Industrial Tractors - Introduction to Macro Economics - Solved Exams, Exams of Introduction to Macroeconomics

Download Industrial Tractors - Introduction to Macro Economics - Solved Exams and more Exams Introduction to Macroeconomics in PDF only on Docsity! MC______ EXE I______ EXE II______ EXE III______ Econ002INTROMACROProf.LucaBossiDecember20,2011 FINALEXAMSUGGESTEDSOLUTIONS MysignaturebelowcertifiesthatIhavecompliedwiththeUniversityofPennsylvania'sCodeof AcademicIntegrityincompletingthisexamination.Inparticular,IdeclarethatIhavenotuseda graphingcalculatortocompletethisexam.  ________________________________________________ Name(printed)    PennID  ____________________________ ______________ Signature   Date INSTRUCTIONS The exam is closed book. It is composed of 40multiple choice questions and three exercises.Allmultiplechoicequestionsareworth1.5points(sothetotalis60points forthemultiplechoicepart).Theexercisesareworth12or14pointseach(thetotalis 40pointsfortheexercisepart).ANSWERALLQUESTIONS. TOTALPOINTS=100.TOTALTIME=120minutes Provide your answerson the exam sheetdirectly. Readall questions very carefully. Writelegibly. EXAMTAKINGPOLICY Ifyouneedtousetherestroom,raiseyourhandandwaitfortheproctortocometoyou.Only onepersoncanbeoutoftheexaminationroomatatime,andtheproctorwillholdontoyour exampaperswhileyouareoutattherestroom. FORTHEDURATIONOFTHEEXAM,ANDWITHTHEEXCEPTIONOFYOURALLOWEDSCIENTIFIC CALCULATOR, YOU HAVE TO TURN OFF EVERYTHING ELSE THAT HAS A POWER BUTTON SIMILARLY TO WHEN YOU ARE TAKINGOFF/LANDING WITH AN AIRPLANE. NO CELL PHONES. YOU CANNOT CONNECT TO THE INTERNET. NO BOOKS.  NO NOTES.  NO HELP SHEETS. NO TALKINGTOEACHOTHER.NOASKINGTHEPROCTORSANYQUESTIONORHELPSOLVINGTHE EXAM. WRITE IN PENCIL OR IN PEN AS YOU LIKE, BUT IF YOU WRITE IN PENCIL THERE IS NO POSSIBILITYTOASKFORREGRADING. PLEASEWRITEYOURNAMEONEVERYSINGLEPAGEOFTHEEXAM. PLEASEWRITEYOURNAMEONEVERYSINGLEPAGEOFTHEEXAM PLEASERETURNTHEEXAMSPECIFICALLYTOYOURTAWHENYOUAREDONE PLEASEDONOTSTARTTHISEXAMUNTILINSTRUCTEDTODOSO.  GOODLUCK! YOUR NAME: ______________________________________ YOUR R.I.’s NAME:________________________________________________ Page 2 of 18 EXERCISEI(14points) Informationaboutaneconomyforthepastthreeyearswasrecentlyreleasedandisgiven below.Allproductsareconsumedwithinthecountry.ExceptforTylenol,whichisimported,all productsareproducedwithinthecountry.Thebasketforatypicalconsumeristwounitsof everynonindustrialgood.Thebaseyearis2009. Year PriceofIndustrial Tractors Quantityof IndustrialTractors PriceofPens QuantityofPens 2008 $500 100 $0.80 500 2009 $350 120 $0.60 700 2010 $550 145 $1.00 1,000  Year PriceofTylenol QuantityofTylenol PriceofAdvil QuantityofAdvil 2008 $0.50 30 $0.50 60 2009 $0.60 55 $1.00 80 2010 $0.70 65 $3.00 100 a)(4points)Calculatetheinflationratefor2008,2009,and2010usingtheGDPDeflator. Roundtothenearesttenthofapercent.  BecauseTylenolisimported,itwillnotbeincludedinGDPcalculations.  