September , 12h

Transcription

1 Universidad Carlos III de Madrid World Economy September , 12h TYPE 1 EXAM DO NOT OPEN THE EXAM BEFORE YOU ARE TOLD TO DO SO Fill in your name, group, and ID number: Exam duration: 2 hours. Name and family name Group/Professor Please read carefully the following instructions. Not following them will result in a suspenso. (a) The only objects you may have on the table are: a calculator, pens, your ID or University card, and the exam. Leave all other objects (e.g. bags, coat, etc ) at the front end of the classroom. (b) Do not talk with any other student. Do not exchange any material with another student. (c) Do not use a pencil to write the exam. (d) Do not take apart the exam sheets Read carefully the following instructions: (a) The exam is made-up of two exercises (Part I) and one essay questions (Part II). You have to do BOTH exercises. Part III is a multiple-choice test. (b) The multiple choice test is eliminatory. You need to score 8 points out of 20 points. Scoring 8 points is a necessary, but not sufficient, condition to pass the exam. Answer the multiple choice test on the special sheet provided. Wrong answers in the multiple choice will be penalised by 1/3. (c) Space is limited. Only use the sheets allocated specifically for the answer of each part. You can use the back of the exam sheets as scrap paper. We will not correct answers which lay outside the allocated space. Answer in a clear and concise manner. DO NOT OPEN EXAM BEFORE YOU ARE TOLD TO DO SO

2 Exercise 1 (20%) PART I (40%) Imagine an economy that only produces two goods: good A that requires labour and capital, and good B that requires land and labour. The total labour supply of the economy is made-up of 6 labour units (workers). Given the quantity of capital and land, the production of each of the two goods depends on the quantity of labour used according to the following schedule: Workers Production of Production of good A good B MPl A MPl B a) Assume that price of good A is equal to 2 and that of good B is equal to 1. Determine graphically the wage, the allocation of labour and the production of both sectors (0.75 points) b) Draw the Production Possibility Frontier in a diagram; show the quantities of good A and B produced in equilibrium; explain why the slope of the Production Possibility Frontier at the equilibrium quantities is equal to the relative price. (0.5 points) c) Indicate the effect of an increase to 8 units of the labour supply on the results on of questions a) and b) above. (0.75 points) Exercise 2 (20%) Suppose that an economy is characterised by a constant savings rate s = 0,5. In addition, suppose that the depreciation rate of capital is given by δ = 0,1, and that population is constant, that is L = 1. The parameter A= 1 reflects the technology available in the country. Finally, the aggregate production function is given by: Y = A K α H (1- α), with α = 0,5 where H=L 2 is the amount of human capital available in the economy. a) Write the per capita product, y =Y /L, as a function of per capita capital, k = K/L, and population, L. (0.25 points) b) Obtain the dynamic equation that describes the evolution of per capita capital in this economy (0.5 points) c) Determine the steady state long-run equilibrium of this economy: long-run growth rate of per capita capital, growth rate of the aggregate capital stock (total, not per capita), long-run growth rate of per capita income, long-run growth rate of aggregate income. In case they exist, the long-run equilibrium (steady state) level of per capita capital and per capita income. (0.75 points) d) Suppose that population growth rate increases to 0.1. Compute the short run and long-run effects on the growth rate of per capita capital and income if the economy starts from the initial steady state. (0.5 points) ANSWER ON THE NEXT PAGES.

3 Answer to Part I: Workers Production of Production of good A good B MPl A MPl B You may continue on the next page.

4 Answer to Part I: You may continue on the next page.

5 Answer to Part I:

6 PART II: ESSAY QUESTIONS (20%) Describe the characteristics of the international monetary system created during the Bretton Woods conference in Describe and explain which factors contributed to its crisis. Answer to Part II

7 PART III: MULTIPLE CHOICE (40%) INDICATE THE CORRECT ANSWER ON THE SPECIAL SHEET PROVIDED. WE WILL ONLY CORRECT THE ANSWERS ON THIS SHEET. EACH ERROR WILL BE PENALISED (1/3). 1. According to the basic Ricardian model of trade, given the following information on the number of units of Clothes and Widgets produced by one unit or Labor, find the Units Labor Requirement to produce one unit of Cloth and one unit of Widget in both countries and choose the correct answer. Number of Units Produced by One Units Labor Requirement Unit of Labor Cloth Widget Cloth Widget Home Foreign (a) Neither country has a comparative advantage. (b) Home has a comparative advantage in cloth. (c) Foreign has a comparative advantage in cloth. (d) Home has a comparative advantage in both products. 2. According to the Ricardian two-country and two-good model of trade, a nation engaging in trade: (a) Has a Consumption Possibility Frontier that lies on or within the Production Possibility Set (b) Has a Consumption Possibility Frontier that coincides with the Production Possibility Frontier (c) Has a Consumption Possibility Frontier that lies on or outside the Production Possibility Set (d) Has a Consumption Possibility Frontier that lies on or within its trade partner s Production Possibility Set 3. In the Factor Specific Model, a ceteris paribus decrease in the price of all goods of the same magnitude leads to a new equilibrium characterized by: a) A proportional increase in the real incomes of all factors of production b) A proportional decrease in the real incomes of all factors of production c) A proportional decrease in the nominal incomes of all factors of production d) In each sector, a proportional decrease in real output 4. An important difference between tariffs and quotas is that tariffs: a) Raise the price of the good b) Generate tax revenue for the government c) Stimulate international trade d) There is no difference between a tariff and a quota, as they both restrict trade 5. The infant industry argument consists in: a) Comparative advantage is irrelevant to economic growth b) None of the other answers is correct c) Developing countries have no comparative advantage d) Developing countries have an absolute advantage the production of manufactures

