Download Midterm #2

ECO 302
Spring 2002
Midterm #2
Name: ____________________
ID #: _____________________
Part I: Instructions: Write your answers in the spaces provided. Show your work
whenever possible. Use the back of the pages if necessary.
Suppose the small, open economy of Country A is described by the following equations:
Yc = current income = 28
Yf = expected future income = 30
Cd = current desired consumption = –10 + (0.5)·[Yc + Yf] – 100·r
Gc = Gf = government spending (c for current, f for future) = 10
Id = current desired investment = 4 + (0.2)·Yf – 100·r
rw = world real interest rate = .06
1.
Fill in the blanks in the following table, and sketch in as accurately as possible the
country's desired national savings and desired investment curves in the graph below:
If r = .04, then Id = ________.
If r = .08, then Id = ________.
If r = .04, then Snd
If r = .08, then Snd
= ________.
= ________.
The country's current account balance is _______________ .
–1–
2.
Suppose the country's economic prospects become worse, and Yf falls to 26.
Show the effects of this on the graph above.
3.
Show the impact on the FE-IS-LM diagram of the reduction in Yf in question 2,
assuming that markets will adjust rapidly.
4.
Suppose all the country's foreign trade is with its neighbor, Upper Silesia (US).
Suppose US politicians are upset about the size of Country A's current account balance,
claiming that this shows that Country A is engaged in "unfair trade." They threaten to
impose tariffs on all goods from Country A unless Country A's current account balance is
brought closer to zero. Suppose that this threat is what caused Yf to fall in question 2.
Describe the effect of this threat on Country A's current account balance.
–2–
5.
Suppose the government of Country A wants to take steps to bring its current
account balance closer to zero. Identify at least two strategies the government could
follow bring the current account balance closer to zero. For each strategy, identify
whether the actions would be "expansionary" or "contractionary".
Instructions: Select the one best answer for each of the following questions. Record
your final choice CLEARLY next to the questions.
1.
"Neutrality of money" means that changes in the money supply cause changes in:
a.
b.
c.
d.
e.
real interest rates.
real GDP.
investment spending
nominal exchange rates.
none of the above.
2.
If utilization rates of capital and labor behave procyclically, then we would expect
to observe in the data that:
a.
average labor productivity would be counter-cyclical.
b.
real wages would be procyclical.
c.
total factor productivity would be procyclical.
d.
Okun's Law would show that a less than 1% rise in output would lower the
unemployment rate by 1%.
e.
inventory investment would be counter-cyclical.
3.
When economic growth slowed down after 1973 in the USA and other developed
countries, what was the predominant cause of the change?
–3–
a.
b.
c.
d.
e.
reduced investment in new capital.
increased use of imported inputs.
a slowing of population growth.
a decline in labor force participation.
a decline in the growth rate of total factor productivity.
4.
Which variables are leading?
(i)
(ii)
(iii)
inventory investment
government spending
stock prices
a.
b.
c.
d.
e.
only (i) and (ii) are true.
only (i) and (iii) are true.
(i), (ii), and (iii) are all true.
only (iii) is true.
only (i) is true.
5.
In the neoclassical (Solow) growth model, suppose countries A and B share the
same initial capital/worker ratio, production function, population growth rate, and
depreciation rate. (Assume this initial ratio is well below the steady-state level.) If country
A has a higher savings rate than country B, then (compared to country B) country A:
(i)
(ii)
(iii)
will have lower initial consumption/person.
will record faster growth of output per person.
will move towards a steady-state with less capital per worker.
a.
b.
c.
d.
e.
only (i) and (ii) are true.
only (ii) and (iii) are true.
all of the statements are true.
only (i) and (iii) are true.
none of the above.
6.
In the IS-LM-FE diagram, the effect of an increase in desired consumption caused
by rising expectations of future income is shown as:
a.
b.
c.
d.
e.
a shift to the left of the supply curve for real balances.
a shift to the right of the IS curve.
a shift to the right of the LM curve.
a shift to the left of the FE line.
a shift to the right of the demand curve for real balances.
7.
If a closed economy is operating at a point below r* (the interest rate at which
Snd = Id,) then the economy is operating ___________ and there is ___________ .
–4–
a.
b.
c.
d.
e.
to the right of the FE line
to the left of the IS curve
to the right of the IS curve
to the left of the LM curve
none of the above.
excess demand for labor
excess supply of goods
excess demand for goods
excess supply of goods
8.
A movement along the IS curve could be caused by;
a.
a shift of the desired national savings line caused by a change in government
spending.
b.
a shift of the desired national savings line caused by a change in income.
c.
a shift of the desired national savings line caused by a change in desired
consumption spending by households, with income held constant.
d.
a change in the price level.
e.
a shift of the desired investment line.
9.
Under the Lucas misperceptions model, a worker would want to increase his labor
supply only when there is an increase in the ___________. Because he lacks enough
information to make a fully informed decision, he also tends to increase his labor supply
when there is an increase in the ___________.
a.
b.
c.
d.
e.
real interest rate
real wage
nominal wage
nominal wage
none of the above.
nominal interest rate
nominal wage
real interest rate
nominal interest rate
10.