First,calculatenominalandrealGDPforeachyear,using2009asthebaseyear: Year NominalGDP RealGDP(Use2009Prices) 2008 ($500)*(100)+($0.80)*(500)+ ($0.50)*(60)=$50,430 ($350)*(100)+($0.60)*(500)+($1)*(60) =$35,360 2009 ($350)*(120)+($0.60)*(700)+($1)*(80) =$42,500 ($350)*(120)+($0.60)*(700)+($1)*(80) =$42,500 2010 ($550)*(145)+($1)*(1,000)+($3)*(100) =$81,050 ($350)*(145)+($0.60)*(1,000)+ ($1)*(100)=$51,450  Next,calculatetheGDPDeflatorforeachyearusing: GDPDeflator=(NominalGDP/RealGDP)*100 Year GDPDeflator 2008 ($50,430/$35,360)*100=142.6 2009 ($42,500/$42,500)*100=100 2010 ($81,050/$51,450)*100=157.5  YOUR NAME: ______________________________________ YOUR R.I.’s NAME:________________________________________________ Page 5 of 18 StateoftheEconomy Probability Asset–A (1styear) Asset–A (2ndyear) AssetB (2ndyearonly) Poor 40% 60 60 120 Average 30% 80 60 140 Good 30% 100 70 170  NotethatassetBhasreturnonlyinyear2(i.e.itdoesnotpayinyear1).Forthepurposeofthis problemassumethattheinterestrateis10%inbothyear1andyear2.  Calculatetheexpectedpayoutinyear2ofassetB.Whatisthepresentvalueofthispayout? CalculatetheexpectedpayoutofassetAinyear1andyear2.  Solutions:  a) ProjectYbecauseapayofftodayisbetterthanthesamepayofftomorrow.Inperiod3 bothprojectsyieldthesamepayoff,butprojectYhasahigherpayoffinperiod1thanprojectX. (thepayoffsforthetwoprojectsarereversedinthetwoinitialperiods). PDV(X)=4+6/1.08+9/(1.08^2)=17.2716andPDV(Y)=6+4/1.08+9/(1.08^2)=17.4198  b) YoujustfoundoutthatforpositiveinterestratesprojectYgivesahigherPDVsoitmust bethat: PDV(Y)PDV(X)=0.095238soitmeansthat 6+4/(1+r1)+9/((1+r1)(1+r2))46/(1+r1)9/((1+r1)(1+r2))=0.095238 so22/(1+r1)=0.095238 solvingforthefirstperiodinterestrate:r1=0.05.Sothefirstperiodinterestrateis5%.  Thenwealsoknowthat17.67322=6+4/1.05+9/(1.05*(1+r2)). Solvingforthesecondperiodinterestratewegetr2=9%.Sotheinterestrateforthesecond periodmustbelowerorequalto9%. c)ExpectedPayout(B)=0.4*120+0.3*140+0.3*170=141 PVExpectedPayout(B)=(1/(1+0.1))^2*(141)=116.53 ExpectedPayout(A1)=0.4*60+0.3*80+0.3*100=78 ExpectedPayout(A2)=0.4*60+0.3*60+0.3*70=63  PAPERFORYOURUSE     YOUR NAME: ______________________________________ YOUR R.I.’s NAME:________________________________________________ Page 6 of 18 EXERCISEIII(12points) ConsidertheSolowmodelwehaveseenandstudiedinclass.Inthisproblemwewillconsider extensiontoaccount foranopeneconomyfirstandtaxationnext.Consideraneconomyand assumethatitsaggregateproductionfunctionisaCobbDouglas   .Furthermore the depreciation of capital is d = 5%, the saving rate is s = 15%,  , A = 1, and the populationgrowthrateisn=5%.Forallcomputationspresentyouranswerswithfourdecimal places.  (a)(6points)NowsupposethatweneedtomodifythecanonicalSolowmodeltoaccountfor capital inflowoutflow (i.e. the economy is now open). In particular assume that because of unfavorable assets taxation and absence of profitable investment opportunities there is an outflowofcapitalfromthecountryatrateof5%fromtheGDPeveryperiod.Foreignersdonot wanttobuyassetsinthiscountry. Whichofthebasicequationsneedstobemodified?Writedownthenewfundamental equationandsolveforthesteadystatelevelofcapitalperperson?Use4decimalsforyour answer.  LetuswritedownthebasicequationsoftheSolowmodel                  Forourcase(3)needstobemodifiedtoaccountforpositivenetcapitaloutflowNCO.In particular                Theequationforaccumulationofaggregatephysicalcapitalnowbecomes:              !       