ECO 301 MACROECONOMIC THEORY UNIVERSITY OF MIAMI DEPARTMENT OF ECONOMICS PRACTICE FINAL EXAM Instructor: Dr. S. Nuray Akin

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1 ECO 301 MACROECONOMIC THEORY UNIVERSITY OF MIAMI DEPARTMENT OF ECONOMICS PRACTICE FINAL EXAM Insrucor: Dr. S. Nuray Akin Name: ID: Insrucions: This exam consiss of 12 pages; please check your examinaion bookle. The oal number of poins is 100. You have 2.5 hours o complee he exam. Good luck! PART I MULTIPLE CHOICE QUESTIONS Insrucions: This par consiss of 40 muliple-choice quesions, each of which is worh 1.5 poins. Circle one and only one answer. 1) The savings curve is upward sloping, because (a) high ineres raes increase he fuure reurns ha households obain from heir savings. (b) high ineres raes increase he opporuniy cos of consuming oday so ha people save more o smooh heir consumpion. (c) low ineres raes reduce he ineres income on curren savings, forcing people o save more. (d) a and b. 2) Which of he flowing is NOT rue abou he Breon Woods agreemen? (a) I aimed o bring sabiliy o he world economy. (b) I involved acive paricipaion of each counry s Cenral Bank in he foreign exchange marke. (c) The Agreemen was abolished when he Oil Crisis hi he economy. (d) The US agreed o fix he value of he dollar according o is endowmen of gold reserves. 3) The heory ha he real exchange rae should be equal o one, because free rade should lead o prices being equalized everywhere, is called (a) Uncovered ineres rae pariy. (b) Covered ineres rae pariy. (c) Purchasing power pariy. (d) Relaive purchasing power pariy. 1

2 4) Some newly indusrialized counries, especially in Eas Asia, have pursued acive governmen policies o encourage saving. If such policies were o increase he savings rae from, say 15% o 20%, and produciviy does NOT grow a all, hen he Neoclassical heory predics ha (a) This will have no effec on GDP per capia. (b) The seady sae per capia capial sock will be higher, bu he growh rae will be zero in he long-run. (c) The seady sae per capia capial sock will be higher, and he growh rae will be higher forever. (d) The growh rae of he economy would increase by 5%. 5) The real ineres rae is calculaed from he nominal ineres rae by (a) Adding he expeced rae of inflaion o he nominal ineres rae. (b) Muliplying he nominal ineres rae by he expeced inflaion rae. (c) Subracing he expeced inflaion rae from he nominal ineres rae. (d) Dividing he nominal ineres rae by he expeced inflaion rae. 6) The main difference beween he exogenous and endogenous heories of growh is ha (a) In he exogenous model, growh resuls from he accumulaion of capial, bu in he endogenous model i resuls from unexplained produciviy growh. (b) Growh in he exogenous model resuls from unexplained improvemens in produciviy, bu in he endogenous model produciviy improvemens depend upon aggregae capial because of learning by doing. (c) Populaion growh is he key mechanism driving growh in he exogenous model, bu no in he endogenous model. (d) All of he above. 7) Wha is he money demand funcion when he uiliy of money for he represenaive M M household is given by U Y, = 0.5ln( Y) + 0.5ln( )? P P (a) D M / P = Y / i (b) D M / P = 2 Y / i (c) D M / P = 0.5 Y / i D M / P = Y / 0.5i (d) ( ) 8) If seignorage is he main source of revenue for he governmen, which of he following will happen? (a) The counry will prosper because now i has a lo of money (b) The money supply will decrease (c) The counry will no collec inflaion ax (d) The counry will observe inflaion. 9) An increase in endowmens of capial will: (a) Shif labor supply o he righ (b) Shif labor supply o he lef (c) Shif labor demand o he righ (d) Shif labor demand o he lef 2