We know a general equilibrium can always be attained in the IS-LM-FE diagram
because:
a.
changes in the real interest rate will cause the IS curve to shift to meet the LM and
FE lines.
b.
changes in the real wage will cause the FE line to shift to where the IS and LM
curves meet.
c.
changes in the money supply will cause the LM curve to shift automatically to
where the IS and FE lines meet.
d.
changes in the price level will cause the LM curve to shift to where the IS and FE
lines meet.
e.
none of the above.
–5–
11.
The "Reverse Causation" can successfully explain why money growth is leading
and procyclical _________, but cannot explain why money growth is leading and
procyclical _________ .
a.
b.
c.
d.
e.
during expansions
during recessions
during Christmas shopping season
following gold discoveries
none of the above.
during recessions
during expansions
following gold discoveries
during Christmas shopping season
12.
US President George W. Bush has made large tax cuts a major part of his
economic policy. Because the USA is a large open economy and not a small open
economy, these tax cuts would have a _________ effect on the current account balance
than they would if the USA were a small open economy, assuming the Ricardian Doctrine
does not apply. If the Ricardian Doctrine DID apply to the USA, the effect of these tax
cuts on the USA's current account balance would be ___________.
a.
b.
c.
d.
e.
smaller negative
smaller positive
smaller negative
larger negative
larger positive
zero
larger
even smaller
even larger
even larger
13.
A shift to the right of the AD curve could be caused by:
(i)
(ii)
(iii)
(iv)
an increase in productivity (technology shock)
a tax decrease, if the Ricardian Doctrine is correct
a shift to the left of the money demand curve
a shift to the right of the desired investment curve
a.
b.
c.
d.
e.
(i) and (iii) are correct.
(ii) and (iv) are correct.
(ii) and (iii) are correct.
(i) and (iv) are correct.
(iii) and (iv) are correct.
14.
In the Solow growth model, dynamic inconsistency is inefficient because:
a.
the capital depreciation rate is higher than the savings rate in the steady-state.
b.
households can increase both current and future consumption by reducing the
share of income that is saved.
c.
capital per worker is rising faster than the population growth rate.
d.
a reduction of the population growth rate would allow for higher current
consumption and higher future consumption.
e.
none of the above.
–6–
15.
If there is no long-run trend in interest rates, then the money market equilibrium
equation says (after some calculus has been applied to it) that inflation will be equal to
zero if:
a.
the rate of money growth is equal to the real interest rate.
b.
the rate of money growth is equal to the elasticity of money demand with respect
to real income.
c.
the rate of money growth is equal to the growth rate of nominal GDP time the
elasticity of money supply with respect to output.
d.
the rate of money growth is equal to zero.
e.
none of the above.
16.
The problem with accepting a production or technology shock model of business
cycle behavior is that such models generally predict that:
a.
b.
c.
d.
e.
stock prices should be counter-cyclical instead of procyclical.
consumption spending should be a lagging variable instead of coincident.
labor productivity should be counter-cyclical instead of procyclical.
investment spending should be counter-cyclical instead of procyclical.
none of the above.
17.
Suppose firms are unable to keep their inventories at their desired levels due to
strong demand for their goods. It must also be true that:
a.
b.
c.
d.
e.
the labor market is not in equilibrium.
the economy is operating at a point to the left of the LM curve.
the economy is operating at a point to the left of the IS curve.
the economy is operating at a point to the right of the FE line.
none of the above.
18.
In the FE-IS-LM model (assuming markets always clear), which of the following
statements about the effects of an increase in government spending will be true?
(i)
The IS curve will shift to the right.
(ii)
The increase in government spending will crowd out an equal amount of other
types of spending.
(iii) The price level will rise.
(iv)
The change in government spending will be neutral.
a.
b.
c.
d.
e.
only (ii) and (iii) are correct.
only (i), (ii), and (iii) are correct.
only (i) and (iii) are correct.
all of the statements are correct.
only (i) is correct.
19.
The relationship between money growth and output changes during Christmas
shopping season can be explained using the _________ theory. The relationship between
–7–
money growth and output changes following gold discoveries when countries used the
gold standard can be explained using the ________ theory.
a.
b.
c.
d.
e.
monetary neutrality
reverse causation
Lucas misperceptions
Lucas misperceptions
none of the above.
reverse causation
monetary neutrality
monetary neutrality
reverse causation
20.
If the economy is operating to the left of the LM line, the ___________ market is
not in equilibrium and there is __________ .
a.
b.
c.
d.
e.
asset
labor
asset
goods
labor
excess demand for money
involuntary unemployment
excess demand for non-monetary assets
excess supply of goods
excess demand for labor
Part III (1 point)
St. Petersburg, Johannesburg, Washington, Santiago, Blagoevgrad. Many of the world's
great cities are named after historical people. Can you name a European country whose
capital city is named after a historical (not mythological) person, who was not from the
country whose capital is named after him?
–8–