Thisinpercapitatermsbecomes:         "#       withourconventionforlowercasevariables:$       $    $ Insteadystatewehavethat:$  $  $%.Substitutinginthelawofmotionofcapitalinper capitatermswehave    $%    $% WecansolveforSS$%inthefollowingsteps.Firstwritetheaboveas  $%    $% Seconddividingbothsidesby$%:   $%     Finallyafterrearrangefor$% YOUR NAME: ______________________________________ YOUR R.I.’s NAME:________________________________________________ Page 7 of 18 $%       Thisexpressiongivesusthesteadylevelcapitalperpersonasfunctionofthefundamental parameters.Substituteforthenumbersinthehypothesistoobtainthenumericalanswer. $%  "     #    "      # & '     (b) (6 points) Forget the calculations you did for part (a) of this exercise, this part of the question is independent from part (a). Now the economy is closed. Suppose we want to introduce a government in the Solow model. In particular, we assume all the production/income in theeconomy is taxedatacertainconstant tax rate(.Householdscan saveonlyafterhavingpaidtaxes. Supposethatthegovernmentalsooffersproductivegovernmentspendingthatenhancestotal production in the economy and that the government is running a balanced budget. Think of these as the services coming from the roads, general infrastructures, public schools, police, firemenetc.Thisbeingthecase,thenewproductionfunctionforoureconomybecomes:  )*  ) Where*denotesgovernmentspending. Nowthedepreciationofcapital isd=5%,thesavingrate iss=15%,  ,A=1,andthe populationgrowthrateisn=5%,andalso  ,and  ,findthesteadystatelevelof capitalperperson.  (Note:Togetfull/partialcreditCLEARLYshowyourwork.Foryourcalculationsuse4decimals)  Ifthegovernmentisrunningabalancedbudgetthen*   Substitutethisintotheproductionfunction:  )  ) Rearrangetheaboveinto)  )  )andsolvefor+    ) ) ))  ))   ) ))  ))   ThelastlinefollowssinceA=1.Outputpercapitaisthen:     ) ))  ))  YOUR NAME: ______________________________________ YOUR R.I.’s NAME:________________________________________________ Page 10 of 18 Cyclicalunemploymentoccursbecausethedemandforgoodsandserviceshasdeclinedandthenumber ofavailablejobshasfallen.  9)Thestickywagetheoryoftheshortrunaggregatesupplycurvesaysthatwhenthepricelevelrises morethanexpected,therealwage a. rises,soemploymentrises. b. rises,soemploymentfalls. c. falls,soemploymentrises. d. falls,soemploymentfalls.  10)LastyeartheimaginarycountryofBahkanhadapopulationof10,000,6,000peopleworked8hours adayandproducedarealGDPof$30,000,000.TheimaginarycountryofSanAndreohadapopulation of15,000,8,000peopleworked7hoursadayandproducedarealGDPof$33,000,000.Whichofthe followingiscorrect? a. BahkanhadthehigherproductivityandthehigherrealGDPperperson.  b. SanAndreohadthehigherproductivityandthehigherrealGDPperperson.  c. BahkanhadthehigherproductivitywhileSanAndreohadthehigherrealGDPperperson.  d. SanAndreohadthehigherproductivitywhileBahkanhadthehigherrealGDPperperson.   11)Supposetheeconomyisinlongrunequilibrium.Ifthereisataxcutatthesametimethatmajor newsourcesofoilarediscoveredinthecountry,thenintheshortrun a. realGDPwillriseandthepricelevelmightrise,fall,orstaythesame.  b. realGDPwillfallandthepricelevelmightrise,fall,orstaythesame.  c. thepricelevelwillrise,andrealGDPmightrise,fall,orstaythesame.  d. thepricelevelwillfall,andrealGDPmightrise,fall,orstaythesame.  12)Aneconomiccontractioncausedbyashiftinaggregatedemandcausespricesto a. riseintheshortrun,andriseevenmoreinthelongrun. b. riseintheshortrun,andfallbacktotheiroriginallevelinthelongrun.  c. fallintheshortrun,andfallevenmoreinthelongrun.  d. fallintheshortrun,andrisebacktotheiroriginallevelinthelongrun.  