NAME: ID Number: 3. Lump sum taxes cause effects. a) Do not; wealth b) do; wealth c) do; substitution d) both (b) and (c).

Transcription

1 NAME: ID Number: Econ 302 Final May 11, 5:05 PM 7:05 PM Instructions: This exam consists of two parts. There are twenty-five multiple choice questions, each worth 2 points (totaling 50 points). The second part consists of 4 problems, also totaling 50 points. Please write clear answers that tell the examiner exactly what you want him/her to know. Make sure you write your name and student ID # on this exam. Good Luck! 1. A permanent increase in government spending crowds out: a) private consumption spending b) private investment spending c) permanent government consumption d) private consumption and private investment spending 2. For the government, is a source of revenue, while is a source of funds. a) transfer payments; issuing new money b) issuing new money, issuing new bonds c) taxes; purchases of government consumption goods d) None of the above 3. Lump sum taxes cause effects. a) Do not; wealth b) do; wealth c) do; substitution d) both (b) and (c). 4. For a unit change in government spending, suppose consumption decreases α and output increases β. Now, suppose when government spending increases temporarily, you observe no change in the real interest rate. What must be true about the relationship between α and β? a) α + β = 0 b) α + β = 1 c) α + β < 1 d) α + β > 1 5. With a lump sum tax and a nominal interest rate of R, someone who saves an extra dollar receives in the next period: a) 1 + R b) 1 + R-τ c) 1 + R(1-τ) d) None of the above.

2 6. The impact in the long run of a temporary increase in the marginal tax rate the after tax real interest rate and investment. a) raises; raises b) lowers; lowers c) raises; lowers d) none of the above 7. Which of the following is the best example of a graduated tax in the United States? a) Social security tax b) Medicare tax c) Federal income tax d) State income tax 8. The Ricardian Equivalence Theorem effectively states that a) spending by the government is considered by the public as equivalent to its own spending b) the timing of taxes does matter c) people view government issued bonds and money as equivalent d) a deficit financed tax cut has no real effect on the economy 9. An open market purchase of bonds for money by the government a) lowers the real interest rate and increases private investment b) decreases the level of output c) has no effect on the price level d) increases the price level but has no effect on real GDP 10. Suppose that Thailand has a large debt denominated in Thai Bhat. Can Thailand just reduce the government consumption to pay off this debt? If so, what happens to the number of Bhat that $1 can buy on the foreign exchange market? a) No way, and no answer is necessary for part two. b) Yes, number of Thai Bhat per U.S. Dollar decreases. c) Yes, number of Thai Bhat per U.S. Dollar stays the same. d) Yes, number of Thai Bhat per U.S. Dollar increases.

3 11. Suppose that Madison issues $1 million in debt to pay for a bigger football stadium. It plans on paying off this debt by making interest payments and rolling the debt forward every year. There s no inflation in Madison, Madisonian taxes are lump sum, and there are no government transfers. The nominal interest rate is expected to be 3% every year. The population of Madison is 1 million and expects to remain at that level forever. Each consumer in Madison will theoretically react in the same manner as if taxes: a) had been raised $1 dollar this year b) had been raised $.04 every year c) Neither a nor b d) Both a and b 12. Suppose a permanent negative shock to the production function affects one small country. That country s real interest rate will while its total expenditures on goods and services will. a) rise; fall b) not change; not change c) not change; fall d) none of the above 13. Suppose a permanent positive shock to the production function affects the entire world. Then in any small country, the real interest rate will while total expenditures on goods and services will. a) rise; fall b) not change; not change c) not change; fall d) none of the above 14. At time period 0, suppose that the rate of return on a 1-period bond is 14% in Germany, and 4% in the U.S. Further, suppose that at time period 0, the exchange rate is 2 German Marks / U.S. Dollar. All else equal, from what you know about purchasing power parity and interest rate parity, what would be reasonable expectations for you to have regarding the inflation rate in Germany and the U.S.? a) U.S. Inflation = 2%, German Inflation = 12% b) U.S. Inflation = 9%, German Inflation = -1% c) none of the above. d) both (a) and (b). 15. Suppose that the U.S. government consumption level rises permanently by $10 billion. According to our model, how much would we expect private consumption to change by? a) C should go up, but less than $10 billion. b) C should go up exactly $10 billion. c) C should go down more than $10 billion. d) C should go down, since government is consuming more.

