UC Davis Spring 2000 Alan M.

Taylor Economics 101 INTERMEDIATE MACROECONOMICS

Midterm Exam
ATTENTION: PRINT AND SIGN YOUR NAME AND WRITE YOUR ID NUMBER.

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THERE ARE 100 POINTS TOTAL ON THIS EXAM. MULTIPLE CHOICE: 30 QUESTIONS. 2 POINTS EACH. 60 POINTS TOTAL. PLACE A CHECK MARK NEXT TO THE CORRECT ANSWER. SHORT PROBLEMS: 5 QUESTIONS. 8 POINTS EACH. 40 POINTS TOTAL. WRITE THE ANSWER IN THE SPACE PROVIDED.

SCORE

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Section: 1 / MULTIPLE CHOICE QUESTIONS INSTRUCTIONS: PLACE A CHECK MARK NEXT TO THE CORRECT ANSWER. ___ 1. In the U.S. economy today, real GDP per person, compared with its level in 1900, is about: __ A. __ B. __ C. __ D. ___ 2. 50 percent higher. twice as high. three times as high. five times as high.

In an economic model: __ A. __ B. __ C. __ D. exogenous variables and endogenous variables are both fixed when they enter the model. endogenous variables and exogenous variables are both determined within the model. endogenous variables affect exogenous variables. exogenous variables affect endogenous variables.

___ 3.

The statistic used by economists to measure the value of economic output is: __ A. __ B. __ C. __ D. the CPI. GDP. the GDP deflator. the unemployment rate.

___ 4.

All of the following are a flow except : __ A. __ B. __ C. __ D. the number of new automobile purchases. the number of people losing their jobs. business expenditures on plant and equipment. the government debt.

___ 5.

Assume that the market basket of goods and services purchased in 1992 by the average family in the United States costs $14,000 in 1992 prices, whereas the same basket costs $21,000 in 1999 prices. However, the basket of goods and services actually purchased by the average family in 1999 costs $20,000 in 1999 prices, whereas this same basket would have cost $15,000 in 1992 prices. Given this data, a Laspeyres index of 1999 prices would be: __ A. __ B. __ C. __ D. 1.05. approximately 1.07. approximately 1.33. 1.50. 1

___ 6.

According to Okun's law, if the unemployment rate rises by about 1 percent over a year's time, the change in real GDP will be a rise of approximately: __ A. __ B. __ C. __ D. 5 percent. 3.5 percent. 2.5 percent. 1 percent.

___ 7.

The two most important factors of production are: __ A. __ B. __ C. __ D. goods and services. labor and energy. capital and labor. saving and investment.

___ 8.

When factor supply is fixed and quantity of the factor is graphed on the horizontal axis while factor price is graphed on the vertical axis, the factor: __ A. __ B. __ C. __ D. supply curve is horizontal. supply curve is vertical. supply curve slopes up to the right. demand curve slopes up to the right.

___ 9.

If the consumption function is given by the equation C = 500 + 0.5Y, the production function is Y = 50K 0.5L 0.5, where K = 100 and L = 100, then C equals: __ A. __ B. __ C. __ D. 1,000. 2,500. 3,000. 5,000.

__ 10.

According to the model developed in Chapter 3, when taxes decrease without a change in government spending: __ A. __ B. __ C. __ D. consumption and investment both increase. consumption and investment both decrease. consumption increases and investment decreases. consumption decreases and investment increases.

__ 11.

In the United Kingdom between 1730 and 1920, during wartime, government spending tended to increase: __ A. __ B. __ C. __ D. but the nominal interest rate did not increase. and the nominal interest rate also increased. but the nominal interest rate decreased. and the nominal interest rate also increased, but the inflation rate did not increase.

__ 12.

In the Solow growth model, if investment exceeds depreciation, the capital stock will ______ and output will ______ until the steady state is attained. __ A. __ B. __ C. __ D. increase; increase increase; decrease decrease; decrease decrease; increase

__ 13.

If a war destroys a large portion of a country's capital stock but the saving rate is unchanged, the Solow model predicts output will grow and that the new steady state will approach: __ A. __ B. __ C. __ D. a higher output level than before. the same output level as before. a lower output level than before. the Golden Rule output level.

__ 14.

The Golden Rule level of the steady-state capital stock: __ A. __ B. __ C. __ D. will be reached automatically if the saving rate remains constant over a long period of time. will be reached automatically if each person saves enough to provide for his or her retirement. implies a choice of a particular saving rate. should be avoided by an enlightened government.

__ 15.

Exhibit: Steady-State Consumption I

The Golden Rule level of the capital-labor ratio is: __ A. __ B. __ C. __ D. __ 16. k *A . above k*A but below k*B. k *B . above k*B.

Assume two economies are identical in every way except that one has a higher population growth rate. According to the Solow growth model, in the steady state the country with the higher population growth rate will have a ________ level of total output and __________ rate of growth of output per worker as/than the country with the lower population growth rate. __ A. __ B. __ C. __ D. higher; the same higher; a higher lower; the same lower; a lower

__ 17.

International data suggest that economies of countries with different steady states will converge to: __ A. __ B. __ C. __ D. the same steady state. their own steady state. the Golden Rule steady state. steady states below the Golden Rule level.

__ 18.

The productivity slowdown that began in the 1970s has been attributed, at least partly, to each of the following except : __ A. __ B. __ C. __ D. running out of new ideas about how to produce. a deterioration in the quality of education. a decline in the number of workers in the labor force. a lower average level of experience among workers.

