Download ECN 101 – Intermediate Macroeconomics Spring 2004 Professor

Professor Òscar Jordà
April 23, 2004
ECN 101 – Intermediate Macroeconomics
Spring 2004
MIDTERM 1
Name ________________________________________Student ID ______________
Instructions:
The exam consists of three parts: (1) 10 multiple choice questions; (2) two problems; and (3) one graphical question.
Please answer all questions in the space provided in this exam. You may use scratch paper but do not turn it in as it
will not be graded. Please budget your time appropriately. Good Luck!
Multiple Choice
Place your multiple-choice answers here
1. B
2. C
3. B
4. B
5. C
6. B
7. C
8. C
9. A
10. C
1. All of the following are a stock except:
A) a consumer's wealth.
B) the government budget deficit.
C) the number of unemployed people.
D) the amount of capital in the economy.
2. Assume that a rancher sells McDonald's a quarter-pound of meat for $1 and that McDonald's sells you a
hamburger made from that meat for $2. In this case, the value included in GDP should be:
A) $0.50.
B) $1.
C) $2.
D) $3.
3. Imputed values included in GDP are the:
A) market prices of goods and services.
B) estimated value of goods and services that are not sold in the marketplace.
C) price of goods and services measured in constant prices.
D) price of goods and services measured in current prices.
4. The production function feature called "constant returns to scale" means that if we:
A) multiply capital by z1 and labor by z2, we multiply output by z3.
B) increase capital and labor by 10 percent each, we increase output by 10 percent.
C) increase capital and labor by 5 percent each, we increase output by 10 percent.
D) increase capital by 10 percent and increase labor by 5 percent, we increase output by 7.5 percent.
5. A competitive firm chooses the:
A) price at which to sell the product produced.
B) wage to pay labor.
C) quantity of labor and capital to employ.
D) rental price to pay capital.
Page 1
Professor Òscar Jordà
April 23, 2004
ECN 101 – Intermediate Macroeconomics
Spring 2004
6. A competitive, profit-maximizing firm hires labor until the:
A) marginal product of labor equals the wage.
B) price of output multiplied by the marginal product of labor equals the wage.
C) real wage equals the real rental price of capital.
D) wage equals the rental price of capital.
7. Exhibit: Output, Consumption, and Investment
In this graph, when the capital-labor ratio is OA, AB represents:
A) investment per worker, and AC represents consumption per worker.
B) consumption per worker, and AC represents investment per worker.
C) investment per worker, and BC represents consumption per worker.
D) consumption per worker, and BC represents investment per worker.
8. If capital lasts an average of 25 years, the depreciation rate is ________ percent per year.
A) 25
B) 5
C) 4
D) 2.5
9. In the Solow growth model, if investment exceeds depreciation, the capital stock will ______ and output
will ______ until the steady state is attained.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
10. If the per-worker production function is given by y = k1/2, the saving rate (s) is 0.2, and the depreciation
rate is 0.1, then the steady-state ratio of capital to labor is:
A) 1.
B) 2.
C) 4.
D) 9.
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Professor Òscar Jordà
April 23, 2004
ECN 101 – Intermediate Macroeconomics
Spring 2004
Analytical Questions (Please answer in the space provided)
11. Assume that a country's production function is Y = K1/2L1/2.
A) What is the per-worker production function y = f(k)?
Solution:
Y K 1 / 2 L1 / 2 K 1 / 2
=
= 1/ 2 = k 1/ 2
L
L
L
B) Assume that the country possesses 40,000 units of capital and 10,000 units of labor. What is Y? What is
labor productivity computed from the per-worker production function? Is this value the same as labor
productivity computed from the original production function?
Solution:
Y = ( 40,000)1 / 2 (10,000)1 / 2 = 20,000
1/ 2
⎛ 40,000 ⎞
y=⎜
⎟ =2
⎝ 10,000 ⎠
Y 20,000
=
=2
L 10,000
C) Assume that 10 percent of capital depreciates each year. What gross saving rate is necessary to make the
given capital-labor ratio of 2, the steady-state capital-labor ratio? (Hint: In a steady state with no population
growth or technological change, the saving rate multiplied by per-worker output must equal the
depreciation rate multiplied by the capital-labor ratio.)
Solution:
sf ( k ) = δk
s=
δk
f (k )
=
0 .1 × 4
= 0 .2
2
D) If the saving rate equals the steady-state level, what is consumption per worker?
Solution:
(1 − s ) y = c
(1 − 0.2) × 2 = 1.6
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Professor Òscar Jordà
April 23, 2004
ECN 101 – Intermediate Macroeconomics
Spring 2004
12.Assume that GDP (Y) is 6,000. Consumption (C) is given by the equation
C = 600 + 0.6(Y – T). Investment (I) is given by the equation I = 2,000 – 100r, where r is the real rate of
interest in percent. Taxes (T) are 500 and government spending (G) is also 500.
A) What are the equilibrium values of C, I, and r?
Solution:
C = 600 + 0.6 × (6,000 − 500) = 3,900
Y = C + I + G ⇒ I = Y − C − G ⇒ I = 6,000 − 3,900 − 500 = 1,600
I = 2,000 − 100r ⇒ 1,600 = 2,000 − 100r ⇒ r = 4%
B) What are the values of private saving, public saving, and national saving?
Solution
Sn = S p + S g
S n = I = 1,600
S g = T − G = 500 − 500 = 0
S p = S n − S g = 1,600
C) If government spending rises to 1,000, what are the new equilibrium values of C, I, and r?
Solution:
C = 3,900
G = 1,000
I = 6,000 − 3,900 − 1,000 = 1,100
1,100 = 2,000 − 100r ⇒ r = 9%
D) What are the new equilibrium values of private saving, public saving, and national saving?
Solution:
Sn = S p + S g
S n = I = 1,100
S g = T − G = 500 − 1,000 = −500
S p = S n − S g = 1,600
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Professor Òscar Jordà
April 23, 2004
ECN 101 – Intermediate Macroeconomics
Spring 2004
Graphical Question:
16.0
14.0
12.0
10.0
In percent
8.0
6.0
4.0
2.0
0.0
Jan-48
Jan-53
Jan-58
Jan-63
Jan-68
Jan-73
Jan-78
Jan-83
Jan-88
Jan-93
Jan-98
Jan-03
-2.0
-4.0
Date
A) Identify what macroeconomic variable is represented by the solid line Unemployment Rate.
B) Identify what macroeconomic variable is represented by the line with squares Inflation Rate
C) Compare the business cycle behavior of these variables in the 70’s with their behavior up to the 60’s. Briefly
comment on the differences you observe and the implications that these observations have for the way policy should
be conducted in each period.
Answer:
During the 70’s inflation peaks before unemployment peaks, whereas in the earlier period recessions were periods
with lower inflation. Therefore, it would seem that tight monetary policy used to bring down inflation may have
caused recessions. In the earlier period, there seems to have been a low cost (in terms of inflation) in stimulating the
economy since inflation went down along with economic activity (measured by unemployment).
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Professor Òscar Jordà
April 23, 2004
ECN 101 – Intermediate Macroeconomics
Spring 2004
Answer Key -- midterm 1 Spring 2004 b
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
B
C
B
B
C
B
C
C
A
C
A) y = k1/2.
B) Y = 20,000; Y/L = 2; y = 2; yes
C) s = 0.2.
D) Consumption per worker will be 1.6.
12. A) 3,900; 1,600; 4 percent
B) 1,600; 0; 1,600
C) 3,900; 1,100; 9 percent
D) 1,600; –500; 1,100
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