QUESTION PAPER

Program: Under Graduate Program

Semester: III Academic Year: 2020-21

Course: Macroeconomics I Course Code: ECON202

Examination Date: 24/12/2020 Time: 11:00 - 1:00 Total Marks: 100

Instructions to students:
Students should read carefully the instructions given on the question paper.
 This is an open book, open notes exam.  Please make sure no other material is with you.
 There are several parts to this exam. The first part is MCQ. For other parts  you need solve
answers in a piece of paper and upload the scanned version at the end of the exam.
 Please make sure that your camera is pointed towards your hand and notebook while you are
solving the written parts. If you have any question, you should type in the chatbox and wait for
me to answer. Do not speak over microphone. 
 You may use a calculator but no other electronic device is not permitted during the exam. 
 Try to be brief and concise with your explanations.
 Label the graphs properly and indicate the direction of change in an appropriate manner. 
 Make sure that all the calculations are understandable in a clear manner. 
Q.No. Questions Mark Course
s Outcomes
Mapped
PART The FE line is vertical because the level of output at full employment 30 CO1,CO2,
1 doesn't depend on the CO3, CO4,CO6
RAN A. real wage rate.
DOM B. level of employment.
30 C. marginal product of labor.
D. real interest rate.

Which of the following would shift the FE line to the left?

A. A beneficial supply shock
B. An increase in labor supply
C. A decrease in the capital stock
D. A decrease in the future marginal productivity of capital

An adverse supply shock would cause the FE line to

A. shift to the right.
B. shift to the left.
C. remain unchanged.
D. remain unchanged if the shock is temporary; shift to the right if
the shock is permanent.

A decline in expected future output would cause the IS curve to

A. shift up and to the right.
B. shift down and to the left.
C. remain unchanged.
D. shift up and to the right only if people face borrowing constraints.

An increase in labor supply would cause the IS curve to

A. shift up and to the right.
B. shift down and to the left.
C. remain unchanged.
D. shift up and to the right only if people face borrowing constraints.

The bowed shape of the per-worker production function is caused by

A. wealth effects that reduce labor supply.
B. diminishing marginal productivity of capital.
C. increasing marginal productivity of labor.
D. increasing marginal productivity of capital.

A temporary decline in productivity would cause the IS curve to

A. shift up and to the right.
B. shift down and to the left.
C. remain unchanged.
D. shift up and to the right only if people face borrowing constraints.

The IS curve will shift down and to the left when

A. desired saving declines.
B. government purchases increase.
C. consumption increases.
D. the expected future marginal product of capital declines.

A change that increases the real money supply relative to real money
demand causes
A. the LM curve to shift down and to the right.
B. the LM curve to shift up and to the left.
C. the IS curve to shift down and to the left.
D. the IS curve to shift up and to the right.

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.

A decrease in the money supply would cause the IS curve to

________ and the LM curve to ________.
A. shift down and to the left; be unchanged
B. shift down and to the left; shift up and to the left
C. be unchanged; shift up and to the left
D. be unchanged; shift down and to the right

When all markets in the economy are simultaneously in equilibrium,

we say
A. markets are complete.
B. markets are perfect.
C. there is disequilibrium.
D. there is general equilibrium.

To reach general equilibrium, the price level adjusts to shift the

________ until it intersects with the ________.
A. IS curve; FE line and LM curve
B. FE line; LM and IS curves
C. LM curve; FE line and IS curve
D. ND curve; FE line and NS curve
Total factor productivity growth is that part of economic growth due
to
A. capital growth plus labor growth.
B. capital growth less labor growth.
C. capital growth times labor growth.
D. neither capital growth nor labor growth.

A temporary supply shock, such as a bumper crop, would

A. shift the FE line to the right and leave the IS curve unchanged.
B. shift the FE line to the left and shift the IS curve up and to the
right.
C. shift the FE line to the left and leave the IS curve unchanged.
D. have no effect on the FE line.

A temporary decrease in government purchases causes the real

interest rate to ________ and the price level to ________ in general
equilibrium.
A. rise; rise
B. rise; fall
C. fall; rise
D. fall; fall

An economic variable that doesn't move in a consistent pattern with

aggregate economic activity is called
A. procyclical.
B. countercyclical.
C. acyclical.
D. a leading variable.

Classical economists think general equilibrium is attained relatively

quickly because
A. the real interest rate adjusts quickly.
B. the level of output adjusts quickly.
C. the real wage rate adjusts quickly.
D. the price level adjusts quickly.

