Mälardalen University, economics

Exam in Macroeconomic principles (NAA135)

Course credits: 7.5 ECTS credits
Date and time: 2022-11-03, 8.30-12.30
Teacher: Johan Lindén
Aids: calculator

Grades, minimum grade points required

A maximum of 30 grade points may be awarded for all exam questions together.
Grades: E: 15p, D: 18p, C: 21p, B: 24p, A: 28p

Time for grading

Test results are normally posted within 15 working days.

Instructions
The exam consists of two parts, A and B. To the questions in part A, only answers are
required. Fill in the answers in the answer form found at the end of the exam.
To the questions in part B, both correct answers in the answer form and complete,
motivated solutions are required. The solutions should be presented on separate paper,
and brief answers copied to the answer form.
Hand in the answer form along with the solutions.
• In the solutions, graphical and mathematical exposition must be accompanied
by explanatory text.
• Explain the notation, especially if it isn’t standard notation used in the course.
• Label all curves and axes in diagrams.
• Start each question on a new sheet of paper. Number the sheets and sort them
in order, first question first.
Part A
Only answers are required to the questions in this part. Fill in the answers in the
answer form.

1. (5p)
The table below shows some figures from the Swedish national accounts for the year
2010. Use these data to calculate the following values for the same year.
(a) capital depreciation
(b) net factor income from abroad
(c) net exports
(d) gross investments
(e) net investments

From the Swedish national accounts 2010

current prices billion SEK
gross production 6777
intermediate consumption (input goods) 3446
gross domestic product (GDP) 3331
gross national product (GNP) 3398
net domestic product (NDP) 2886
net national product (NNP) 2953
private consumption 1611
public consumption (government purchases) 891
exports 1656
imports 1447

2. (5p)
In an economy, the velocity of money (V ) is constant. Real GDP (Y ) grows by 3% per
year, the money supply (M ) grows by 5% per year, and the nominal interest rate is
i = 6% per year. Use the quantity theory of money to answer the following questions.
(a) What is the growth rate of nominal GDP?
(b) What is the inflation rate (π)?
(c) What is the real interest rate (r)?
(d) Suppose instead that the money supply grows by 6% per year, while output
growth and the nominal interest rate remain at their original levels. Then what
is the inflation rate (π)?
(e) Then what is the real interest rate (r)?
3. (5p)
Use the long run model for a small open economy to determine the expected effect on
the equilibrium from an increase in taxes (T ).
For each of the following variables, state whether it is expected to increase (+), decrease
(–), remain unchanged (0), or whether the effect is indeterminate (?).
All variables are in real terms.
(a) production (Y )
(b) investments (I)
(c) national savings (S)
(d) net exports (NX )
(e) the real exchange rate (ε)
Part B
To the questions in this part, complete solutions as well as correct answers are required.
Write the solutions on separate paper. Fill in the answers in the answer form.

4. (5p)
A closed economy is described by the following equations:
• The accounting identity: Y = C + I + G
• Production: Y = 3500
• Government purchases: G = 1600
• Taxes: T = 1500
• Household consumption C is given by the consumption function:
C = 200 + 0.8(Y − T )
• Investments I depend on the real interest rate r as: I = 600 − 10000r
(where, for example, r = 0.01 means that the interest rate is 1%.)
Use the classical theory for the long run equilibrium of a closed economy to answer the
following questions.
(a) What are national savings (S) in equilibrium?
(b) What is the equilibrium real interest rate (r)?
(c) What are investments (I)?
(d) Suppose that government purchases falls to G = 1500. What is the new equilib-
rium level of national savings (S)?
(e) What is the new equilibrium real interest rate (r)?
5. (5p)
An economy’s aggregate output Y is given by the Cobb-Douglas production function:

Y = 2K 1/2 L1/2

where K is the capital stock and L is the amount of labor employed. The economy
has K = 32000 units of capital and a labor force of L = 500 workers.
(a) If the real wage w adjusts to equilibrate labor supply and labor demand, what is
the real wage?
(b) What is equilibrium production Y ?
(c) What is the total amount of wages earned by all workers in the economy?
(d) Suppose instead that there is a minimum real wage that is 25% above the equi-
librium wage calculated in part (a), and that firms employ their optimal amount
of labor at this wage. What is the level of employment L?
(e) What is now the total amount of wages earned by all workers?

6. (5p)
A country’s technology is described by the production function

Y = F (K, L) = K 1/2 L1/2

where Y is its level of output (GDP), K is its capital stock, and L is its labor force.
The country saves 20% of its output (s = 0.20). The capital depreciation rate is 5%
per year (δ = 0.05). There is no population growth or technological progress. The
country is a closed economy.
Use the Solow growth model to compute the steady state values of the following vari-
ables.
(a) capital per worker (k = K/L)
(b) output per worker (y = Y /L)
(c) consumption per worker (c)
(d) investments per worker (i)
(e) capital output ratio (K/Y )
Answer form
to exam in Macroeconomic principles (NAA135).
Give only brief answers here. Present complete solutions to part B on separate paper.

Question Requested value: Answer:

Part A
1.
(a) capital depreciation:
(b) net factor income from abroad:
(c) net exports:
(d) gross investments:
(e) net investments:
2.
(a) growth rate of nominal GDP (%):
(b) inflation rate (π):
(c) real interest rate (r):
(d) inflation rate (π):
(e) real interest rate (r):
3.
(a) change in Y (+, –, 0, or ?):
(b) change in I (+, –, 0, or ?):
(c) change in S (+, –, 0, or ?):
(d) change in NX (+, –, 0, or ?):
(e) change in ε (+, –, 0, or ?):
Part B
4.
(a) national savings (S):
(b) real interest rate (r):
(c) investments (I):
(d) new national savings (S):
(e) new real interest rate (r):
5.
(a) real wage (w):
(b) production (Y ):
(c) total wages:
(d) employment (L):
(e) total wages:
6.
(a) capital per worker (k):
(b) output per worker (y):
(c) consumption per worker (c):
(d) investments per worker (i):
(e) capital output ratio (K/Y ):