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311FA07 Final RJGRev (1) 071211 Solutions
311FA07 Final RJGRev (1) 071211 Solutions
YOUR NAME:
INSTRUCTIONS
1. The exam lasts 2 hours.
2. The exam is worth 120 points in total: 35 points for the multiple choice questions, 55
points for the analytical questions, and 30 points for the essays.
3. Write your answers to Part A (the multiple choice section) in the blanks on page 1.
You wont get credit for circled answers in the multiple choice section.
4. Place all of your answers for part B in the space provided
5. You must show your work for part B questions
6. Write your essays with a pen. Write clearly!
7. Good Luck and Happy Holidays!
PART A
Choose the ONE alternative that BEST completes the statement or answers the question.
Your answers must be in the space provided below.
USE CAPITAL LETTERS.
1. ____
7. ____
13. ____
19. ____
25. ____
31. ____
2. ____
8. ____
14. ____
20. ____
26. ____
32. ____
3. ____
9. ____
15. ____
21. ____
27. ____
33. ____
4. ____
10. ____
16. ____
22. ____
28. ____
34. ____
5. ____
11. ____
17. ____
23. ____
29. ____
35. ____
6. ____
12. ____
18. ____
24. ____
30. ____
14. After a period of sustained unexpected inflation, it is likely that the renegotiation of
nominal wages will
(a)
shift the SAS curve downward thereby increasing output.
(b)
shift the SAS curve upward thereby increasing output.
(c)
shift the SAS curve upward thereby decreasing output.
(d)
shift the AD curve downward thereby increasing output.
15. If the inflation rate is 10% and nominal GDP growth is 8% then real GDP must have
(a)
increased by 2%.
(b)
decreased by 18%.
(c)
decreased by 2%.
(d)
increased by 18%.
16. The output-capital ratio (Y/K) depends on the following four determinants. Which
determinant of these four is most likely to be affected by government growth policy?
(a)
the nature of the production function
(b)
the depreciation rate
(c)
the growth rate of labor input
(d)
the growth of capital per person
17. Suppose that the nominal exchange rate between the dollar and the English pound
was 1 pound per $2 and that the English price level was twice that of the U.S., then the
real exchange rate is
(a)
1 pound/$1.
(b)
2 pounds/$1.
(c)
1 pound/$2.
(d)
1 pound/$4.
18. The theory of economic growth divides the causes of growth into
(a)
elements affecting the output ratio and factors affecting population growth.
(b)
elements affecting the output ratio and factors affecting inflation.
(c)
elements affecting the amount of factor inputs available and the productivity
of those inputs.
(d)
None of the above
19. Let the government increase autonomous taxes. The aggregate demand curve will
(a)
shift leftward and the IS curve will shift leftward.
(b)
shift rightward and the IS curve will shift rightward.
(c)
remain unaffected but the IS curve will shift leftward.
(d)
become positively sloped but the IS curve will remain negatively sloped.
20. Unanticipated inflation will hurt _______ and help _______.
(a)
pensioners; borrowers
(b)
borrowers; pensioners
(c)
the government; tax payers
(d)
homeowners; banks
27. Given that all countries have the same Cobb-Douglas production function, i.e.
Y/N=(K/N)b, a ten-fold difference in per capita income requires a difference in capital per
capita by a factor of
(a)
10.
(b)
10b.
(c)
101/b.
(d)
b.
28. Okuns Law refers to
(a)
the trade-off between inflation and unemployment.
(b)
the relationship between real and nominal output growth.
(c)
minimum wage laws and the impact of price controls.
(d)
the relationship between the unemployment rate and the ratio of actual to
natural output.
29. If the economy is characterized by diminishing or decreasing returns to scale, then
(a)
a doubling of inputs will lead to a three-fold increase in output.
(b)
a doubling of inputs will lead to a constant output.
(c)
a doubling of inputs will lead to a two-fold increase in output.
(d)
a doubling of inputs will lead to a less than two-fold increase in output.
30. In equilibrium, rate of growth of capital in a simple closed economy (i.e. NX=0) is
determined primarily by
(a)
the growth rate of savings.
(b)
the level of saving less expenditures for replacement capital.
(c)
per capita well being.
(d)
the growth rate of replacement capital.
31. Which of the following policies would NOT affect the natural unemployment rate?
(a)
a reduction in minimum wages
(b)
an increase in public-service employment
(c)
an increase in subsidized private employment
(d)
a reduction in sales taxes
32. Monetarists believe that the major source of macroeconomic instability lies in
(a)
the private investment sector and the government sector.
(b)
the government sector.
(c)
private corporations and the government sector.
(d)
export and import sector.