When aggregate economic activity is increasing, the economy is said

to be in
A. an expansion.
B. a contraction.
C. a peak.
D. a turning point.
A variable that tends to move later than aggregate economic activity
is called
A. a leading variable.
B. a coincident variable.
C. a lagging variable.
D. an acyclical variable.

Which of the following macroeconomic variables is countercyclical?

A. Real interest rates
B. Unemployment
C. Money growth
D. Consumption

Which of the following is true?

A. Employment and unemployment are both coincident with the
business cycle.
B. Employment and unemployment are both procyclical.
C. Employment is procyclical and unemployment is coincident with
the business cycle.
D. Employment is procyclical and unemployment is countercyclical.

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.

In a steady state
A. both consumption per worker and the capital-labor ratio are
constant.
B. consumption per worker is constant, but the capital-labor ratio can
change.
C. capital and labor, by definition, are inversely related to one
another.
D. consumption per worker can change, but the capital-labor ratio is
constant.

The level of the capital-labor ratio that maximizes consumption per

worker in the steady state is known as the
A. Solow residual capital-labor ratio.
B. Golden Rule capital-labor ratio.
C. q theory capital-labor ratio.
D. dynamically efficient capital-labor ratio.
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

All else being equal, a permanent decrease in the saving rate in a

steady-state economy would cause
A. an increase in the capital-labor ratio and an increase in
consumption per worker.
B. an increase in the capital-labor ratio and a decrease in
consumption per worker.
C. a decrease in the capital-labor ratio and a decrease in consumption
per worker.
D. a decrease in the capital-labor ratio and an increase in
consumption per worker.

An increase in the growth rate of population in a steady-state

economy would cause
A. a parallel shift upward in the investment line.
B. a pivot up and to the left in the investment line.
C. a pivot down and to the right in the investment line.
D. a parallel shift downward in the investment line.

In the very long run, the level of consumption per worker can grow
continually if
A. the saving rate continually falls.
B. the population growth rate continually rises.
C. productivity continually improves.
D. the depreciation rate continually rises.

Which of the following statements about M1 and M2 is not true?

A. Transaction accounts are part of M1.
B. M2 is more liquid than M1.
C. M2 is larger than M1.
D. Transaction accounts are part of M2.

What's the most common way for a central bank to reduce the money
supply?
A. Collect higher taxes
B. Sell bonds to the public
C. Buy bonds from the government
D. Buy bonds from the public
People's best guesses about returns on assets are called
A. expected returns.
B. liquidity.
C. risk.
D. the term structure of returns.

If the substitution effect of the real interest rate on saving is smaller

than the income effect of the real interest rate on saving, then a rise
in the real interest rate leads to a ________ in consumption and a
________ in saving, for someone who's a lender.
A. fall; fall
B. fall; rise
C. rise; rise
D. rise; fall

The marginal product of labor

A. is measured by the slope of the production function relating
capital to employment.
B. is larger when the labor supply is relatively larger.
C. is smaller when the labor supply is relatively smaller.
D. decreases as the number of workers already employed increases.

An invention that speeds up the Internet is an example of

A. an income effect.
B. an increase in labor.
C. a substitution effect.
D. a supply shock.

When a person receives an increase in wealth, what is likely to

happen to consumption and saving?
A. Consumption increases and saving increases.
B. Consumption increases and saving decreases.
C. Consumption decreases and saving increases.
D. Consumption decreases and saving decreases.

The set of assets that a holder of wealth chooses to own is called

A. an asset assortment.
B. a wealth strategy.
C. a portfolio.
D. an investment envelope.

The Ricardian equivalence proposition suggests that a government

deficit caused by a tax cut
A. causes inflation.
B. causes a current account deficit.
C. raises interest rates.
D. doesn't affect consumption.

The desired level of the capital stock will increase if the

A. user cost of capital increases.
B. expected future marginal product of capital increases.
C. effective tax rate increases.
D. price of capital increases.

The desire to have a relatively even pattern of consumption over time

is known as
A. excess sensitivity.
B. the substitution effect.
C. the consumption-smoothing motive.
D. forced saving.

An increase in expected future output while holding today's output

constant would
A. increase today's desired consumption and increase desired
national saving.
B. increase today's desired consumption and decrease desired
national saving.
C. decrease today's desired consumption and increase desired
national saving.
D. decrease today's desired consumption and decrease desired
national saving.

Tobin's q is equal to
A. the ratio of capital's market value to its replacement cost.
B. the ratio of capital's replacement cost to its market value.
C. the expected after-tax real interest rate.
D. the stock market value of a firm.

What is the difference between gross investment and net investment?

