Download Midterm #2

ECO 302
Spring 2009
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.
1. China has been a poor country, but is becoming a rich country. Using the Solow model,
show why it is reasonable (and not surprising) that China’s output per person has been growing
faster than the USA’s output per person.
2. Economist Paul Krugman once observed that the “growth accounting” analysis of the East
Asian (Japan, South Korea, Malaysia, etc) countries showed that most of the growth was
explained by dK/K and dN/N, not dA/A. Why did this suggest that the countries’ growth would
slow down?
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3.
Suppose a country has n =0.02, d = 0.08, s = 0.10, and y = 0.4k(1/2). (Solow model).
a.
Find the steady-state value of k.
b.
find the steady-state value of y.
c.
Suppose the country wants to double the steady-state value of y by increasing k. What
would be the new steady-state value of k?
d.
What new value of s would be needed to reach this new steady-state value of k?
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Instructions: Select the one best answer for each of the following questions. Record your final
choice CLEARLY next to the questions.
1.
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 zero.
b.
the rate of money growth is equal to the growth rate of real income times the
elasticity of money demand with respect to real income.
c.
the rate of money growth is equal to the elasticity of money demand with respect
to real income.
d.
the rate of money growth is equal to the growth rate of nominal GDP time the
elasticity of money supply with respect to output.
e.
none of the above.
2.
If the velocity of money is unstable, then _____ is unstable, and _____ is unstable.
a.
b.
c.
d.
e.
W/P
desired national savings
the money demand function
the LM curve
the MS curve
the FE line
the IS curve
the LM curve
the AS curve
the IS curve
3.
Which business cycle facts support the view that business cycles are caused by
supply shocks?
(i)
(ii)
(iii)
average labor productivity is pro-cyclical
money supply growth is leading and pro-cyclical
government expenditure is pro-cyclical
a.
b.
c.
d.
e.
both (ii) and (iii) are true.
(i), (ii), and (iii) are all true.
only (i) is true.
only (ii) is true.
only (iii) is true.
4. Economists studying business cycles seek intellectual enlightenment by understanding the
causes of these cycles. Therefore they are most interested in ____ variables. Business leaders –
seeking only grubby personal gain – are interested only in profits and are interested in ____
variables.
a.
b.
c.
d.
e.
pro-cyclical
lagging
leading
coincident
leading
counter-cyclical
leading
leading
lagging
lagging
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5.
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)
(ii)
(iii)
(iv)
The IS curve will shift to the right.
The increase in government spending will increase desired national saving.
The price level will rise.
The change in government spending will be neutral.
a.
b.
c.
d.
e.
only (i) is correct.
only (i), (ii), and (iii) are correct.
only (i) and (iii) are correct.
only (ii) and (iii) are correct.
none of the above.
6. Suppose an economy features “neutrality of money’. After all variables adjust, an increase
in the money supply would be shown as a ________ in the FE-IS-LM diagram and a ______ in
the AS-AD diagram.
a.
b.
c.
d.
e.
shift to the right of the IS curve
shift to the right of the FE line
shift to the left of the LM curve
shift to the right of the LM curve
no change to any curve
shift to the right of the AD curve
shift to the right of the AS curve
shift to the left of the AD curve
shift to the left of the AD curve
shift to the right of the AD curve
7.
Suppose in the neo-classical (Solow) growth model, Country A and Country B
share the same technology, same depreciation rate of capital, same savings rate, and same
population growth rate. Country A has a higher initial capital-labor ratio than Country B.
Which is also true?
a.
Country A will have a lower growth rate of output/worker.
b.
Country A will have a higher initial growth rate of consumption per worker.
c.
Country B will have more depreciation per worker than Country A.
d.
Country B’s output per worker will be less than that of Country A, but total output
will be higher.
e.
Country A will end up at a higher steady-state capital/worker ratio.
8.
The real business cycle model assumes that beneficial “shocks” to the aggregate
production function causes business cycle expansions. If this is true, then ____ should be
pro-cyclical, which is ______ with the actual facts.
a.
b.
c.
d.
e.
labor force participation
inflation
average labor productivity
money supply growth
government spending
inconsistent
consistent
consistent
inconsistent
inconsistent
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9.
Which of the following would be measured as “total factor productivity growth”
in the growth accounting framework?
