Download Test 1 - Department of Economics

Department of Economics
University of Toronto
Prof. Gustavo Indart
October 18, 2013
ECO 209Y
MACROECONOMIC THEORY AND POLICY
Term Test #1
LAST NAME
FIRST NAME
STUDENT NUMBER
Indicate your section of the course:
Monday, 2-4 – L0101
Tuesday, 2-4 – L0201
Wednesday, 2-4 – L0301
Thursday, 2-4 – L0401
INSTRUCTIONS:
1. The total time for this test is 1 hour and 50 minutes.
2. Aids allowed: a simple, non-programmable calculator.
3. Use pen instead of pencil.
DO NOT WRITE IN THIS SPACE
Part I
/30
Part II
/20
TOTAL
Part III
1.
/10
2.
/10
3.
/10
/80
Page 1 of 12
PART I
(30 marks)
Instructions:
 Enter your answer to each question in the table below. Table cells left blank will receive a
zero mark.
 Each question is worth 2.5 marks. No deductions will be made for incorrect answers.
1
2
3
4
5
6
7
8
9
10
11
12
1. Consider an open economy without depreciation of the capital stock, without government
transfer payments, and where personal income tax is the only source of government
revenue. If GDP is $1000 billion, consumption is $650 billion, private savings is $150 billion,
government purchases is $220 billion, and net exports is -$50 billion, which of the following
is true in this economy?
A) Disposable income is $900.
B) Investment is $150.
C) The budget deficit is -$20.
D) Personal income tax is 250.
E) None of the above.
2. Justin buys a newly-built house on July 1, for which he pays $350,000. Knowing that the rent
for a similar house is $20,000 per year and that Justin previously lived rent-free with his
parents, what is the impact of this transaction on this year’s GDP?
A) Consumption rises by $10,000 and investment rises by $350,000.
B) Consumption rises by $350,000 and investment is unchanged.
C) Consumption rises by $20,000 and investment rises by $350,000.
D) Consumption is unchanged and investment rises by $350,000.
E) Consumption rises by $10,000 and investment is unchanged.
Use this space for rough work.
Page 2 of 12
3. Suppose that an economy produces only apples, bananas, and oranges, and that prices (in
dollars) and quantities (in millions of pounds) are as shown in the following table:
Good
Year 2011
Year 2012
Quantity
Price
Quantity
Price
Apples
20
$6
15
$5
Bananas
10
$8
15
$10
Oranges
5
$10
8
$12
Using the chain method of estimating real GDP growth, between 2011 and 2012 real GDP
increased by approximately
A) 16.0 percent.
B) 19.8 percent.
C) 23.5 percent.
D) 20.6 percent.
E) None of the above.
4. Consider an open economy in equilibrium where private savings equals private investment
and the government has a balanced budget. Given the above, which of the following is true?
[Note: The notation is as used in class.]
A) C + I + G > Y.
B) C + I + G < Y.
C) NX < 0.
D) X = Q.
E) None of the above is true.
5. Consider the AE model of an open economy as developed in class. Suppose that the
economy is initially in equilibrium and autonomous exports increase. All else equal, which of
the following will be true in the new equilibrium?
A) Government budget deficit will increase.
B) Imports will decrease.
C) Private investment will decrease.
D) Consumption will decrease.
E) Private savings will increase.
Use this space for rough work.
Page 3 of 12
Use the following data of a hypothetical economy to answer questions 6 and 7.
Consumption expenditures
Government debt
Government expenditure on goods and services
Net exports
Capital consumption allowance (depreciation)
Corporate profits before taxes
Indirect taxes minus subsidies
Government transfer payments
Net income from abroad
Corporate and personal income taxes
Gross investment
600
0
220
55
135
150
125
100
75
180
200
6.
Given the information in the table above, what is the level of net domestic income?
A) 950.
B) 815.
C) 1075.
D) 1150.
E) None of the above is correct.
7.
Given the information in the table above, what is the level of gross national product (GNP)?
A) 1075.
B) 850.
C) 975.
D) 1150.
E) None of the above is correct.
8.
In a model with income taxes, an increase in exogenous imports will
A) not affect the level of private saving.
B) increase overall aggregate expenditure.
C) increase the budget deficit.
D) increase the level of consumption.
E) decrease the trade deficit.
Use this space for rough work.
Page 4 of 12
9.
