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(as it appears on TritonEd)

Student ID:

ECON 110A: Intermediate Macroeconomics

Miderm I, Fall 2020
University of California, San Diego

STATEMENT OF ACADEMIC INTEGRITY: I confirm that I have neither given nor

received unauthorized assistance in the completion of this exam. My integrity and that of the
university has been upheld.

Signature Date

DIRECTIONS: Please answer all questions in the space provided. Place the answers to the multiple
choice on the front page of the exam (below). Ambiguous multiple choice answers will be marked
wrong. Good luck!
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SECTION 1 Multiplie Choice Questions [20 points; 2 points each]

Circle the answer to each multiple choice question in the following table.

1 A B C D E

2 A B C D E

3 A B C D E

4 A B C D E

5 A B C D E

6 A B C D E

7 A B C D E

8 A B C D E

9 A B C D E

10 A B C D E

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1. Short-run macroeconomics focuses on the study of , while long-run macroeco-

nomics focuses on .

(A) prices; quantities

(B) inflation; economic fluctuations
(C) economic growth; welfare
(D) economic fluctuations; economic growth
(E) welfare; inflation.

2. According to the data available to us, for most of human history there was
sustained growth until when economic growth .

(A) virtually no; World War II; took off

(B) rapid; the Great Depression; stagnated
(C) moderate; the 1990s; stagnated
(D) virtually no; the Second Industrial Revolution; took off
(E) moderate; the First Industrial Revolution; stagnated

3. Which of the following are socioeconomic changes that appear to accompany economic
growth?

(A) a decline of agricultural employment

(B) improvements in gender equality
(C) pollution and environmental degradation
(D) decreases in working hours
(E) all of the above

4. U.S. expenditure shares by households, firms, and the government were relatively
except during .

(A) constant; the 1970s

(B) variable; the Great Depression
(C) constant; World War II
(D) constant; the Vietnam War
(E) variable; the 1990s

5. According to the income approach, the largest contributor to GDP comes from?

(A) indirect business taxes

(B) firm profits
(C) compensation of employees
(D) the depreciation of fixed assets
(E) none of the above

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6. When the city of Los Angeles hires more police officers, may rise, but it may be
due to the associated with crime.
(A) GDP; costs
(B) revenues; costs
(C) tatxes; benefits
(D) interest rates; costs
(E) prices; costs
7. If the nominal GDP rises by 3% and the price level rises by 5%, then the real GDP
by percent.
(A) rises; eight
(B) falls; eight
(C) rises; two
(D) falls; two
(E) none of the above
8. To compare the size of two countries’ economies, we first need to convert each country’s GDP
to a common currency using and then adjust for .
(A) the interest rate; the exchange rate
(B) the exchange rate; price level differences
(C) price level differences; the interest rate
(D) the exchange rate; the interest rate
(E) the interest rate; fiscal policy
9. The economic principle of diminishing marginal product of capital is represented by the
mathematical assumption that the production technology .
(A) is always increasing
(B) is always decreasing
(C) is concave with respect to capital
(D) is convex with respect to capital
(E) is continuously differentiable
10. Given observed variation in capital-per-worker across countries, the neoclassical growth
model the cross-country variation in GDP-per-capita, when we assume TFP
is the same.
(A) over-predicts
(B) under-predicts
(C) exactly predicts
(D) exactly predicts only after 1980
(E) none of the above

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SECTION 2 Short Questions [30 points; 10 points each]

For each question, please provide a brief answer in the alotted space.

1. Stylized Facts on Economic Growth. For each of the following variables, identify in the
box whether it has a positive (+), negative (-), U-shaped (U), or ambiguous (A) relationship
with long-run growth.

(A) Urbanization
(B) Service sector employment
(C) Years of formal education
(D) Hours Worked
(E) Female Labor Force Participation

Question: (A) (B) (C) (D) (E)

Answers:

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2. The Neoclassical Production Model Recall the Neoclassical Production Model we stud-
ied in class with a constant returns to scale production technology. The firm’s decision
problem is given by:

max Π = AK α N β − rK − wN
K,L

where K is capital input, N is labor input, r is the price of capital, and w is the wage rate.

