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Spring 2009
ECO 302b
Exam 2
Professor Nilsen/Sullivan
Name: _____________________
Student ID #________________
Part I. Multiple-guess (each 2½ points) Select the best answer.
1. The per-worker production function in the Solow model assumes:
(a) constant returns to scale and increasing marginal productivity of capital.
(b) constant returns to scale and diminishing marginal productivity of capital.
(c) increasing returns to scale and diminishing marginal productivity of capital.
(d) decreasing returns to scale and diminishing marginal productivity of capital.
2. The Solow model demonstrates that:
(a) in the absence of productivity growth, economic growth will turn negative in the long
run.
(b) in the absence of productivity growth, economic growth will reach a steady state of
zero percapita growth in the long run.
(c) productivity growth must exceed the rate of growth in the population to avoid a steady
state in the long run.
(d) productivity growth will inevitably decline due to diminishing marginal productivity.
3. Which of the following changes would lead, according to the Solow model, to a higher
level of long-run output per worker?
(a) A lower level of capital per worker.
(b) An increase in the saving rate.
(c) A rise in the rate of population growth.
(d) A decrease in productivity.
4. An earthquake destroys a good portion of the capital stock. How would you expect this
to affect the capital-labor ratio in the long run? There would be:
(a) a rightward movement along the saving-per-worker curve and an increase in the
capital-labor ratio.
(b) no change in the long-run capital-labor ratio.
(c) a downward shift in the saving-per-worker curve and a decrease in the capital-labor
ratio.
(d) a leftward movement along the saving-per-worker curve and a decrease in the capitallabor ratio.
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5. An increase in the real interest rate would cause an increase in the real demand for
money:
(a) no matter what the change in expected inflation.
(b) if expected inflation fell by less than the rise in the real interest rate.
(c) if expected inflation fell by the same amount as the rise in the real interest rate.
(d) if expected inflation fell by more than the rise in the real interest rate.
6. A developing country does not have enough taxes to cover its expenditures and is
unable to borrow. This government would be most likely to cover its deficit by:
(a) purchasing government bonds from the public.
(b) selling government bonds to the public.
(c) selling newly issued government bonds directly to the central bank.
(d) buying newly issued government bonds directly from the central bank.
7. Suppose a new law imposes a tax on all trades of bonds and stock. What is the likely
effect on money demand?
(a) Money demand declines first, then rises when inflation increases.
(b) Money demand rises.
(c) The overall effect is ambiguous.
(d) Money demand declines.
8. If real income rises 4%, prices rise 1%, and nominal money demand rises 4%, what is
the income elasticity of real money demand?
(a) 3/4
(b) 4/5
(c) 5/6
(d) 1
9. If real GDP is $4 billion, the price level is 1.25, and the nominal money stock is $500
million, then velocity is:
(a) 0.1.
(b) 1.
(c) 10.
(d) 100.
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10. Suppose the real money demand function is:
Md/P =
+ 0.2 Y – 10,000 (r+ πe).
Assume M =
00, P =
= 0.03, and Y = 5000. The real interest rate that clears
the asset market is:
(a) 3%.
(b) 6%.
(c) 11%.
(d) 14%.
11. An economic variable that moves in the same direction as aggregate economic
activity (up in expansions, down in contractions) is called:
(a) procyclical.
(b) countercyclical.
(c) acyclical.
(d) a leading variable.
12. A variable that tends to move in advance of aggregate economic activity is called:
(a) a leading variable.
(b) a coincident variable.
(c) a lagging variable.
(d) an acyclical variable.
13. Which of the following macroeconomic variables is acyclical?
(a) Real interest rates
(b) Unemployment
(c) Money supply
(d) Consumption
14. A decline in the stock market, which makes consumers poorer, would cause:
(a) the aggregate demand curve to shift to the right.
(b) the aggregate demand curve to shift to the left.
(c) a movement down and to the right along the aggregate demand curve.
(d) a movement up and to the left along the aggregate demand curve.
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15. The FE line is vertical because the level of output at full employment doesn’t depend
on the:
(a) real wage rate.
(b) level of employment.
(c) marginal product of labor.
(d) real interest rate.
16. You have just read that the Federal Reserve has increased the money supply to avoid
a recession. For a given price level, you would expect the LM curve to:
(a) shift up and to the left as the real money supply falls.
(b) shift up and to the left as the real money supply rises.
(c) shift down and to the right as the real money supply falls.
(d) shift down and to the right as the real money supply rises.
17. What adjusts to restore general equilibrium after a shock to the economy?
(a) The LM curve
(b) The IS curve
(c) The FE line
(d) The labor supply curve
18. An increase in expected inflation causes the real interest rate to _____ and output to
_____ in the short run, before prices adjust to restore equilibrium.
(a) rise; rise
(b) rise; fall
(c) fall; rise
(d) fall; fall
19. Suppose the intersection of the IS and LM curves is to the left of the FE line. A
decrease in the price level would most likely eliminate a disequilibrium among the asset,
labor, and goods markets by:
(a) shifting the LM curve down and to the right.
(b) shifting the IS curve up and to the right.
(c) shifting the IS curve down and to the left.
(d) shifting the FE curve to the left.
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20. Under an assumption of monetary neutrality, a change in the nominal money supply
has:
(a) no effect on the price level.
(b) a less than proportionate effect on the price level.
(c) a proportionate effect on the price level.
(d) a more than proportionate effect on the price level.
Short Answers (8 points each). Write your answers briefly on the back of the page(s).
1) Show using graphs of the Solow model the effect of a decline in the rate of savings.
2. What is the quantity theory of money? Is it appropriate tool for policy makers? Why
or why not?
3. Explain why the aggregate demand curve is downward sloping.
4. Why should the short-run aggregate supply curve be horizontal and the long-run
aggregate supply curve be vertical?
Problems (10 points each). Solve on the back of the page(s).
1. An economy has a population growth rate of 1% per year and capital depreciates at
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14% per year. The country’s per-worker production function is yt  6  k 2 where y is
output per worker and k is capital per worker.
a) Find the steady-state values of capital per worker, income per worker, consumption per
worker and investment per worker if households save 10% of their income.
b) Find the capital labor ratio required in order to double the steady state value of output
per capita. What fraction of income would households have to save to achieve twice the
level of output per worker as was achieved in step a?
2. Desired consumption and investment are:
C d  400  400r  .2Y
I d  240  400r
Let G = 200.
(a) Find an equation relating desired national savings to r and Y.
(b) What value of the real interest rate clears the market when Y = 1000? Graph the
IS curve.
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