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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? –1– 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.) –2– 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 –3– 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. –4– 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 –5– 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 sf(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 + aKdK/K + aNdN/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–