economic growth. $0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000 $16,000 $18,000 $20,000 $22,000 $24,000 $26,000 0 2 4 6 8 10 12 14 16 Labor force (millions) T o ta l o u tp u t (m ill io n s) Subsistence line Production function a. According to this Malthusian model, how much output is required to sustain each worker? In other words, what is the subsistence level of output per worker? $ b. If the labor force were 12 million, would the population tend to increase, decrease, or remain constant? c. If the labor force were 4 million, would the population tend to increase, decrease, or remain constant? d. What is the equilibrium level of annual wages (output per worker) according to this model? $ e. What is the equilibrium size of the labor force according to this model? million f. Suppose the production function shifts down due to an environmental disaster. What will be the new equilibrium level of annual wages, according to this model? $ R 0 R RR X/Y NG/Y 1–(G/Y) I/YC/Y NG/Y (6) [Technical change: 4 pts] Over the period 1970 to 1990, the annual growth rate of output per worker in South Korea was 6.33% and the annual growth rate of capital per worker was 7.89%. Assume that the share of capital income plus depreciation in national income was about (1/3), as it is in the United States. a. Compute the contribution of capital to productivity growth, to the nearest hundredth of a percentage point. % b. Contribute the contribution of technology to productivity growth, also called the Solow residual, to the nearest hundredth of a percentage point. % (7) [Money: 8 pts] The U.S. Federal Reserve and the U.S. Treasury Department reported the following data for August 2005. [Hint: Some of the data are extraneous and not needed for this problem.] Bank reserves $45 billion Consumer credit $2147 billion Commercial paper outstanding $1556 billion Travelers checks, demand deposits, and other checkable deposits $659 billion Federal debt held by public $4614 billion Currency $712 billion Savings deposits, small time deposits, money-market mutual funds, and other deposits on which check writing is limited or not allowed $5183 billion a. Compute "M1." $ billion b. Compute "M2." $ billion c. Compute the monetary base. $ billion d. Assume banks hold zero excess reserves. Compute the money multiplier for “M2” to the nearest tenth. (8) [Money multiplier: 4 pts] Suppose the required reserve ratio were 0.08 and the Federal Reserve increased bank reserves by $20 billion. a. If everyone held money in the form of deposits only (no currency) by how much would the money supply increase? $ billion b. If everyone held $0.12 in currency for every $1.00 in deposits (that is, the ratio of currency to deposits were 0.12) by how much would the money supply increase? $ billion (9) [Money velocity: 2 pts] According to the Federal Reserve, the stock of money (M1) was about $1372 billion in the first quarter of 2005, while according to the U.S. Bureau of Economic Analysis, U.S. annual GDP was $12,199 billion. Compute the velocity of M1 to the nearest tenth. (10) [Quantity equation: 2 pts] According to the U.S. Bureau of Economic Analysis, U.S. real GDP grew at an annual rate of 3.3% from 1980 to 1990, while according to the Federal Reserve, the stock of money (M2) grew at an annual rate of 7.9%. Assuming the velocity of money were constant, what should have been the average rate of inflation, according to the quantity equation? % III. Critical thinking: Write a one-paragraph essay answering one question below (your choice). Full credit requires correct economic reasoning, legible writing, good grammar including complete sentences, and accurate spelling. [4 pts] (1) Consider the following statement. "The world is getting more and more crowded. Soon we will run out of natural resources and economic growth will stop." Do you agree or disagree? Why or why not? Cite the historical record. (2) Suppose we had no currency or checking deposits and had to find a new form of money. Evaluate the following alternatives: (1) fresh pears, (2) lumber, (3) candy bars. Which would be best? Why? Which question are you answering, (1) or (2)? _________ . Please write your answer below: [end of exam]