Macroeconomics: Real Interest Rates and Exchange Rates, Study notes of Economics

Download Macroeconomics: Real Interest Rates and Exchange Rates and more Study notes Economics in PDF only on Docsity! Econ 102/Lecture 100 Final Exam Form 1 April 27, 2005 1. The Wall Street Journal reports that 2004 saw an increase in the real interest rate and a simultaneous depreciation of the real exchange rate. Which of the following events can explain this phenomenon according to the (long-run) open-economy model? a) An increase in the government budget deficit b) An increase in the government budget surplus c) A quota is imposed, restricting imports of a foreign good d) Capital flight out of the country e) None of the above 2. Suppose a US resident buys a car from a German auto company and the auto company uses the US- dollar revenues to buy stock in GM (a large US auto company) from a British shareholder, who then deposits the money into a dollar-denominated bank account in Great Britain. Which of the following is true from the perspective of the US? a) NX decreases, Foreign Direct Investment decreases b) Imports decrease, Net Foreign Investment decreases c) NX decreases, Net Foreign Portfolio Investment decreases d) NX increases, Net Foreign Investment decreases e) NX decreases, Net Foreign Investment is unchanged 3. Suppose that fear of war outside the US causes people everywhere to view assets outside the US as more risky before. According to the open economy model, which of the following cannot be true? a) The real interest rate in the US decreases b) Domestic investment in the US increases c) The US real exchange rate appreciates d) Net Exports in the US increases e) The value of the US dollar, measured in foreign currency, rises 10. Suppose that the US economy is initially, in the year 2003, in long-run equilibrium at point A in the figure below, with zero inflation and at the natural rate of unemployment. Assume that the labor force in the US totals 100 million people and the aggregate production function is Y=100,000L (Y is real GDP, L is number of people employed). If the economy moves to point B in 2004, then the unemployment rate for 2004 is _______, and the inflation rate from 2003 to 2004 is ________. P Y in billions of US$ 9,500 AD1 SRAS1 LRAS 100 AD2 102 A B 9,900 104 a) 1%; 2% b) 3%; 2% c) 5%; 2% d) 1%; 4% e) 3%; 4% 11. Which of the following is not a valid reason for why the short run aggregate supply curve slopes upward? a) Wages and other input costs may be slow to adjust to changes in the price level. b) A rising price level reduces the real interest rate and therefore encourages production. c) Some firms may be slow to adjust their prices because of menu costs. d) Some firms may misinterpret a rise in the general price level as an increase in demand for their own products. e) None of the above. That is, all of the above are valid reasons for why the short-run aggregate supply curve is upward sloping. 12. Assume MPC = 0.8. The White House decides to implement expansionary policy to increase the GDP. If the government increases its purchases by $1 billion, from the multiplier effect, the increase in consumption will be ______, and from the crowding out effect, the increase in investment is ______. a) $1.25 billion; positive b) $1.25 billion; negative c) $4.0 billion; negative d) $5.0 billion; positive e) $5.0 billion; negative 13. When actual inflation exceeds expected inflation, a) Unemployment is greater than the natural rate of unemployment b) Unemployment is less than the natural rate of unemployment c) Unemployment is equal to the natural rate of unemployment d) Phillips Curve shifts up because of actual inflation rises e) Phillips Curve shifts down because of expected inflation falls Answer the following four questions based on the information provided in the table below: Year 2001 2002 2003 2004 Real GDP 100 110 140 150 Nominal GDP 110 130 160 200 14. What is the rate of inflation between 2001 and 2002? a) 7.4% b) 10% c) 13% d) 18.2% e) 20% 15. Which is the base year? a) 2001 b) 2002 c) 2003 d) 2004 e) none of the above 16. How would you best describe the change in the price level from 2002 to 2003? a) inflation b) hyperinflation c) disinflation d) deflation e) stagflation 17. Assume that population in 2001 was 1 million, and that it grew at a constant rate of 20% per year each year. In which year did the average person enjoy the highest standard of living? a) 2001 b) 2002 c) 2003 d) 2004 e) There is insufficient information 18. Real GDP per person is $30,000 in Wolverina, $15,000 in Spartii, and $7,000 in Buckenesia. Annual saving per person is $1,000 in all three countries. Everything else being equal, we would expect a) All three countries to grow at the same rate b) Wolverina to have the highest rate of growth in GDP per person c) Spartii to have the highest rate of growth in GDP per person d) Buckenesia to have the highest rate of growth in GDP per person e) There is insufficient information for predicting relative growth rates 23. The following assets (a through e) are each offered at the same selling price. Each asset pays the dollar amounts indicated over a three year period, with the first payment today, the second a year from today, and the third two years from today. The real interest rate is constant at 20%. Which asset has the highest net present value? a) $300, $300, $300 b) $299, $301, $300 c) $200, $400, $300 d) $100, $530, $300 e) $400, $400, $0 24. The government believes that the interest rate is too high, so it is planning a policy change that will lower the interest rate. Using the long run closed economy model, which of the following policy options will accomplish the government’s goal? I. A decrease in government spending II. An investment tax credit III. A decrease in Social Security