(i)
improvement in production efficiency caused by more efficient legal and
regulatory environment for business
(ii)
unmeasured quality improvements in capital that increase productivity
(iii) installation of new capital equipment
a.
b.
c.
d.
e.
only (i).
both (i) and (ii).
both (ii) and (iii).
both (i) and (iii).
(i), (ii), and (iii).
10.
A shift to the right of the IS curve could be caused by:
a.
b.
c.
d.
e.
a supply shock causing Y to fall.
a change in interest rates, causing households to increase their desired savings.
a tax cut that makes investment more profitable.
an increase in the money supply.
a shift of the labor supply curve to the right, causing Y to rise.
11. A decrease in the velocity of money would cause:
a.
b.
c.
d.
e.
a shift to the left of the LM curve.
a shift to the right of the MS/P line.
a shift to the right of the IS curve.
a shift to the left of the FE line.
none of the above.
12.
When the growth accounting method is applied to US economic data for the
period of 1948 – 1973, productivity growth (or “total factor productivity growth”) was
1.53 % per year on average. During the years 1973-1982, productivity growth was -0.27
percent per year on average. The data strongly support the theory that the slowdown was
caused by:
a.
b.
c.
d.
e.
the rise in the price of oil caused by OPEC.
stricter environmental regulation.
a decline in the quality of education.
increasing prevalence of drug use.
nobody knows.
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13. According to the Lucas Misperceptions Model, changes in output can be caused by
increases in the money supply, as long as the increases in the money supply are:
a.
b.
c.
d.
e.
procyclical.
offset by decreases in velocity.
big enough to raise the price level.
matched by higher wages.
unexpected.
14. In the neoclassical (Solow) growth model, if a country’s savings rate s is less than the
population growth rate n, then:
a.
b.
c.
d.
e.
the country’s capital-labor ratio must be above the steady-state level.
output will fall over time.
the marginal product of capital will be negative.
the depreciation rate of capital d must be negative.
none of the above.
15. If the interest rate is above the level at which Ms/P is equal to L(Y, r), then there is ______
and the economy is _________.
a.
b.
c.
d.
e.
excess supply of money, to the right of the LM curve.
excess demand for money; to the left of the IS curve.
excess supply of money; to the left of the LM curve.
excess demand for money, to the right of the IS curve.
none of the above.
16. Suppose the IS curve intersects the LM curve at a point to the right of the FE line. In the
market-clearing model, a general equilibrium can always be attained by:
(i) a fall in the real interest rate, which shifts the IS curve to the left, to the point where the LM
and FE lines meet.
(ii) a rise in the price level, which shifts the LM curve to left, to the point where the IS and FE
lines meet.
(iii) a rise in the real wage, which shifts the FE line to the left, to the point where the IS and LM
lines meet.
a.
b.
c.
d.
e.
only (i) is true.
only (ii) is true.
only (iii) is true.
both (i) and (ii) are true.
none of the above.
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17. In order for “Reverse Causation” to explain why output expanded in the gold standard era
following major gold discoveries, we would have to conclude that:
a.
b.
c.
d.
e.
the discovery of gold caused businesses to invest more in inventory.
a decrease in average labor productivity caused the discovery of gold.
the economic expansion that was about to occur caused somebody to discover the gold.
the MS growth caused the gold discovery.
the discovery of gold caused the velocity of money to fall.
18. If the economy is operating to the right of the FE line, then the ____ market is not in
equilibrium and there is excess _____ .
a.
b.
c.
d.
e.
capital
asset
labor
product
labor
demand for capital
supply of money
demand for labor
supply of products
supply of labor
19. The aggregate demand curve describes the equilibrium conditions from the _____
market(s), while the aggregate supply curve describes the equilibrium conditions from the
_______ market(s).
a.
b.
c.
d.
e.
labor and product
labor
product
asset
product and asset
20.
Which variables are leading?
(i)
(ii)
(iii)
stock prices
money growth
inventory investment
a.
b.
c.
d.
e.
only (iii) is true.
only (i) is true.
only (i) and (ii) are true.
only (i) and (iii) are true.
(i), (ii), and (iii) are all true.
asset
product and asset
asset and labor
product and labor
labor
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Extra Credit: (1 point)
The first shape below can be divided into two identically-shaped parts by cutting along
the dashed line.
The second shape can also be divided into two identically-shaped parts with a single cut.
Show how.
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