13)Ifthepricelevelfalls,therealvalueofadollar a. rises,sopeoplewillwanttobuymore.Thisresponsehelpsexplaintheslopeoftheaggregate demandcurve.  b. rises,sopeoplewillwanttobuymore.Thisresponseshiftsaggregatedemandtotheright.  c. falls,sopeoplewillwanttobuyless.Thisresponsehelpsexplaintheslopeoftheaggregate demandcurve.  d. falls,sopeoplewillwanttobuyless.Thisresponseshiftsaggregatedemandtotheleft.  14)ConsideranidenticalbasketofgoodsinboththeU.S.andIndia.Ifthenominalexchangerateis unchanged,whichofthefollowingwilldefinitelydecreasetheU.S.realexchangeratewithIndia? a. thepriceofthebasketofgoodsrisesintheU.S.andIndia.  b. thepriceofthebasketofgoodsrisesintheU.S.andfallsinIndia.  c. thepriceofthebasketofgoodsfallsintheU.S.andrisesinIndia.  d. thepriceofthebasketofgoodsfallsinbothIndiaandtheU.S.. YOUR NAME: ______________________________________ YOUR R.I.’s NAME:________________________________________________ Page 11 of 18  15)(Hard)Assumethatbanksdonotholdexcessreserves.Thebankingsystemhas$50millionin reservesandhasareserverequirementratioof10percent.Thepublicholds$20millionincurrency. Thenthepublicdecidestowithdraw$10millionincurrencyfromthedepositsofthebankingsystem.If theFedwantstokeepthemoneysupplystableonlybychangingthereserverequirement,thenwhat shouldthenewreserverequirementbe? a. Approx.11.1percent b. Approx.10.1percent c. Approx.9.1percent d. Approx.8.1percent Tosolvethisexerciseweneedtorecallanduseappropriatelythefollowingformulas: rrcr crmoney    1multiplier  M=moneymultiplier*B rr D R   cr D C   SoinitiallyweknowthatR=50,rr=0.1,C=20 Since rr D R  then 1.050  D sothatD=500.And cr D C  = 500 20  ThenthepublicdecidesforsomereasontoincreaseCby10anddecreaseDby10. So,afterthiseventhappens,wehaveC=30,D=490.Itfollowsthat: cr D C  = 490 30  WeknowthattheFEDwantstokeepthemoneysupplystableandthatthemonetarybaseB= C+Rwillnotbeenchangedbythisevent.TheFEDisgoingtolowerrrsothatRgoesdownand Bisnotchanged. Since rrcr crmoney    1multiplier  Beforetheeventwewouldhave 1.0 500 20 1 500 20 1multiplier       rrcr crmoney  Aftertheevent rrrrcr crmoney       490 30 1 490 30 1multiplier  SinceM=moneymultiplier*BandwewanttohaveBandMthesamebeforeandafterthe event,howmuchshouldrrchange?Weneedtosolve: YOUR NAME: ______________________________________ YOUR R.I.’s NAME:________________________________________________ Page 12 of 18 1.0 500 20 1 500 20   = rr  490 30 1 490 30  490 520 490 30 70 520       rr  Withthecalculatorwefindthatrr=0.081approx. Sorr=8.1%  16)WhichofthefollowingwouldbothraisetheU.S.exchangerate? a. capitalflightfromothercountriestotheU.S.occursandtheU.S.movesfrombudgetsurplusto budgetdeficit  b. capitalflightfromothercountriestotheU.S.occursandtheU.S.movesfrombudgetdeficitto budgetsurplus  c. capitalflightfromtheU.S.toothercountriesoccurs,theU.S.movesfrombudgetsurplusto budgetdeficit  d. capitalflightfromU.S.toothercountriesoccurs,theU.S.movesfrombudgetdeficittobudget surplus  17)AGermancitizenbuysanautomobileproducedintheUnitedStatesbyaJapanesecompany.Asa result, a. U.S.netexportsincrease,U.S.GNPandGDPareunaffected,JapaneseGNPincreases,Germannet exportsdecrease,andGermanGNPandGDPareunaffected. b. U.S.netexportsandGDPincrease,JapaneseGNPincreases,Germannetexportsdecrease,and GermanGDPandGNPareunaffected. c. U.S.netexports,GNP,andGDPincrease,JapaneseGDPincreases,Germannetexportsdecrease, andGermanGDPisunaffected. d. U.S.netexports,GNP,andGDPareunaffected,JapaneseGNPincreases,Germannetexports decrease,andGermanGDPandGNPfall.  