(A) In words, explain what it means for a production technology to have constant returns
to scale (CRS). What parameter restrictions on the above yields a CRS technology ?
.

(B) The firm’s optimal choice (demand) for capital and labor are given by the follow opti-
mality conditions:

r = αAK α−1 N β (Demand for Capital)

w = βAK α N β−1 (Demand for Labor)

Explain what these conditions say (in words) and why these equations characterize
optimal demand. (HINT: what happens if we replace equalities with inequalities?)
.

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3. Development Accounting and Total Factor Productivity Through the neoclassical

production model, we derived a theoretical prediction of the economic determinants of a
country’s GDP-per-capita. The formula was given by

(1)
1
y = Ak 3

where y is GDP-per-capita, k = K/L is capital per worker, and A is total factor productivity
(TFP).

(A) In comparing the model’s predictions to the data, which was the more important factor
in accounting for differences in GDP-per-capita between rich and poor countries, capital-
per-worker or total factor productivity?
.

(B) One reason economists think TFP varies across countries is due to a misallocation
of resources. Explain what is meant by this and provide an example of misalloca-
tion. Does the data suggest that misallocation grows or shrinks with economic growth?
.

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SECTION 3 Long Questions [60 points; 30 points each]

For each question, please provide a brief answer in the alotted space.

1. Measuring Gross Domestic Product. Consider the economy of the fantastical land of
Utopia which produces only two goods, Rainbows and Unicorns. Refer to the following NIPA
table summarizing production in Utopia during 2018-2019 in answering the following:

2018 2019

Quantity Unicorns 100 110

Quantity Rainbows 50 50

Price Unicorns $1.00 $1.50

Price Rainbows $10.00 $9.00

(A) Calculate the change in Utopia’s Nominal GDP between 2018 and 2019.
.

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(B) Using a Laspeyres index, calculate Utopia’s change in real GDP between 2018 and 2019.
.

(C) Does economic growth differ between your answers for (A) and (B)? Briefly explain.
.

(D) As an economist, the ministers of Utopia have asked you to compare their economic
performance to their neighboring country, Dystopia, in 2019. You are told that the
nominal GDP of Dystopia was 4,800 dystopian dollars; the exchange rate (Utopia dollar
/ Dystopia dollar) was 0.5; the relative price level (Putopia /Pdystopia ) is equal to 0.25;
and the interest rate in Dystopia is 1.05. Which country has the larger economy?
.

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(E) Some economists have argued that GDP-per-capita is an insufficient statistic to mea-
sure long-run growth because it misses many welfare improving changes to society (i.e.
literacy, crime rates, culture, etc.) and therefore may provide a misleading picture. In
a sentence or two, explain whether you think these criticisms are valid and the extent
to which they lead comparisons of GDP-per-capita to be misleading.
.

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2. The Consumption-Savings Model Recall the consumption-savings model with log utility
which we studied in class:

maximize log(ct ) + βlog(ct+1 )

ct ,st ,ct+1

subject to ct + s t = y t ,
ct+1 = yt+1 + (1 + r)st

where ct , ct+1 are consumptiton choices, st is the net asset position (borrowed or saved
money), yt , yt+1 is income in each period, β is the discount factor, and r the interest rate.

(A) In a sentence, explain the economic decision problem faced by households in the consumption-
savings model above. What are the endogenous variables? What does β represent?
.

(B) Show that the two period budget constraints can be combined into a single inter-
temporal budget constraint (IBC). What technology does the household have access
to that makes this possible?
.

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(C) Write down the Euler equation for the consumption-savings model with log-utility.
Explain in words what the mathematical equation says about the way households make
consumption and savings decisions.
.

(D) Suppose that in response to a recession, the government institutes a budget-neutral tax
policy which provides income transfers to households today that will be paid for by
future tax increases. Using the consumption-savings model, explain whether such a
policy will stimulate spending today. Justify your answer.
.

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