4 16. Interest rate parity implies that a) nominal interest rates in different countries are always equal b) countries with higher inflation rates will have lower nominal interest rates than countries with lower inflation rates c) the faster a country s exchange rate depreciates, the higher it its nominal interest rate d) none of the above 17. Interest rate parity implies that a) nominal interest rates in different countries must be equal b) countries with higher inflation rates have lower real interest rates than countries with lower inflation rates c) the faster a country s exchange rate depreciates, the higher is its nominal interest rate d) None of the above 18. An Econ PhD student has $1. He sees the following exchange rates on his Reuters terminal: Japanese Yen / U.S. Dollar = 250, British Pound / U.S. Dollar = 1, Japanese Yen / British Pound = 300. According to his macroeconomic analysis, he expects that the British Pound / U.S. Dollar rate will increase, but isn t totally sure. He d really like to make some money, since T.A.ing doesn t pay very much and he needs to buy an XBOX 360. Is there an arbitrage (risk-free profit) opportunity? If so, what is it? a) No way. The PhD student is stuck with his Super Nintendo, tough luck. b) Yes. Buy Yen with Dollars, then buy Pounds with Yen, then buy Dollars with Pounds. Repeat. c) Yes. Buy British Pounds. Wait until tomorrow, and hope that the Pound / Dollar rate rises. d) Yes. Buy Pounds with Dollars, then buy Yen with Pounds, then buy Dollars with Yen. Repeat. 19. A current account deficit a. occurs when a nation s saving exceeds its investment b. occurs when a nation s investment exceeds its saving c. occurs when net foreign investment is positive d. None of the above 20. If, contrary to the Ricardian Equivalence Theorem, a deficit financed tax cut raises people s wealth, then a) The real interest rate rises b) Private consumption demand increases. c) Private investment decreases d) All of the above.

5

6 21. The desired stock of capital depends upon a. the real interest rate b. the rate of depreciation c. the marginal product of capital d. All of the above 22. Suppose that in an economy, there are more employed people than unemployed people. Which of the following condition is needed for the economy to ultimately reach the equilibrium? (a) job-finding rate + job-separation rate = 1 (b) job-finding rate is smaller than job-separation rate (c) job-finding rate is equal to job-separation rate (d) job-finding rate is greater than job-separation rate 23. Suppose that the production function is given by Y=AK α L 1-α. Also suppose that there is no population growth or technological progress. Then in this economy, long run growth in the level of GDP is possible if (a) α=0 and sa-δ>0. (b) α=0 and sa-δ<0. (c) α=1 and sa-δ>0. (d) α=1 and sa-δ< Suppose that the production function is Y = AK α and that A remains constant over time. Then the real interest rate A. increases as the economy grows B. remains constant as the economy grows C. decreases as the economy grows. D. may increase or decrease as the economy grows. 25. Suppose the nominal interest rate rises only because of an increase in the inflation rate. Then, the quantity of investment demanded a. Decreases b. Does not change c. increases d. changes in an ambiguous manner

7 Part 2: Answer the following four questions. 1. PPP and Interest Rate Parity: (15 points) Derive the formulas for Purchasing power parity and Interest rate Parity in relative form. Suppose that the return on domestic bonds held by foreigners in country i are subsidized at the rate s and that returns on domestic bonds held by residents of country j are taxed at the rate τ. Write down the interest parity condition (between countries i and j) as viewed by an investor in country k.

8 2. Current Account Balance: (10 points) Consider a two-country model. Assume that the Current Account Balance is initially positive for one country. Assume that a permanent positive shock to production affects the country which initially had a positive current account balance. Assume that the shift increases the MPK. Graphically, indicating the effect on the commodity market clearing. Be clear to indicate what happens to the real interest rate and the CA balance. Explain the intuition behind the graphs.

9 3. Economic Growth: (15 points) Suppose that the production function takes the form Y = AK α *L 1-α, where α = 1/3. Assume that the saving rate, s = 0.15 and the rate of depreciation δ = 0.05 Further, let A = 1, and L = 2, initially. a) Suppose that A doubles. What happens to the steady state real interest rate? What happens to steady state wage rate? (10 points)

10 b) Suppose that the steady state stock of capital is 20. What saving rate guarantees that the economy will converge to this level of capital? (You need to provide a numerical answer) (5 points)

11 4. Government Consumption (10 points) Consider the model of government spending that we considered in class. Assume that α represents the degree of substitutability between government consumption and private consumption. Assume that β is the effect of government consumption on production. Assume that a rise in government consumption raises the schedule for the marginal product of capital. Further, assume that α + β < 1. Draw a graph indicating the effect of a temporary increase in government consumption on the commodity market. Clearly indicate what happens to the consumption demand curve and the investment demand curve and explain. What is the difference between this model and the one we studied in class?