18)LastyearPanglossiahadrealGDPof27.0billion.ThisyearithadrealGDPof31.5billion.Whichof thefollowingchangesinpopulationisconsistentwitha5percentgrowthrateofrealGDPperperson overthelastyear? a. Thepopulationdecreasedfrom88millionto84million.  b. Thepopulationdecreasedfrom75millionto73million.  c. Thepopulationincreasedfrom45millionto50million.  d. Thepopulationincreasedfrom60millionto62million.  19)IfU.S.citizensdecidetosavealargerfractionoftheirincomes,therealinterestrate a. decreases,therealexchangerateofthedollardepreciates,andU.S.netcapitaloutflow increases.  b. decreases,therealexchangerateofthedollarappreciates,andU.S.netcapitaloutflow decreases.  c. increases,therealexchangerateofthedollarappreciates,andU.S.netcapitaloutflow decreases.  YOUR NAME: ______________________________________ YOUR R.I.’s NAME:________________________________________________ Page 15 of 18 28)PresidentLukeSkywalkerisrunningforreelectionagainstSenatorHanSolo.Skywalkerproclaims thatmorepeopleareworkingnowthanwhenhetookoffice.Solosaysthattheunemploymentrateis highernowthanwhenSkywalkertookoffice.Youconcludethat a. oneofthemmustbelying.  b. bothofthemcouldbetellingthetruthifthelaborforceparticipationrateandthelabor forcebothfell. c. bothofthemcouldbetellingthetruthifthelaborforcegrewslowerthanemployment. d. bothofthemcouldbetellingthetruthifthelaborforcegrewfasterthanemployment.  29) Mostspellsofunemploymentare a. long,andmostunemploymentobservedatanygiventimeislongterm. b. long,butmostunemploymentobservedatanygiventimeisshortterm. c. short,butmostunemploymentobservedatanygiventimeislongterm. d. short,andmostunemploymentobservedatanygiventimeisshortterm.  30)Supposeoneyearagothepriceindexwas120andMariapurchased$20,000worthofbonds.One yearlaterthepriceindexis126.Mariaredeemsherbondsfor$22,250andisina40percenttax bracket.WhatisMaria’srealaftertaxrateofinteresttothenearesttenthofapercent? a. 4.3percent  b. 3.1percent  c. 1.8percent  d. 1.2percent  31)Supposethattherearediminishingreturnstocapital.Supposealsothattwocountriesarethesame exceptonehaslesscapitalandsolessrealGDPperperson.Supposethatbothincreasetheirsavingrate from3percentto4percent.Inthelongrun a. bothcountrieswillhavepermanentlyhighergrowthratesofrealGDPperperson,and thegrowthratewillbehigherinthecountrywithmorecapital. b. bothcountrieswillhavepermanentlyhighergrowthratesofrealGDPperperson,and thegrowthratewillbehigherinthecountrywithlesscapital. c. bothcountrieswillhavehigherlevelsofrealGDPperperson,andthetemporaryincrease ingrowthinthelevelofrealGDPperpersonwillhavebeengreaterinthecountrywith morecapital. d. bothcountrieswillhavehigherlevelsofrealGDPperperson,andthetemporaryincrease ingrowthinthelevelofrealGDPperpersonwillhavebeengreaterinthecountrywith lesscapital.  32)Supposetheeconomyisinlongrunequilibrium.Inashortspanoftime,thereisalargeinfluxof skilledimmigrants,amajornewdiscoveryofoil,andamajornewtechnologicaladvanceinelectricity production.Intheshortrun,wewouldexpect a. thepriceleveltoriseandrealGDPtofall.  b. thepriceleveltofallandrealGDPtorise.  c. thepricelevelandrealGDPbothtostaythesame.  d. Alloftheabovearepossible.  