benefit payments to retired people a) I only b) II only c) III only d) I and II e) I and III 25. Suppose the economy is in long-run equilibrium. A positive technological shock shifts the long-run aggregate supply curve by $60 billion. Simultaneously, the Federal government purchases $30 billion worth of Mankiw books to be supplied to public universities. You are told that the MPC equals 0.8 and that the crowding out effect is $60 billion. Then in the long-run, you would expect a) Real GDP would be higher but the price level would be lower b) Real GDP would be higher but the price level would be the same c) Real GDP, nominal GDP and the price level would all be higher d) Nominal GDP and the price level would be higher but real GDP would be the same e) Nominal GDP, real GDP and the price level would all be lower 26. Consider the same facts as in the question above, except that you are told that the crowding out effect is in fact $140 billion. In the long-run you would now expect a) Real GDP would be higher but the price level would be lower b) Real GDP would be higher but the price level would be the same c) Real GDP, nominal GDP and the price level would be the same d) Nominal GDP and the price level would be higher but real GDP would be the same e) Nominal GDP, real GDP and the price level would all be lower 27. You are told that the labor market equilibrium wage is currently above the minimum wage. Everything else being equal, the long-run aggregate supply curve would shift right if the government were now to a) Increase the minimum wage by law b) Decrease the minimum wage by law c) Make unemployment benefits more generous d) Raise taxes on investment spending e) None of the above 28. The sticky wage theory of the short-run aggregate supply curve says that when the price level rises more than expected, the real wage a) Rises, so employment rises b) Stays the same, so there are no changes in long-run output c) Says the same, so employment stays the same d) Falls, so employment rises e) Falls, so employment falls Use the following graph to answer the next three questions: Inflation rate (a) (d) (b) 29. For purposes of this question only: If point (d) above represents a point on the short-run Phillips Curve where expected inflation equals 3%, and the natural rate of unemployment is 10%, which of the following must be true about point (b)? I Expected inflation equals 3% II Actual inflation equals 3% III Actual unemployment is less than 10% a) I only b) I and II only c) I, II and III d) II only e) II and III only 30. Assume again that the natural rate of unemployment is 10%. Which of the following is a possible combination of actual unemployment (u), actual inflation (π), and expected inflation (Eπ) represented by point (a) above? a) u=8%, π =7%, Eπ =3% b) u=10%, π =7%, Eπ =3% c) u=8%, π =3%, Eπ =7% d) u=12%, π =3%, Eπ =7% e) u=10%, π =3%, Eπ =7% Unemployment rate SRPC1 SRPC2 (e) (c) 36. Which of the following is not one of the four ways that deflation can harm economies, according to the assigned article in the Economist? a) Deflation pushes down wages, while prices remain sticky, so that workers are worse off b) Deflation swells the real burden of debt, causing bankruptcies and bank failures c) Expectation of falling prices causes consumers to postpone spending, reducing aggregate demand d) Workers are often reluctant to accept a pay cuts in nominal terms, so that when prices are falling the real wage bill goes up causing firms to reduce production e) Interest rates cannot go below zero, so deflation makes real interest rates painfully high 37. AMT stands for a) Aggregate Macroeconomic Throughput b) Alternative Minimum Tax c) Absolute Maximum Tangent d) Aggregate Monetary Trend e) Alan the Mighty Teacher 38. Alan Greenspan cited several uncertainties that make the management of monetary policy difficult. Among them was a) Whether an increase in the money supply would raise or lower interest rates b) Whether an increase in the money supply would raise or lower real GDP c) How much money there is in the economy d) The interest rate at which commercial banks are lending among themselves e) The reserve requirement 39. Suppose that the unemployment rate is constant at 5%. Every week, 15 in every 1,000 workers quit their job or are fired. If there are 50 persons unemployed at any one time in the economy, approximately what percentage of them would have to become employed every week for the unemployment rate to remain constant? a) 10% 40. 18% 41. 5% 42. 15% 43. 28% Short Answer Question #1: (10 points) Suppose that a closed economy starts in a long-run equilibrium with a zero rate of inflation. Suppose also that the economy’s GDP is initially not growing. Let the initial values of the economy’s variables be the following: Real GDP: Y0 = 800 Price level: P0 = 100 Rate of inflation: π0 = 0.0% Nominal rate of interest: i0 = 2.0% Rate of unemployment: u0 = 5.0% Now suppose that the central bank of the country begins to expand the money supply at a rate of 3.5% per year, indefinitely. a. After one year, assuming that the change in policy has not yet come to be expected, how will each of the above variables compare to what they were initially? Answer by inserting one of the following symbols into the blanks: “>”, “<”, “=”, or “?” (the latter if the comparison is ambiguous). Also, in the space at the right of each, say briefly in words the reason for your answer (may be used for partial credit if your answer is wrong). An example of such a reason would be “AD shifts left.” Y Y0 because P P0 because π π0 because i i0 because u u0 because b. After 20 years, assuming that this is long enough to reach long-run equilibrium, approximately what will each of these variables be? Y20 = because P20 = because π20 = because i20 = because u20 = because