Mälardalen University, economics

Exam in Macroeconomic principles (NAA135)

Course credits: 7.5 ECTS credits
Date and time: 2022-01-07, 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
2012. Use these data to calculate the following values for the same year.
(a) gross production
(b) gross domestic product (GDP)
(c) gross national product (GNP)
(d) net domestic product (NDP)
(e) net national product (NNP)

From the Swedish national accounts 2012

current prices billion SEK
intermediate consumption (input goods) 3542
private consumption 1718
public consumption (government purchases) 956
gross investments 670
capital depreciation 472
exports 1722
imports 1516
net factor income from abroad 90

2. (5p)
Consider an economy that produces and consumes only apples, of which there are two
kinds: red and green. In year 1, red apples cost $1 each, green apples cost $2 each,
and 10 red apples are produced and consumed (and no green apples). In year 2, red
apples cost $2 each, green apples cost $1 each, and 10 green apples are produced and
consumed (and no red apples).
Use year 1 as the base year.
(a) Compute nominal GDP in year 1.
(b) Compute nominal GDP in year 2.
(c) Compute real GDP in year 2.
(d) Compute the GDP deflator in year 2.
(e) Compute the consumer price index (CPI) in year 2.
3. (5p)
Use the long run model for a small open economy to determine the expected effect on
the equilibrium from a decrease 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 = 4000
• Government purchases: G = 1800
• Taxes: T = 2000
• Household consumption C is given by the consumption function:
C = 400 + 0.7(Y − T )
• Investments I depend on the real interest rate r as: I = 500 − 2500r
(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 rises to G = 1900. What is the new equilib-
rium level of national savings (S)?
(e) What is the new equilibrium real interest rate (r)?

5. (5p)
In an economy, the velocity of money (V ) is constant. Real GDP (Y ) grows by 5% per
year, the money supply (M ) grows by 14% per year, and the nominal interest rate is
i = 11% 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 10% 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)?
6. (5p)
A country’s technology is described by the production function

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

where Y is the country’s level of output (GDP), K is its capital stock, L is its labor
force, and E is labor efficiency.
The country saves 10% of its output (s = 0.10) and has a population growth rate of 4%
per year (n = 0.04). The growth rate of labor efficiency (E) is 2% per year (g = 0.02),
and the capital depreciation rate is 4% per year (δ = 0.04).
Assume that the country is a closed economy, and that the labor force grows at the
same rate as the population.
Use the Solow growth model to compute the steady state values of the following vari-
ables.
(a) capital per effective worker (k)
(b) output per effective worker (y)
(c) consumption per effective worker (c)
(d) investments per effective worker (i)
(e) the growth rate of total production
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) gross production:
(b) gross domestic product (GDP):
(c) gross national product (GNP):
(d) net domestic product (NDP):
(e) net national product (NNP):
2.
(a) nominal GDP in year 1:
(b) nominal GDP in year 2:
(c) real GDP in year 2:
(d) the GDP deflator in year 2:
(e) CPI in year 2:
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) growth rate of nominal GDP (%):
(b) inflation rate (π):
(c) real interest rate (r):
(d) inflation rate (π):
(e) real interest rate (r):
6.
(a) capital per effective worker (k):
(b) output per effective worker (y):
(c) consumption per effective worker (c):
(d) investments per effective worker (i):
(e) growth rate of total production: