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Midterm Practice
Midterm Practice
PRACTICE Midterm
GLEC
Prof. Max Croce
Important Notes:
All of your answers must be provided in the space allotted below each question. Anything outside
this will not be graded. In all cases the space provided is sufficient for a perfect score.
Information that is incorrect or not pertinent to the question will result in a reduced score.
You may use outside published material as well as class notes to assist you in your answers. You
are not allowed assistance from any individual(s).
None of the questions are designed to trick you. However some of the questions you have seen
before, but with important details that are different--so do not just put down familiar answers!
GOOD LUCK!
Answers: _ __ _ __ __ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __
Question: 1 2 3 4 5 6 7 8 9 10
1
PARTI: MULTIPLE CHOICE (40 points, 4 points for each question).
Put answers on the front page!
2. Looking at the composition of GDP in the last 50 years, we can claim that:
A. Both in India and the US the consumption share has been converging to about 70%
B. The investment share has a positive trend in India and negative trend in the US
C. Both US and India are net exporters, and their exports represent a large share of GDP
D. The government expenditure share has declined both in India and the US
2
A. Implies that the rest of the world (taken together) has negative NX
B. Is historically the largest component of GDP
C. Makes domestic investment greater than domestic savings
D. none of the above
8. Using our simple model of the money market suppose two things happen:
i. The monetary authorities decrease the money supply, and
ii. Private banks increase their reserves.
Keeping everything else constant, the equilibrium interest rate (R) will
A. Increase.
B. Decrease.
C. Increase as long as the change in the money supply is greater than the change in I.
D. Decrease as long as the change in the money supply is greater than the change in I.
E. It is not possible to determine with the available information.
9. A firm produces AC units for 100M of INR but does not sell them right away. The units are stored
in the company depot. According to national accounting:
A. GDP increases because consumption of durable goods increases
B. GDP increases because there is a positive change in inventories and hence in consumption
C. GDP increases because there is a positive change in inventories and hence in investment
D. None of the above
10. According to the article How the US Lost Out on iPhone Work from The New York Times:
``It isnt just that workers are cheaper abroad. Rather, Apples believe the vast scale of
overseas factories as well as the flexibility, diligence and industrial skills of foreign
workers have so outplaced their American counterparts that Made in USA is no
longer a viable option for most Apple products
This article:
A. Contradicts the concept of international competitive advantages
B. implies that there is consensus on the substantial weakness of electronics manufacturing in Asia
C. Refers to the broader theme of international monetary policy
D. None of the Above
3
PART II: LABOR MARKET (30 points total)
The Economist article Labour pains (Sep 21st, 2000) has a passage stating that
Economists have put forward [several] explanations for the increase in wage inequality: (1)
technological change (new technology); (2) increased imports from low-wage developing
economies; (3) higher immigration of low-skilled workers most economists reckon that new
technology is by far the most important factor.
In the data, the employment of high-skilled workers has increased, as opposed to the employment of
low-skill workers that has declined. Also, wages for low-skilled workers have declined, and wages for
high skilled workers have risen.
Given this data, what arguments would convince economists that new technology is the most important
factor in explaining an increase wage inequality? What are the counterfactual implications of the other
two hypotheses?
Answer:
4
PART IV: MONETARY POLICY (30 points total)
As a policy response to the recent financial crisis, the Fed bought bonds and also raised the interest rate
it offered banks on reserves.
(a) How does this policy affect the monetary base? Explain carefully
(c) What is the likely impact on inflation if banks continue to hold large reserves with the central
bank?
5
Scratch Sheet
6
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