__ 19.

If Y is output, K is capital, u is the fraction of the labor force in universities, L is labor, and E is the stock of knowledge, and the production Y = F (K ,(1 u ) EL ) exhibits constant returns to scale, then output (Y ) will double if: __ A. __ B. __ C. __ D. K is doubled. K and u are doubled. K and E are doubled. L is doubled.

__ 20.

If the number of employed workers equals 200 million and the number of unemployed workers equals 20 million, the unemployment rate equals ______ percent (rounded to the nearest percent). __ A. __ B. __ C. __ D. 0 9 10 20

__ 21.

All of the following are reasons for frictional unemployment except : __ A. __ B. __ C. __ D. workers have different preferences and abilities. unemployed workers accept the first job offer that they receive. the flow of information is imperfect. geographic mobility takes time.

__ 22.

Permitting a lower minimum wage for teenagers would likely: __ A. __ B. __ C. __ D. raise teenage unemployment. raise teenage wages overall. prevent teenagers from getting job experience. raise unemployment among unskilled adults.

__ 23.

Suppose that over the course of a year 100 people are unemployed for 4 weeks each (the short-term unemployed), while 10 people are unemployed for 52 weeks each (the long-term unemployed). Approximately what percentage of the total weeks of unemployment were attributable to the long-term unemployed? __ A. __ B. __ C. __ D. 9 percent. 10 percent. 43.5 percent. 56.5 percent.

__ 24.

Currency equals: __ A. __ B. __ C. __ D. M1. the sum of funds in checking accounts. the sum of checking accounts and paper money. the sum of coins and paper money.

__ 25.

Percentage change in P is approximately equal to the percentage change in: __ A. __ B. __ C. __ D. M. M minus percentage change in Y. M minus percentage change in Y plus percentage change in velocity. M minus percentage change in Y minus percentage change in velocity.

__ 26.

"Inflation tax" means that: __ A. __ B. __ C. __ D. as the price level rises, taxpayers are pushed into higher tax brackets. as the price level rises, the real value of money held by the public decreases. as taxes increase, the rate of inflation also increases. in a hyperinflation, the chief source of tax revenue is often the printing of money.

__ 27.

A positive relationship between nominal interest rates and inflation in the United States is obvious in: __ A. __ B. __ C. __ D. both recent data and nineteenth-century data. recent data but not nineteenth-century data. nineteenth-century data but not recent data. neither nineteenth-century data nor recent data.

__ 28.

The opportunity cost of holding money is the: __ A. __ B. __ C. __ D. nominal interest rate. real interest rate. rate of inflation. prevailing Treasury bill rate.

__ 29.

Between 1880 and 1896, the price level in the United States fell 23 percent. This movement was ________ for bankers of the Northeast and ________ for farmers of the South and West. __ A. __ B. __ C. __ D. bad; bad good; good good; bad bad; good

__ 30.

The hyperinflation experienced by interwar Germany illustrates how fiscal policy can be connected to monetary policy when government expenditures are financed by: __ A. __ B. __ C. __ D. new taxes. borrowing in the open market. printing large quantities of money. selling gold.

Section: 2 / SHORT ANSWER QUESTIONS INSTRUCTIONS: WRITE THE ANSWER IN THE SPACE PROVIDED.

31.

A) Suppose there is a technological breakthrough that increases the productivity of all capital and, consequently, increases the demand for investment. Using the long-run model of the economy developed in Chapter 3, graphically illustrate the impact of the increased investment demand. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction curves shift; and v. the terminal equilibrium values. B) State in words what happens to: i. the real interest rate; ii. national saving; iii. investment; iv. consumption; and v. output.

A)

B) i. ii. iii. iv. v.

real interest rate increases national saving is unchanged amount of investment is unchanged consumption is unchanged output is unchanged, fixed because it is determined by the factors of production

32.

It rains so much in the country of Tropicana that capital equipment rusts out (depreciates) at a much faster rate than it does in the country of Sahara. If the countries are otherwise identical, in which country will the Golden Rule level of capital per worker be higher? Illustrate graphically.

The Golden Rule level of capital per worker will be higher in Sahara.

33.

Suppose that technological change is not labor-augmenting, but affects only capital. Use the Solow growth model of Chapter 5 to graphically illustrate the impact of the slower rate of technological change that increases the rate at which capital wears out (the rate of depreciation increases) on the steady-state capital-labor ratio and the steady-state level of output per worker. Be sure to label the: a. axes; b. curves; c. initial steady-state levels; d. terminal steady-state levels; and e. the direction curves shift.

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34.

Assume that a society consists of two types of workers. For type A, 3 million workers lose their jobs each year, and each one takes a year to find a new one. For type B, 36 million workers lose their jobs each year (3 million per month), and each takes one month to find a new job. Thus, at any given time, 6 million are unemployed in this economy. A) How many "spells" of unemployment occur each year in this economy? B) What percentage of the "spells" are only one month long? C) If you take all the workers unemployed each year and multiply each by the length of his or her unemployment "spell," how many "months" of unemployment would there be in this economy each year? D) Of all the "months" of unemployment, how many are accounted for by the workers unemployed a year at a time?

A) B) C) D)

39 million 92.3 percent 72 million 50 percent

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35.

Assume that the demand for real money balance (M /P ) is M /P = 0.6Y 100i, where Y is national income and i is the nominal interest rate. The real interest rate r is fixed at 3 percent by the investment and saving functions. The expected inflation rate equals the rate of nominal money growth. A) If Y is 1,000, M is 100, and the growth rate of nominal money is 1 percent, what must i and P be? B) If Y is 1,000, M is 100, and the growth rate of nominal money is 2 percent, what must i and P be?

A) i = 4 percent, P = 1/2 B) i = 5 percent, P = 1

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