Consider a hypothetical open economy with a marginal propensity to import (m) equal to
0.15 and an aggregate expenditure multiplier (αAE) equal to 2.5. If the government of this
country were to close the economy, i.e., to forbid any imports or exports, the corresponding
aggregate expenditure multiplier (αAE) would then be
A) 4.00.
B) 2.35.
C) 2.65.
D) 3.00.
E) none of the above.
10. The Globe and Mail (Oct. 1, 2013) reported that the Bank of Canada was slashing its
growth forecast for the Canadian economy from an expansion of 3.8 percent in the third
quarter to a milder growth of only 2.0 percent. This less optimistic view was mainly the
result of
A) a reduction in consumption expenditure due to a loss of confidence.
B) poor export performance due to the economic weakness of Canada’s trading
partners.
C) a lack of growth in business fixed capital investment.
D) a decrease in government expenditure in line with fiscal deficit reduction targets.
E) both B) and C).
11. The ultimate objective of the so-called “starve the beast” theory is
A) to eliminate government deficits.
B) to reduce wasteful expenditures by the government.
C) to improve efficiency in the economy.
D) to minimize the size of the government.
E) none of the above.
12. According to the September monthly report of the U.S. Congressional Budget Office, the
U.S. federal deficit for the first 11 months of fiscal year 2012-2013 (October through
August) was $753-billion, which represented a massive $411-billion decrease over the
same period a year earlier. Which of the following might account for most of this 35 percent
decrease in the U.S. federal budget deficit?
A) A reduction in transfer payments due to significant increases in employment.
B) Substantial spending cuts as directed by Congress.
C) Greater government revenues as a result of increases in national income and
corporate profits.
D) Greater government revenues due to the expiration of the payroll tax cuts in January.
E) Both B) and C).
Use this space for rough work.
Page 5 of 12
PART II
(20 marks)
Consider the following model of a closed economy:
Desired consumption expenditure
C = 325 + 0.8YD – 10i
Desired investment expenditure
I = 100 – 15i + 0.08Y
Desired government purchases
G = 260
Government transfer payments
TR = 100
Taxes
TA = 50 + 0.1Y
Full-employment income
Yfe = 3200
a) As a function of Y and i, what is the equation for private saving (S) in this model? As a
function of Y, what is the equation for public saving (BS)? As a function of Y and i, what is
the equation for national saving (SN)? (3 marks)
Page 6 of 12
b) If equilibrium income (Y*) is 3000, what is the equilibrium rate of interest (i*) in this
economy? Show all your work. (2 marks)
c) What are the values of private saving (S), public saving (BS), national saving (SN), and
investment (I) at the equilibrium income of part b) above? Show all your work. (4 marks)
d) Suppose now that the central bank implements expansionary monetary policy and reduces
the rate of interest to 4 percent (i.e., i = 4). At Y = 3000, what will be the values of private
saving (S), national saving (SN), and desired investment (I) when i = 4? Show all your work.
(3 marks)
Page 7 of 12
e) At i = 4 and Y = 3000, is the economy in equilibrium? Why or why not? If not, how is
equilibrium to be restored? Briefly explain. (2 marks) If the economy is not in equilibrium at i
= 4 and Y = 3000, what will be the level of equilibrium income if the central bank keeps the
rate of interest constant at 4 percent? Show all your work. (2 marks)
f)
What are the values of private saving (S), public saving (BS), national saving (SN), and
investment (I) at the level of equilibrium income of part e) above? Show all your work. (4
marks)
Page 8 of 12
PART III
(30 marks)
Instructions: Answer the following three questions in the space provided. Each question is
worth 10 marks.
1. Critically comment on the following statement:
“A policy of greater government purchases and an unchanged budget surplus will
have no impact on the level of income.”
Show your answer algebraically and explain the economics. Consider the aggregate
expenditure model of a closed economy as developed in class, and assume that taxes are
independent of income (i.e., t = 0) and there are no transfer payments (i.e., TR = 0).
Page 9 of 12
2. Critically comment on the following statement:
“The simple expenditure multiplier would be smaller if desired investment
expenditure were an increasing function of the level of income.”
Show your answer algebraically and explain the economics. Consider the aggregate
expenditure model of a closed economy as developed in class.
Page 10 of 12
3. Critically comment on the following statement:
“Government deficits reduce business and consumer confidence and thus
governments should aim to keep a balanced budget at all times.”
Page 11 of 12
Use this space for rough work.
Page 12 of 12