33)SupposetheeconomyofTheforcebewithyoulandhasthefollowingmonetarysituation. M1=1000$ YOUR NAME: ______________________________________ YOUR R.I.’s NAME:________________________________________________ Page 16 of 18 Requiredreserveratio=1/4 Currencytodepositratio=1/4 IftheCentralBankbuys600$worthoftreasurybills(i.e.bonds): a. Themoneymultiplieris5/2andthedepositsare600. b. Thereservesare100andthemonetarybaseis400 c. Bothaandbarecorrect. d. Thechangeinthemoneysupplyis$1,500  rrcr crmoney    1multiplier = 2 5 4 1 4 1 1 4 1     Recallthat B rrcr crM *1     Thereforetheinitiallevelof 4001000* 5 2* 5 2  MB  Ifthefedbuys600$worthoftreasurybills,thenthenewlevelofBis400+600=1000 ThereforethenewMis 25001000* 2 5*1     B rrcr crM  ItthusfollowthatthechangeinthemoneysupplyisnewMoldM=25001000=1500$  34)Duringthelasttaxyearyoulentmoneyatanominalrateof6percent.Actualinflationwas1.5 percent,butpeoplehadbeenexpecting1percent.Thisdifferencebetweenactualandexpected inflation a. transferredwealthfromtheborrowertoyouandcausedyouraftertaxrealinterestratetobe 0.5percentagepointshigherthanwhatyouhadexpected.  b. transferredwealthfromtheborrowertoyouandcausedyouraftertaxrealinterestratetobe morethan0.5percentagepointshigherthanwhatyouhadexpected.  c. transferredwealthfromyoutotheborrowerandcausedyouraftertaxrealinterestratetobe 0.5percentagepointslowerthanwhatyouhadexpected.  d. transferredwealthfromyoutotheborrowerandcausedyouraftertaxrealinterestratetobe morethan0.5percentagepointslowerthanwhatyouhadexpected.   Table2Usetheinformationinthistabletoanswerthefollowingquestions.  Country  Currency Currencyper U.S.Dollar U.S.Price Index CountryPrice Index Bolivia Boliviano 8.00 200 1600 Japan Yen 80.00 200 20,000 Morocco Dinar 10.00 200 2,000 Norwegian Kroner 6.5 200 1,500 Thailand Baht 40.00 200 7,000   35)RefertoTable2.Whichcurrency(ies)is(are)lessvaluablethanpredictedbythedoctrineof purchasingpowerparity? YOUR NAME: ______________________________________ YOUR R.I.’s NAME:________________________________________________ Page 17 of 18 a. bolivianoanddinar  b. yenandkroner  c. bahtandkroner  d. baht  36)RefertoTable2.Inrealterms,U.S.goodsaremoreexpensivethangoodsinwhichcountry(ies)? a. BoliviaandMorocco  b. Japan,Norway,andThailand  c. JapanandNorway  d. Thailand  37)RefertoTable2.Inrealterms,U.S.goodsarelessexpensivethangoodsinwhichcountry(ies)? a. BoliviaandMorocco  b. Japan,Norway,andThailand  c. JapanandNorway  d. Thailand  38)Whichofthefollowingisastoreofvalue? a. cashandstocks b. cashbutnotstocks  c. stocksbutnotcash  d. neithercashnorstocks  39)Iftheeconomyunexpectedlywentfrominflationtodeflation,  a. bothdebtorsandcreditorswouldallhavereducedrealwealth.   b. bothdebtorsandcreditorswouldallhaveincreasedrealwealth.  c. debtorswouldgainattheexpenseofcreditors.   d. creditorswouldgainattheexpenseofdebtors.  40)In2002,theUnitedStatesplacedhighertariffsonimportsofsteel.Accordingtotheopeneconomy macroeconomicmodelthispolicyshouldhave a. reducedimportsintotheUnitedStatesandmadeU.S.netexportsrise.  b. reducedimportsintotheUnitedStatesandmadethenetsupplyofdollarsintheforeign exchangemarketshiftright.  c. reducedimportsofsteelintotheUnitedStates,butreducedU.S.exportsofothergoodsbyan equalamount.  d. reducedimportsofsteelintotheUnitedStatesandincreasedU.S.exportsofothergoodsbyan equalamount.