A. Net investment = gross investment minus taxes
B. Net investment = gross investment minus net factor payments
C. Net investment = gross investment minus inventory accumulation
D. Net investment = gross investment minus depreciation

The uncertainty about the return an asset will earn is

A. liquidity.
B. risk.
C. time to maturity.
D. stochastic dominance.

The fraction of additional current income that a person consumes in

the current period is known as the
A. consumption-smoothing motive.
B. consumption deficit.
C. saving rate.
D. marginal propensity to consume.

Which of the factors listed below might cause the Ricardian

equivalence proposition to be violated?
A. There may be international capital inflows and outflows.
B. Consumers may not understand that an increase in government
borrowing today is likely to lead to higher future taxes.
C. There may be constraints on the level of government spending.
D. There may be constraints on the level of government taxation.

Suppose your company is in equilibrium, with its capital stock at its

desired level. A permanent increase in the depreciation rate now has
what effect on your desired capital stock?
A. Raises it, because the future marginal productivity of capital is
higher
B. Lowers it, because the future marginal productivity of capital is
lower
C. Raises it, because the user cost of capital is now lower
D. Lowers it, because the user cost of capital is now higher

An increase in the expected real interest rate will

A. increase the desired capital stock.
B. decrease the desired capital stock.
C. have no effect on the desired capital stock.
D. have the same effect on the desired capital stock as a decrease in
corporate taxes.

Cyclical unemployment arises when

A. unskilled or low-skilled workers find it difficult to obtain
desirable, long-term jobs.
B. labor must be reallocated from industries that are shrinking to
areas that are growing.
C. workers must search for suitable jobs and firms must search for
suitable workers.
D. output and employment are below full-employment levels.

If the rate of depreciation increases, then user cost ________ and the
desired capital stock ________.
A. falls; falls
B. falls; rises
C. rises; rises
D. rises; falls

The two main characteristics of the production function are

A. it slopes downward from left to right, and the slope becomes
flatter as the input increases.
B. it slopes upward from left to right, and the slope becomes steeper
as the input increases.
C. it slopes upward from left to right, and the slope becomes flatter
as the input increases.
D. it slopes downward from left to right, and the slope becomes
steeper as the input increases.

The marginal product of capital is the increase in

A. capital needed to produce one more unit of output.
B. output from a one-unit increase in capital.
C. labor needed to accompany a one-unit increase in capital.
D. output from a one-dollar increase in capital.

An increase in the real wage rate will cause

A. the labor demand curve to shift to the right.
B. the labor demand curve to shift to the left.
C. the quantity of labor demanded to rise.
D. a movement along the labor demand curve.

An increase in the real wage would result in a

A. movement along the labor demand curve, causing an increase in
the number of workers hired by the firm.
B. shift of the labor demand curve, causing an increase in the number
of workers hired by the firm.
C. movement along the labor demand curve, causing a decrease in
the number of workers hired by the firm.
D. shift of the labor demand curve, causing a decrease in the number
of workers hired by the firm.

A decrease in the number of workers hired by a firm could result

from
A. an increase in the marginal product of labor.
B. an increase in the marginal revenue product of labor.
C. an increase in the real wage.
D. a decrease in the real wage.

What two factors should you equate in deciding how many workers
to employ?
A. The marginal product of labor and the marginal product of capital
B. The marginal product of labor and the real wage rate
C. The marginal product of labor and the real interest rate
D. The marginal product of capital and the real wage rate

Which of the following events would lead to an increase in the

marginal product of labor for every quantity of labor?
A. An increase in the real wage
B. A decrease in the real wage
C. A favorable supply shock such as a fall in the price of oil
D. An adverse supply shock, such as a reduced supply of raw
materials
Frictional unemployment arises when
A. unskilled or low-skilled workers find it difficult to obtain
desirable, long-term jobs.
B. labor must be reallocated from industries that are shrinking to
areas that are growing.
C. workers must search for suitable jobs and firms must search for
suitable workers.
D. output and employment are below full-employment levels.

The income effect of a higher real wage on the quantity of labor

supply is the
A. idea that workers feel psychologically wealthier when wages are
higher, so they work more.
B. effect that income must rise when wages rise.
C. tendency of workers to supply more labor in response to
becoming wealthier.
D. tendency of workers to supply less labor in response to becoming
wealthier.

An adverse oil-price shock reduces labor demand. What happens to

current employment and the real wage rate?
A. Both employment and the real wage rate would increase.
B. Both employment and the real wage rate would decrease.
C. Employment would increase and the real wage would decrease.
D. Employment would decrease and the real wage would increase.

