Download Midterm 2

ECO 302
Spring 2012
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. Write out the growth accounting equation. Describe how the equation was used to try to
determine what may have caused the growth slowdown in the United States from 3.7 percent per
year in 1948-1973 to 1.55 percent per year from 1973-1982. (A similar slowdown occurred in
most other developed countries at the same time.)
2. Suppose a country’s workers consist initially of 100 men. Suppose also that women work
twice as hard as men and produce twice as much output per person. This fact goes unnoticed by
government economic statisticians (all of whom are men).
In the next time period, the working population consists of 100 men plus 10 women equals 110
workers, so the growth rate of the number of workers is recorded as 10%. Output rises from 100
in the initial period to 120 in the new period. Capital remains the same. How would the growth
accounting equation “explain” the rise in output from 100 to 120? Why does the growth equation
explain the growth in this way?
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3. Using the diagram from the neo-classical (Solow) growth model, show the situation of a
country that has reached its steady-state capital/worker ratio. Explain in words why
capital/worker remains constant over time when the country is in the steady-state.
4. For a country in the steady-state, describe on the graph and in words what happens if there
is a change in the aggregate production function resulting from the discovery of a new (better)
technology.
5. The neoclassical growth model assumes that a country finances its accumulation of capital
through its own savings. Suppose there is an international capital market in which countries can
lend at the world real interest rate rw if the country’s marginal product of capital is less than rw,
or borrow if the country’s marginal product of capital is greater than rw. How do you suppose
this would affect the results of the model? (Use the back of the page if necessary.)
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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.
An increase in consumers’ expected future income shifts the desired national
savings curve to the _____, and the IS curve to the _____.
a.
b.
c.
d.
e.
left
right
right left
right right
left
left
none of the above.
2. An increase in the money supply (holding the price level constant) would cause the LM
curve to shift to the _____. An increase in the price level (holding the money supply constant)
would shift the LM curve to the _____. If the economy features neutrality of money, the
combined effect on the LM curve is _____.
a.
b.
c.
d.
e.
left
right
left
right
left
right
left
right
left
right
a shift to the right
a shift to the left
a shift to the left
no change
no change
3.
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
initial capital/worker ratio. Country A has a higher population growth rate than Country
B. Which is also true?
a.
Country A will end up at a higher steady-state capital/worker ratio.
b.
Country A will have a lower growth rate of output/worker.
c.
Country A will have higher initial consumption per worker.
d.
Country B will have more depreciation per worker than Country A.
e.
Country B’s output per worker will always approach but never catch up to
Country A’s output per worker.
4.
The product market equilibrium in a large open economy (LOE) is in equlibrium
at where the LOE’s desired national savings is greater than its desired investment. If the
LOE wants its current account balance to be zero, it should _____ its national savings,
which will cause the world real interest rate to _____.
a.
b.
c.
d.
e.
increase
decrease
decrease
increase
none of the above.
increase
decrease
increase
decrease
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5.
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)
improving the collection of GDP data so that less of the country’s output goes
unrecorded
(iii) investments in new capital equipment
(iv)
growth in the labor force participation rate of women
a.
b.
c.
d.
e.
both (i) and (iii).
both (i) and (iv).
both (i) and (ii).
both (ii) and (iii).
(i), (ii), and (iii).
6.
A shift to the right of the IS curve could be caused by:
a.
b.
c.
d.
e.
a shift of the labor supply curve to the right, causing Y to rise.
a supply shock causing Y to fall.
a change in interest rates, causing households to increase their desired savings.
an increase in taxes that induces consumers to reduce their consumption spending.
none of the above.
7
A shift to the right of the LM curve could be caused by:
a.
a rise in the price level.
b. an increase in willingness to hold non-monetary assets.
c.
a rise in interest rates.
d. an increase in desired investment spending by firms caused by new technological
improvements.
e.
none of the above.
8. In the neoclassical (Solow) growth model, if a country’s income and output per worker
equal 100, the country’s capital per worker equals 100, the country saves 25% of its income, its
population growth rate is 5%, and 15% of its capital wears out each year, then:
a.
b.
c.
d.
e.
output will rise by approximately 5% per year.
capital per worker will rise by approximately 5% per year.
consumption per worker is approximately 90% of income per worker.
the economy is in the steady-state.
the economy is dynamically inefficient.