3 10) The relaive price of a baske of foreign goods, valued in erms of a baske of domesic goods, is called: (a) Nominal exchange rae. (b) Purchasing power pariy. (c) Real exchange rae. (d) Floaing exchange rae. 11) If Coca-Cola sells is producs in he Dominican Republic, bu buys he syrup (raw maerials) in Georgia, and he Dominican currency weakens wih respec o he Dollar, hen Coca-Cola has: (a) Earned more income from is operaions in he Dominican Republic relaive o he amoun paid in Dollars for heir inpu. (b) Earned less income from is operaions in he Dominican Republic relaive o he amoun paid in Dollars for heir inpu. (c) I does no affec Coke, because hey sell big quaniies in many counries. (d) I does no affec Coke, because he demand for heir produc is inelasic. 12) The price of a ypical bundle of goods in Mexico is 200 Pesos and he price of a similar bundle of goods in Ialy is 400 Euros. If he exchange rae is 0.5 Euros o a Mexican Peso, hen which of he following is rue? (a) The Mexican and Ialian baskes are equal in price. (b) The Ialian baske is.25 as expensive as he Mexican baske; hence Euro should depreciae for he purchasing power pariy o hold. (c) The Mexican baske is.25 as expensive as he Ialian baske; hence Euro should depreciae for he purchasing power pariy o hold.. (d) The Mexican baske is.25 as expensive as he Ialian baske; hence Peso should depreciae for he purchasing power pariy o hold. 13) Which of he following is an example of Cyclical unemploymen? (a) Job seekers search ineffecively o find a job. (b) Unemploymen as a resul of a echnological revoluion. (c) A company absains from hiring, because i believes here are no enough qualified individuals available for he job. (d) Cubacks resuling from a recessionary economic phase. 14) Which of he following should increase he nominal exchange rae of dollars per peso? (a) Americans sar preferring Mexican goods o homemade goods. (b) Mexico's real GDP increases. (c) Peso is expeced o depreciae. (d) The Mexican ineres rae decreases. 15) Which of he following is NOT claimed by Keynesian economic hough? (a) Governmen inervenion is necessary when markes do no funcion perfecly. (b) Unemploymen can exis in he marke naurally. (c) Firms may be willing o pay higher han equilibrium wages o arac qualiy workers. (d) The economy has perfecly funcioning markes. 3

4 16) Georgia is a small open economy ha akes he world ineres rae r w as given. Assume r w =0.25, he invesmen demand I= 5- r w, and he household uiliy funcion log C 1 + 2log C 2. There are 5 unis of income in he firs period and 0 unis of income in he second period. The counry is a) Ne borrower of 13/4 b) Ne borrower of 10/3 c) Ne borrower of 17/12 d) Ne lender of 17/12 17) Suppose ha a new ax is imposed on a firm every ime i hires a worker. Wha would happen o he efficiency wage and unemploymen as a resul of his ax? a) Efficiency wage increases, unemploymen decreases. b) Efficiency wage decreases, unemploymen decreases. c) Efficiency wage decreases, unemploymen increases. d) Efficiency wage increases, unemploymen increases. 18) Which of he following is a radable good? a) haircu b) consrucion c) house d) airplane engines 19) Suppose ha he per worker urnover cos for a firm is given by c 0.33/ ( w/ p) be he efficiency wage for his economy? a) 0.29 b) 1.74 c) 0.57 d) 17.4 =. Wha will 20) Suppose ha Joe, an Economics suden a Universiy of Miami, has he opporuniy o purchase his exbooks in boh he US and in Mexico wih no exra coss or rade barriers. The price of his Economics exbook is $140 dollars in he US, and 210 pesos in Mexico. The nominal exchange rae is 0.5 dollars per peso. Then, a) The real exchange rae is.75, and he should purchase he book in he Unied Saes b) The real exchange rae is.75, and he should purchase he book in Mexico c) The real exchange rae is 1.25, and he should purchase he book in he Unied Saes d) The real exchange rae is 1.25, and he should purchase he book in Mexico 21) The efficiency wage heory argues ha a) Firms choose o pay a higher wage han he classical equilibrium wage, hus he real wage is higher han he wage a which he labor marke clears. b) Firms choose o pay a higher wage han he classical equilibrium wage, hus he real wage is lower han he wage a which he labor marke clears. c) Firms choose o pay a lower wage han he classical equilibrium wage, hus he real wage is lower han he wage a which he labor marke clears. d) Firms choose o pay a lower wage han he classical equilibrium wage, hus he real wage is higher han he wage a which he labor marke clears. 4