33. Before the Great Depression, macroeconomic theory was dominated by the
__________ approach that presumed the essential ________ of the private economy.
(a)
Keynesian, stability
(b)
Keynesian, instability
(c)
old classical, stability
(d)
old classical, instability
34. Myths discussed by the Economist about the Great Depression include that Hooverera government policy was ___________ and that Roosevelt New Deal policy was
_______
(a)
passive; passive
(b)
perversely active; passive
(c)
passive; perversely active
(d)
perversely active; perversely active
35. The Okuns Law line in Chapter 8 lies above the actual values for 1995-2004 because
(a)
Supply shocks were beneficial in this period
(b)
The natural rate of unemployment fell
(c)
The natural rate of unemployment rose
(d)
Supply shocks were adverse in this period
1 2 / 3 1 / 6 1 / 2
K
H N
3
and
MPH
1 1 / 3 5 / 6 1 / 2
K H
N
6
2) Show that the share of physical capital in output is 1/3 and the share of human capital
in output is 1/6. (Assume that each factor is paid its marginal product) (4 points)
1 2 / 3 1 / 6 1 / 2
K
H N K
MP
K
The share of physical capital in output is
K
3 1/ 3 1/ 6 1/ 2
1/ 3
Y
K H N
Similarly, the share of human capital in output is
1 1 / 3 5 / 6 1 / 2
K H
N H
MPH H
6 1/ 3 1/ 6 1/ 2
1/ 6
Y
K H N
Y
K
H
to both
and
. Write
N
N
N
K
down the equations characterizing the steady state physical capital - labor ratio (
) and
N
H
the steady state human capital labor ratio (
). (5 points)
N
Y
K
H
( )1 / 3 ( )1 / 6
N
N
N
Y
K
(n d )
N
N
Y
H
(n d )
N
N
4) Using the equations from part 3, find the steady-state physical capital-labor ratio (
and the steady-state human capital-labor ratio (
H
) (8 points)
N
K 1/ 3 H 1/ 6
H
) ( )
0.1
N
N
N
K
H
K H
4
Solving for
and
we get:
N
N
N
N
0.2(
Y
). (4 points)
N
K
)
N
Suppose that natural real GDP ( Y N ) equals 1,000, the Feds desired real federal funds
rate ( FF * ) equals 3% and its desired inflation rate ( p * ) equals 2%. Suppose you are
Actual inflation
2%
3%
3%
4%
Real GDP
900
1,000
1,100
1,200
1) For each level of GDP, compute the log output ratio Y . (3 points)
2000: Y 10.53
2001: Y 0 Y
2002: Y 9.53
2003: Y 18.23
2) Write down the equation for the Taylor Rule, leaving unspecified the parameters a and
b. (2 points)
Equation for the Taylor Rule:
r FF r FF * a( p p * ) bY
or r FF 3 a ( p 2) bY
3) Using the Taylor Rule, calculate the real federal funds rate for the given combinations
of inflation and real GDP when a b 1 . (5 points)
In this case, Taylor Rule is r FF 3 ( p 2) Y
Real federal funds rate is:
2000: r FF 7.53
2001: r FF 4
2002: r FF 13.53
2003: r FF 23.23
4) Using the Taylor rule, calculate the real federal funds rate for the given combinations
of inflation and real GDP when the Fed is targeting inflation, that is, a 1 and b 0 . (5
points)
In this case, Taylor Rule is r FF 3 ( p 2) p 1
Real federal funds rate is:
2000: r FF 3
2001: r FF 4
2002: r FF 4
10
2003: r FF 5
QUESTION 3 (15 points)
Let the following represent the structure of a large open economy with a fixed exchange
rate:
C = CA + 0.6(Y-T)
CA = 500-5r
T = 1000
(M/P)D = 0.2Y-10r
MS/P = 1000
IP = 1000-20r
G = 1000
NX = 1000-0.1Y-100e
(A) Initially let foreign and domestic interest rates be equal so that r = rf and let the
foreign exchange rate e=2. Find the IS and LM equations. (5 points)
k = 1/[(1-0.6)(1-0)+0+0.1] = 2
AP = 500-5r-0.6(1000)+1000-20r+1000+800 = 2700-25r
IS: Y=k*AP = 2(2700-25r) = 5400-50r
LM: MS/P=(M/P)D => 1000 = 0.2Y-10r => Y = 5000+50r
(B) Find the equilibrium domestic and foreign interest rates and the equilibrium output.
(2 points)
Solve IS and LM simultaneously
r=4
Y = 5200
(C) Suppose the balance of payments (BOP) is zero if Y and r satisfy: r=-101+0.02*Y.
Calculate the new level of equilibrium output, the interest rate, and the money supply
after an increase of autonomous consumption by 100. (so that now CA = 600-5r) (Hint:
Use the new IS curve and the BOP equation to determine the new level of output and
interest rate. Then determine the money supply that makes the LM curve pass through the
new equilibrium) (8 points)
New IS : Y = 5600-50r
BOP : r=-101+0.02Y.
Solving for r and Y: Y=5325 and r=5.5
New money supply: MS/P=0.2(5325)-10(5.5)=1010
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