Download Write `T` if the statement is true and

Economics 304
Fall 2000
Midterm Exam n
PART I: TRUE/FALSE (3.5 pts. each). Write 'T' if the statement is true and 'F' if the statement is false.
1) In the Solow model, if productivity doesn't change, the economy must eventually reach a steady state.
2) The Golden Rule capital-labor ratio is the level of the capital-labor ratio that, in the steady state, maximizes
output per worker.
3) Money's primary role in the economy comesfrom the benefits of lowering transactions costs and allowing
specialization. This function of money is called unit of account.
4) People keep currency in their pockets when bank deposits pay interest becausebank deposits lose value due to
inflation.
5) Money demand is given by Md / P = 1,000+ .2Y -1,000i. Given that P = 200, Y = 2,000,and i = .10,nominal
money demand is equal to 1,300.
6) An economic variable that moves in the same direction as aggregate economic activity (up in expansions,
down in contractions) is called procyclical.
MULTIPLE CHOICE (4 pts. each). Choose the one alternative that best completes the statement or answers the question.
7) An economy has government purchases of 1,000.Desired national saving and desired investment are given by
Sd = 200 + 5,000r + .10Y -.20G
Id = 1,000- 4,000r
When the full-employment level of output equals 5,000,then the real interest rate that clears the goods market
will be
A) 1.11%.
B) 5.56%.
8) A temporary increase in government
C) 16.67%.
D) 21.11%.
purchases would cause
A) a leftward shift in the saving curve and a leftward shift in the investment
B) a leftward shift in the saving curve and a rightward
shift in the investment
curve.
curve.
C) a leftward shift in the saving curve, but no shift in the investment curve.
D) no shift in the saving curve, but a rightward
shift in the investment
curve.
9) Over the past year, productivity grew 1%, capital grew 0%, and labor grew 5%. If the elasticities of output with
respect to capital and labor are 0.4 and 0.6, respectively, how much did output grow?
A)l%
8)2%
C)3%
10) A decline in population growth will lead to a
in output per worker.
A) fall; fall
in the steady-state
B) fall; rise
C) rise; rise
1
D) 4%
capital-labor
ratio and a
D) rise; fall
11) In the textbook model of endogenous growth, long-run output growth would rise if there were either a
in the saving rate or a
in the depreciation rate.
A) rise; rise
B) rise; fall
C) fall; rise
D) fall; fall
12) Which 0£the £0l10wingis most likely to lead to an increase 0£ 1% in the nominal demand £or money?
A) an increase in real income 0£ 1/2%
B) a decreasein real income 0£ 1/2%
C) a decline 0£ 1% in the price level
D) an increase 0£ 1% in the price level
13) If the interest elasticity of money demand is -0.1, by what percent does money demand change if the nominal
interest rate rises from 2% to 3%?
A) -0.1%
B) 5%
C) 0%
D) -5%
14) Which of the following macroeconomic variables is procyclical and lags the business cycle?
A) business fixed investment
B) employment
C) stock prices
D) nominal interest rates
ESSAY. Write your answer in the space provided or on the other side of the paper.
1) (13 pts.) A country has the per-worker production function
yt = 5 ktO.5,
where yt is output per worker and kt is the capital-labor ratio. The depreciation rate is 0.2 and the population
growth rate is 0.05.The saving function is
St = 0.2Yt,
where St is total national saving and Yt is total output.
a. What is the steady-state value of the capital-labor ratio?
b. What is the steady-state value of consumption per worker?
2) (18 pts.) How would each of the following changesaffect the steady-state values of the capital-labor ratio,
output per worker, and consumption per worker? Use a diagram to show your answer.
a. A change in the composition of the capital stock raises the depreciation rate.
b. Government tax policies change to encourage a higher saving rate.
c. A supply shock reduces productivity sharply.
17) (16 pts.) Suppose velocity is constant at 3, real output is 6000,and the price level is 20.
1) Determine the real and nominal demand for money.
2) From this initial situation, the government increasesthe nominal money supply to 50,000.If velocity and
output remain unchanged, by how much will the price level increase?
BONUS
(5 pts.):
Md
Money demandfunction is
= 55 + 21 y -50(7t e + r) .Find the velocity ofmoney ifY = 1000,
p
'Y = 6%,
7te=4%.
Answer Key
Testname: EXAM2. TST
1) Answer: TRUE
2) Answer: FALSE
3) Answer: FALSE
4) Answer: FALSE
5) Answer: FALSE
6) Answer: TRUE
7) Answer: B
8) Answer: C
9) Answer: D
10) Answer: C
11) Answer: B
12) Answer: D
13) Answer: D
14) Answer: D
1) Answer: a. sJ(k)= (n + d)k, so 0.2 x 5kO.5= 0.25 k; or kO.5= 4, so k = 16
b. c = (1- s)y = 0.8y = 16
2) Answer: a. The rise in d reduces the capital-labor ratio, as well as output per worker and consumption per
worker.
b. The rise in s raises the capital-labor ratio, as well as output per worker and consumption per worker .
c. The decline in productivity shifts the production function down, reducing the capital-labor ratio, as
well as output per worker and consumption per worker.
3) Answer: 1) Nominal: 40,000;Real: 2,000
2) 25%
V= 1.82