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9. If the interest rate is below 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 left of the LM curve.
excess demand for money, to the right of the LM curve.
excess supply of money, to the right of the IS curve.
excess demand for money; to the left of the IS curve.
none of the above.
10.
Which variables are leading?
(i)
(ii)
(iii)
average labor productivity
residential investment
money supply
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.
none of the above.
11. In the market-clearing model, if the three lines (FE-IS-LM) do not intersect at the same
point, 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) an adjustment of the price level, which shifts the LM curve 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.
both (i) and (ii) are true.
only (i) is true.
only (ii) is true.
only (iii) is true.
none of the above.
12. The aggregate supply curve describes the equilibrium conditions from the _____ market(s),
while the aggregate demand curve describes the equilibrium conditions from the _______
market(s).
a.
b.
c.
d.
e.
product and asset
labor and product
labor
product
asset
labor
asset
product and asset
asset and labor
product and labor
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Output/worker
savings/worker
Capital /worker
13.
Suppose a country has a capital per worker ratio of k0 that is less than the level
where the sf(k) line crosses the (n+d)k line. For this country, output per worker will ___
over time because:
a.
grow
b.
shrink
c.
grow
constant.
d.
grow
e.
shrink
population growth is greater than depreciation.
savings is greater than investment.
investment is greater than that needed to keep capital per worker
consumption is greater than investment
depreciation of capital is greater than investment.
14.
In the graph above, for the country with a capital per worker ratio of k0, the
amount of consumption per person can be seen as:
a.
b.
c.
d.
e.
the distance from point A to point D.
the distance from point B to point C.
the distance from point C to point D.
the distance from point A to point B.
the distance from point A to point C.
–6–
15.
Factors that would cause the desired national savings curve to shift to the left
include:
(i)
higher current income
(ii)
higher expected future income
(iii) higher real interest rate
a.
b.
c.
d.
e.
both (i) and (ii) are true.
both (ii) and (iii) are true.
only (i) is true.
only (ii) is true.
only (iii) is true.
16.
For a closed economy, the product market is in equilibrium only if _____ is equal
to _____.
a.
b.
c.
d.
e.
government expenditure
savings
the current account balance
money supply
desired national savings
taxes
investment
the capital account balance
money demand
desired investment
17.
In the growth accounting equation:
dY/Y = dA/A + aKdK/K + aNdN/N
Which of the terms is not directly observable, and must be inferred (guessed) by saying it
is whatever value makes the equation work?
a.
b.
c.
d.
e.
dY/Y
dA/A
dK/K
dN/N
aN
–7–
Real
interest
rate
S Nd
rw
Id
Savings, investment
18.
In the diagram above, a small, open economy has a desired national savings curve
that intersects its desired investment curve at the world’s real interest rate. If the
economy’s desired investment curve then shifts to the right, then:
a.
b.
c.
d.
e.
the world’s real interest rate will rise.
the small country’s interest rate will rise above the world’s real interest rate.
the country will run a current account deficit.
the country’s product market cannot be in equilibrium.
none of the above are correct.
19.
In the diagram above, if the country whose national savings and desired
investment are shown is a LARGE country instead of a SMALL country, then a shift to
the right of the desired investment curve would have a _____ effect on the country’s
current account balance and a _____ effect on the world’s real interest rate.
a.
b.
c.
d.
e.
smaller
smaller
smaller
bigger
bigger
smaller
bigger
bigger
none of the above.
–8–
Real
interest
rate
FE
LM
X
IS
Real output
20. Suppose the economy in the diagram above is operating at point X. In this case, there is
excess ____ of labor, excess _____ of products, and excess ____ of money.
a.
b.
c.
d.
e.
supply
supply
demand
demand
demand
supply
supply
demand
none of the above.
supply
supply
demand
demand
Part III Time Wasting Extra Credit (1 point)
Show how the shape below can be divided into two identical shapes with a single (not
necessarily straight) cut.
–9–