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14.02 FINAL EXAM: PRINCIPLES OF MACROECONOMICS
BOOK ONE
STOP!! READ INSTRUCTIONS FIRST.
The exam is comprised of two (2) different parts. This means you will need to turn in
BOTH exam booklets at the end of the quiz.
All answers are to be written on the exam itself.
Sections I & II are in this first packet, and Section III is in the other packet.
PRINT AND SIGN YOUR NAME AND CIRCLE YOUR TA/SECTION ON BOTH
BOOKS.
Read all questions carefully and completely before beginning the exam. There are 9
pages including the cover page in this, the first, exam booklet, and 7 pages in the second
booklet – make sure you do them all.
Show your work on all questions in order to receive partial credit.
If your answer includes a graph, label all curves and axes clearly.
The quiz is worth a total of 110 points.
No notes, calculators, or books may be used during the exam.
You will have 3 hours to complete the exam. Good luck!
________________________________________________
STUDENT NAME – PRINT CLEARLY
________________________________________________
STUDENT SIGNATURE
By signing above, you are certifying that you will not discuss the exam with students
taking the conflict, and that you agree to abide by the MIT policies on academic honesty.
CIRCLE YOUR TA NAME/ SECTION TIME:
Mark Lewis – 10 AM
Mark Lewis – 11 AM
Samer Haj-Yehia – 9 AM
Samer Haj-Yehia – 11 AM
Samer Haj-Yehia – 12 PM
Samer Haj-Yehia – 1 PM
Alejandro Neut – 2 PM
Alejandro Neut – 3 PM
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SECTION I: TRUE or FALSE. Explain your answer in one or two sentences. (36
points, 2 points for each question)
1. As a rule of thumb, current conditions suggest that for every point that
unemployment is below the full employment level, inflation will increase by 0.5
percentage points per year.
2. Fiscal policy is more effective when consumers’ marginal propensity to consume
is higher.
3. It is possible that France, Germany and Japan all experience growth rates higher
than the US, yet the most important technical advances be made in the US.
4. In a traditional consumer spending regression, a high R2 means that high income
causes higher consumption.
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5. For a given change in annual income, consumption should increase more the more
permanent people believe the change to be.
6. According to the AD-AS model, tax cuts should lead to an increase in the price
level.
7. An expansionary fiscal policy will tend to reduce the trade deficit.
8. Under perfect capital mobility, when a country joins a system of fixed exchange
rates, it gives up the freedom to choose its interest rate.
9. Growth in the long run is driven entirely by how much capital a country
accumulates (saving rates minus depreciation).
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10. The Asian miracle (i.e. the very high average growth rates in East Asia during the
last few decades) is mainly due to high investment rates and adoption of foreign
technology.
11. The greater the sensitivity of investment and consumer demand to interest rates,
the more stimulative is a given increase in the money supply.
12. The LM curve slopes downward because at higher interest rates consumers save
more.
13. GNP is the sum of all transactions in the economy.
14. All else equal, firms' optimal levels of capital are higher when the interest rate is
higher.
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15. When a J-Curve situation exists, a depreciation of the US dollar relative to the yen
causes a prompt improvement in nominal US net exports, but a delayed, more
gradual improvement in real US net exports.
16. The higher the share of youth in the population, the lower the non-accelerating
inflation rate of unemployment.
17. The “supply side” economics of the Reagan presidency were targeted to increase
business investment by reducing the cost of capital through a more generous
monetary policy and a conservative fiscal policy.
18. Stocks tend to trade with higher current yields than bonds because debt holders
have the first claim on corporate assets in the event of business crises.
END OF SECTION I
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SECTION II: MULTIPLE CHOICE. Explain your choice in one or two sentences.
(14 points, 2 points per question.)
1. A low sensitivity of unemployment to output growth could be associated with:
a. pro-cyclical labor supply.
b. pro-cyclical productivity.
c. labor hoarding.
d. All of the above.
e. (a) and (b) only.
Why? Explain briefly:
2. When one year German bonds pay 7% and the one-year American T-bills pay
only 5%, then:
a. All Americans should save in German bonds.
b. The market expects 2% depreciation of the US dollar in one year.
c. The market expects 2% appreciation of the USD in one year.
d. None of the above.
Why? Explain briefly:
MULTIPLE CHOICE CONTINUED ON NEXT PAGE.
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Consider the following model economy for question 3:
C = c0 + c1 (Y-T)
I = d0 + d1Y – d2i
G = 50
T = 50
X = x1 ( Yforeign)
M = m0 + m1Y,
0< c1 < 1, 0< d1 < 1, 0< m1 < 1
3.
Changes in which of the following parameters change the fiscal multiplier?
a.
b.
c.
d.
e.
c1 only
c1 and c0
d1 and c1
d1, c1, and m1
d0 and c0
Why? Explain briefly:
4. Real growth in the United States was lower in late 1970s and 1980s than in the
1960s because
a. high R&D spending diverted business funds from productive plants and
equipment.
b. emerging competition from Europe and Japan increased imports, thereby
cutting GDP.
c. education achievements were diminishing due to school overcrowding.
d. capital formation of many types was exceptionally strong in the 1960s.
Why? Explain briefly:
MULTIPLE CHOICE CONTINUED ON NEXT PAGE.
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5. A large R2 value for a regression indicates that
a. we have large residuals.
b. there is a causal relationship between our dependent and explanatory
variables.
c. the model fits poorly.
d. a and c.
e. none of the above.
Why? Explain briefly:
NOTE THAT FOR QUESTIONS 6 & 7, THERE MAY BE MULTIPLE CORRECT
ANSWERS.
6. Which of the following reasons contribute to the LM Curve associating high
interest rates with high income levels? (Circle all appropriate causes.)
a.
b.
c.
d.
Higher interest rates discourage capital spending
Lower interest rates reduce the opportunity cost of cash
High income levels encourage more saving
The Fed reduces the money supply when output is high
Why? Explain briefly:
MULTIPLE CHOICE CONTINUED ON NEXT PAGE.
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7. Which of the following are reasonably true about the structure of US GDP?
(Circle if true.)
a. Wages are about 2/3 of national income.
b. Government spending at all levels combined is rarely greater than 25% of
GDP.
c. Exports and imports are each about a quarter of GDP.
d. “Investment” includes business plant construction but not housing
construction.
Why? Explain briefly:
END OF SECTION II.
END OF BOOK ONE – GO TO BOOK TWO.
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