A bird flu epidemic causes many people to flee the country, but does
not affect labor demand significantly because almost all the goods
produced within the country are exported. What happens to current
employment and the real wage rate?
A. Both employment and the real wage rate would increase.
B. Both employment and the real wage rate would decrease.
C. Employment would increase and the real wage would decrease.
D. Employment would decrease and the real wage would increase.

The equilibrium level of employment, achieved after the complete

adjustment of wages and prices, is known as the
A. zero-unemployment level of employment.
B. natural state.
C. invisible handshake.
D. full-employment level of employment.
PART This part of the exam needs you to use the IS-LM model to determine 20 CO4, CO73
2 the effects of each of the following on the general equilibrium values
of the real wage, employment, output, the real interest rate,
RAN consumption, investment, and the price level. Use graphs and label
DOM them properly to indicate any change. Also explain for each of the
ANY cases what are the channels though which such changes are occurring.
4
(a) The impact of a tougher immigration laws by Trump
Administration on US Economy
(b) There's increased volatility in the prices of stocks and bonds.
(c) Government decides to increase corporate tax rate.
(d) Increased computerization reduces stock market brokerage costs
(e) War between china and India on Indian economy
(f) Decrease in oil prices for Indian economy
(g) RBI decided on conduct contractionary monetary policy

PART 1) A country has the per-worker production function 10 CO3,CO7

3
RAN yt = 5 ,
DOM t
ANY where yt is output per worker and k is the capital-labor ratio. The
1 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 output per worker?
(c) What is the steady-state value of consumption per worker?

2) A country has the per-worker production function

yt = 6 ,
where yt is output per worker and kt is the capital-labor ratio. The
depreciation rate is 0.1 and the population growth rate is 0.1. The
saving function is
St = 0.1Yt,
where St is total national saving and Yt is total output.
(a) What is the steady-state value of capital-labor ratio?
(b) What is the steady-state value of output per worker?
(c) What is the steady-state value of consumption per worker?

3) A country has the per-worker production function

yt = 6 ,
where yt is output per worker and kt is the capital-labor ratio. The
depreciation rate is 0.1 and the population growth rate is 0.1. The
saving function is
St = 0.1Yt,
where St is total national saving and Yt is total output.
(a) What is the steady-state value of capital-labor ratio?
 (b) What is the steady-state value of output per worker?
(c) What is the steady-state value of consumption per worker?

PART The economy is described as below 15 CO7

4 , Q1 d
C =360−200 r +0 . 1Y

I d=120−400r , G=120 ,

Md
( )
P
=100+0 . 2Y −200i ,

πe=0 , P=2 , M =300

a) Find an equation for desired national saving, S in terms of output Y

and the real interest rate r. What value of the real interest rate clears
the goods market when Y = 550? When Y = 600? When Y = 650?
Use the goods market equilibrium condition to derive the IS curve.
Graph the IS curve.

b) What is the real interest rate r that clears the asset market when Y =
550? When Y = 600? When Y = 650? Use the asset market
equilibrium condition to derive the LM curve. Graph the LM curve.

c) Now suppose that the full employment level of output is Y¯ = 640.

Add the FE line to your graph with the IS and LM curves. If there is
no point where all three curves intersect, the economy must not be in
general equilibrium. One of the assumptions of the IS-LM framework
is that the price level P adjusts to restore general equilibrium. To what
price level P does the economy converge in order to restore general
equilibrium in this economy? During this time of price level
adjustment, by how much does the actual rate of inflation exceed the
expected rate of inflation, πe = 0?

PART Suppose the money demand function is 15 C01,CO7

4 , Q2 Md/P = 1000 + 0.2Y - 1000 (r + πe).
(a) Calculate velocity if Y = 2000, r = .06, and πe = .04.
(b) If the money supply (Ms) is 2600, what is the price level?
(c) Now suppose the real interest rate rises to 0.11, but Y and Ms are
unchanged.
What happens to velocity and the price level? So if the nominal
interest rate were
to rise from 0.10 to 0.15 over the course of a year, with Y remaining at
2000, what would the inflation rate be?
 d
PART Desired consumption is C  = 100 + 0.8Y - 500r - 0.5G. 10 CO4,CO7
4, Q3
Desired investment is Id = 100 - 500r.

Real money demand is (MD/P) = Y - 2000i.

Other variables are πe = 0.05, G = 200, Y = 1000, and M = 2100.

(a)  Find the equilibrium values of the real interest rate, consumption,
investment, and the price level.

(b) Suppose the money supply increases to 2800. Find the equilibrium
values of the real interest rate, consumption, investment, and the price
level. (Assume that the expected inflation rate is unchanged.)