8 6. Potentially, what disequilibrium could a persistent current account surplus reflect? a) Over-consumption b) Excessive budget deficits c) Excessive budget surpluses d) Over-investment 7. In the basic Neo-Classical Growth model (basic Solow model) and in the absence of technological progress, a drop in the savings rate leads to: a) In the short-run, the growth rates of per capita capital and income fall, and in the long-run, their growth rate goes to zero b) In the short-run, the growth rates of per capita capital and income increase, and in the long-run, their growth rate goes to zero c) In the short-run, the growth rates of per capita capital and income fall, and in the long-run, their growth rate falls d) In the short-run, the growth rates of per capita capital and income increase, and in the long-run, their growth rate increases 8. If a good is imported into (small) country H from (small) country F, then the imposition of a tariff in country H: a) Raises the price of the good in both countries (the Law of One Price ) b) Raises the price in country H and does not affect its price in country F c) Reduces the price of the good in both countries d) Reduces the price of the good in H and could raise it in F 9 Export subsidies a) Reduce domestic prices in the exporting country b) Benefit consumers in the exporting country c) Raise prices in the importing country d) Reduce consumers surplus in the exporting country 10. In the Ricardian model of trade, the slope of the Production Possibility Frontier: a) Decreases in absolute value along the Production Possibility Frontier b) Represents the combination of goods that can be consumed in the economy c) Increases in absolute value along the Production Possibility Frontier d) Is constant along the Production Possibility Frontier 11. Among the various attempts to solve the debt crisis, the Baker Plan: a) Suggested to shorten the repayment period in order to get out of the crisis more rapidly b) Allowed to extend the repayment period but without reducing the burden of the debt c) Was in favor of a partial cancellation of the debt burden through a reduction in the rate of interest applicable d) Launched the Highly Indebted Poor Country Initiative" aimed at reducing the debt of the poorest countries

9 12. The World Economic Forum regularly publishes the Global Competitiveness Index which is a measure of the competitiveness level for several countries. In every report, developing countries show low levels of the index, which reflects problems in achieving competitiveness in their economies. Hence, a) If the economies of developing countries opened to international trade, domestic firms would probably not survive and GDP of the country would fall b) None of the other answers is correct c) Given that the absolute levels of competitiveness (absolute advantages) of developing countries are lower than those of developed countries, developing countries would not benefit from free trade d) Even if developing countries do not have absolute advantages, they always have comparative advantages in the production of some goods and services and hence they would benefit from free trade 13. If the savings curve stands the depreciation schedule (constant rate), find which of the following statement is true in the context of the AK model of endogenous growth analyzed in class: a) The growth rate of GDP per capita depends on the stock of capital per capita b) There is not steady state c) Policies aimed at controlling the birth rate do not affect long run growth d) Policies which foster savings over time are useless to increase growth in the long run 14. In our country we need 12 hours of work to produce one unit of meat and 24 hours to produce one unit of milk, while in the rest of the World (*) they need 36 hours of work to produce one unit of meat and 18 for milk. Assuming that the equilibrium relative price is 1, determine the relative wage (wage of rest of the world over wage in our country) if there is free trade: a) W * /W = 2/3 b) W * /W = 1 c) W * /W = 1/4 d) W * /W = 1/2 15. The Triffin paradox/dilemma consists in: a) The paradox that the militar expenditure due to the Vietnam war have increased the economic growth in the USA and at the same time caused the devaluation of the dollar b) The doubts of the economic advisor of President Nixon, Mr. Triffin, with regard to whether the USA should change money for gold in August 1971 c).the fact that capital flight resulting from the Vietnam war led to deflation in the US which increased the competitiveness of US exports d) None of the other answers is correct 16. In the context of international negotiations, the issues related to intellectual and industrial property were introduced for the first time in the: a) Uruguay Round b) Kennedy Round c) Tokio Round d) Doha Round 17. Ceteris paribus and according to the Specific Factor Model with two goods and three factors of production, what is the effect of the increase in the stock of the factor Labor (Labor is the NOT specific factor; it is used in the production of both goods)? a) A reduction in the use of the other two factors of production b) An increase in the marginal productivity of Labor in the production of both goods

10 c) A decrease in the real hourly wage d) An increase in the real hourly wage 18. The Microcredit system introduced by the Grameen Bank: a) Compared to the traditional credit market (bank system), the morosity rate is lower b) It is based on a principle of reciprocal trust, such as if the borrower cannot repay the loan, the group has to pay back and also pay a fine c) It is a special kind of credit given by the bank aimed at fostering the development of the private sector in developing countries d) Gives small donations to women with more than 5 kids to realize micro investments 19. Which of the following statements is true?: a) Globalization is an unstoppable process that does not depends on policy decisions b) Globalization is independent from the degree of liberalization of capital movements c) Globalization can affect the income distribution within a country d) Globalization always reduce the income earned by workers in developing countries 20. The WTO (World Trade Organization): a) Kept the same dispute settlement process implemented under GATT b) In some cases, it allows for trade retaliation against a member country c) Was created in 1945 as one of the institutions of the Bretton Woods system, together with the World Bank and the FMI, in order to supervise and regulate international trade d) Does not allow for trade retaliation against a member country