Download Dr. Yetkiner ECON 202

Izmir University of Economics
Department of Economics
I. Hakan Yetkiner
http://www.hakanyetkiner.com
ECON 202
MACROECONOMIC THEORY
Dr. Yetkiner
5 April 2013
Midterm Exam I--KEY
1. (15 Points) Calculate the GDP of KingLand, a fictitious economy whose numbers are
listed below. Do so using all three methods (value added approach, income approach, and
expenditure approach) and do not forget to indicate your calculations clearly.
KingLand, year 2012
Farmer King, (private firm)
Corn Sold to Govt
Corn Sold to Singapore
Corn Sold to KingFoodCo, Inc
Payment to workers
Tax on profit
Pesticides imported for Corn
Production
Govt
Total Tax Income
Payment to workers
Purchase of Corn
Purchase of Corn Flakes
Unemployment benefits Paid
KingFoodCo, Inc
Corn Flakes Sold to Consumers
Corn Flakes Sold to Govt
Corn bought from Farmer King
Salt bought from Egypt for Corn Flakes
Payment to workers
Tax on Profit
Corn Inventory
Beginning of Year
End of Year
$30
$25
$20
$40
$25
$5
Households
Taxes on wage income
Unemployment benefits Received
Corn Flakes purchased
$65
$15
$30
$20
$5
VA App:
Farmer Jones
(30+25+20-5) +
FoodCo
(100+20-[20+5]-10
Exp App:
C
I
G
100 + (-5) + 65 +
(X-M)
(25-15)
Inc. App.:
Wage Income
(40+20+15) +
Profits
(5+35) +
75
120
-70
-85
Govt.
15
$100
$20
$20
$10
$20
$30
$10
$5
$10
$5
$100
= 170
= 170
Grading: 5 points each
1
TA
(25+30)
= 170
Izmir University of Economics
Department of Economics
I. Hakan Yetkiner
http://www.hakanyetkiner.com
2. (15 Points, 5 points each) The country of Old Jersey produces milk and butter, and it has
published the following macroeconomic data, where quantities are in gallons and prices are
dollars per gallon.
a) Calculate the percentage change in nominal GDP between Year 1 and Year 2.
b) Calculate the percentage change in real GDP (take Year 2 as the base year) between
Year 1 and Year 2.
c) Compute the GDP deflator for year 1 and year 2 and compute the rate of inflation
from year 1 to year 2.
Nominal GDP Y1= 1000+2000=$3000
Nominal GDP Y2= 2700+6000=$8700
Percentage change: 190%
Real GDP Y1= 1500+4000=$5500
Real GDP Y2= 2700+6000=$8700
Percentage change: 58.18%
GDP deflator Y1: 3000/5500=54.54
GDP deflator Y2: 8700/8700=100
Inflation: 83%
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Izmir University of Economics
Department of Economics
I. Hakan Yetkiner
http://www.hakanyetkiner.com
3. (20 Points) Suppose the economy of Hope is represented by the following equations:
AE=C+I+G
C = 500 + 0.5YD
YD =Y–T
T=600
I=300 G=2000
a) (5 points) Given the above variables, calculate the equilibrium level of output.
b) (5 points) Graphically illustrate the equilibrium level of output for this economy.
c) (5 points) Now, assume that taxes increase from 600 to 700. What is the new
equilibrium level of output? How much does income change as a result of this event?
What is the multiplier for this economy?
d) (5 points) (Graphically illustrate the effects of this tax increase on the demand line
and Y. Clearly indicate in your graph the initial and final equilibrium levels of
output.
a) Y=2800+0.5(Y-600)
0.5Y=2500
Y*=5000 Multiplier is (1/0.5)=2
c) ∆Y=2*(-50)=-100
Y**=4900
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Izmir University of Economics
Department of Economics
I. Hakan Yetkiner
http://www.hakanyetkiner.com
4. (15 Points) Use the IS-LM model to answer this question. Suppose there is a
simultaneous increase in government spending and reduction in the money supply (assume
that GDP remains intact after all changes). Explain what effect this particular policy mix
will have on investment and consumption. Do not forget to support your answer by a
figure.
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Izmir University of Economics
Department of Economics
I. Hakan Yetkiner
http://www.hakanyetkiner.com
5. (30 Points) Consider the following IS-LM model:
C  400  0.75YD ; T  400  0.1 Y ; I  3001500i ; G  600 ; P  0.5
M d  3  Y  12000  i (real money demand); M s  3000 (nominal money supply). If you
1000 0.325
3
6000
solve this model, you find that IS equation is i 
is

Y and i 
Y
1500 1500
12000
12000
LM equation. And equilibrium values are Y*  2500 and i*  0.125 (=12.5%).
(a) (7 points) Suppose now that government spending is increased by 100 (from 600 to
700). What is the government spending multiplier? Calculate.
(b) (8 points) Solve for new Y, i, C, and I and describe in words the effects of an
expansionary fiscal policy.
(c) (7 points) Go back to original question. Suppose now that there is a policy mix and
that government spending is increased by 100 (from 600 to 700) and Nominal MS
from 3000 to 3500. What is the mixed policy multiplier? Calculate.
(d) (8 points) Solve for new Y, i, C, and I and describe in words the effects of an
expansionary fiscal policy.
One may find IS equation from income-expenditure equality.
Y  400  0.75Y - 400 - 0.1Y 300 - 1500i  700 
Y  1100  0.675Y - 1500i 
0.325Y  1100 -1500i 
i
1100 0.325

Y
1500 1500
This is IS equation
LM equation can be derived from the money market.
6000  3  Y 12000i 
12000i  3  Y  6000 
i
3
6000
Y
This is LM equation
12000
12000
Equilibrium income and interest rate can be found via LM and IS equations.
1100 0.325
3
6000

Y
Y

1500 1500
12000
12000
1100 6000
3
0.325


Y
Y
1500 12000 12000
1500
14800  5.6  Y 
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Izmir University of Economics
Department of Economics
I. Hakan Yetkiner
http://www.hakanyetkiner.com
Y*  2642.85
i *  0.1607 (=16.07%)
Hence government spending multiplier is  (2642.85  2500) /(100)  1.4285
(c) Mixed policy multiplier:
The NEW IS equation is:
i
1100 0.325

Y
1500 1500
This is new IS equation
The NEW LM equation is:
i
3
7000
This is new LM equation
Y12000 12000
Equilibrium GDP and i are follows:
1100 0.325
3
7000

Y
Y

1500 1500
12000
12000
1100 7000
3
0.325


Y
Y
1500 12000 12000
1500
8800  7000
5.6

Y
12000
12000
Y *  2821.42
i*  0.1220
The mixed policy multiplier is  (2821.42  2500) /(100  1000)  0.2918
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Izmir University of Economics
Department of Economics
I. Hakan Yetkiner
http://www.hakanyetkiner.com
6. (5 Points) Indicate for each of the following transactions whether they raise GDP or not.
If your answer is YES, which component of GDP increases?
a)
b)
c)
d)
e)
The government gives you an unemployment benefit.
You pay a broker who helped you with your purchase of bonds and stocks.
You buy a DVD from a DVD pirate.
You buy a new car.
You sell your home-made cakes to a friend.
a) NO.
b) YES.
c) NO.
d) YES.
e) NO.
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