5 22) Which of he following is a flow variable? a) Income b) Wealh c) Capial d) Governmen deb 23) When moneary policy is NOT neural, a) Boh he real and nominal variables change. b) Real variables change, nominal variables don. c) Nominal variables change, real variables don. d) Neiher nominal, nor real variables change. 24) Which of he following saemens is NOT a possible explanaion why he purchasing power pariy does no hold? a) Exisence of non-radable goods in a ypical baske b) Free rade affecing real prices c) Differences in consumer preferences among naions d) Exisence of ariffs 25) Under he floaing exchange rae sysem, when he nominal exchange rae increases, we say ha he dollar agains he foreign currency. a) Appreciaes b) Devaluaes c) Depreciaes d) Revaluaes 26) Johnny los his job as an elecrical engineer for a manufacurer ha was pu ou of business by echnology changes. He has been acively looking for a job for he pas wo years. Johnny is a) a discouraged worker b) srucurally unemployed c) fricionally unemployed d) cyclically unemployed 27) If he Unied Saes is on a sysem of fully flexible exchange raes and he ineres rae in a foreign counry rises relaive o ha in he Unied Saes, hen a) he asses from he foreign counry become less aracive b) he demand for he foreign currency will shif lefwards c) he exchange rae will increase as he foreign currency becomes sronger d) he exchange rae will decrease as he domesic currency becomes weaker 28) Wha conclusion can be made from he Neoclassical Growh Model? a) There is a posiive relaionship beween he savings rae and per capia capial in he seady sae. b) There is a negaive relaionship beween depreciaion rae and he capial per capia. c) Boh (a) and (b) d) None of he above. 5

6 29) Consider a small open economy. If here is a posiive produciviy shock in he counry, how will he domesic capial marke be affeced? a) The domesic ineres rae will rise. b) The domesic ineres rae will decrease. c) The domesic ineres rae will say he same. d) The invesmen demand will fall. 30) The means ha he raes of reurn should be equalized among naions for similar asses afer correcing for percenage change in he curren exchange rae. a) Purchasing Power Pariy b) Covered ineres rae pariy c) Uncovered ineres rae pariy d) Real Exchange Rae 31) Which of he following is NOT a growh fac for he US? a) The share of consumpion expendiures in GDP has been seady. b) The share of capial income in GDP has been seady. c) The share of labor income in GDP has been seady. d) The mos imporan facor in GDP per capia growh has been he increase in capial. 32) Suppose ha a governmen spends $200 on goods and services, pays $50 as ransfer paymens o individuals, and runs a budge surplus of $100. Then, he ax revenue of he governmen mus be a) $150 b) $350 c) $50 d) $250 33) If he invesmen and savings funcions are I(i) = 1/(3i) and S(i,Y) = 5Y, wha is he resuling IS curve? a) i = 1/(5Y) b) i = 15Y c) i = 1/(15Y) d) i = 3/5Y 34) When a counry fixes he rae a which i exchanges is domesic currency agains anoher for a long definie period, a) The counry employs a sof peg. b) The counry employs a hard peg. c) The counry depreciaes is currency. d) The counry devalues is currency. 35) For an individual who ries o opimally choose beween consumpion and leisure, he budge consrain indicaes a) he maximum oupu ha can be produced wih a given amoun of labor. b) he oal expendiure on goods ha can be suppored by wage earnings. c) he maximum uiliy ha can be reached by consumpion and work. d) he difference beween oal revenue and oal cos of producion. 6

7 36) Suppose he governmen wans o boos aggregae demand hrough fiscal and moneary policy insrumens. Which of he following policy mixes will deliver he desired resul, unambiguously? a) Increase governmen spending and he money supply so ha he ineres rae does no rise. b) Increase governmen spending bu reduce money supply, so ha GDP does no increase. c) Increase axes and money supply. d) Reduce ransfers made o privae ciizens. 37) Suppose ha he real money supply and real money demand funcions are given by S d M / P = 250and M / P = 0.25Y 5i, respecively. Then, he equaion for he LM curve is a) i=0.25y-250 b) i=0.5y-50 c) i=0.05y-50 d) i=0.05y+50 38) Which of he following is he disposable income of a naion? a) Governmen expendiures (G) + Governmen ransfers (TR) Tax revenue (T) b) Governmen expendiures (G) + Governmen ransfers (TR) + Tax revenue (T) c) GDP + Governmen ransfers (TR) Tax revenue (T) d) GDP Governmen ransfers (TR) Tax revenue (T) 39) The labor supply funcion a) shows he amoun of labor firms are willing o employ a each real wage. b) shows he fracion of ime households devoe o work a each nominal wage. c) is posiively sloped if he subsiuion effec dominaes he wealh effec. d) is posiively sloped if he wealh effec dominaes he income effec. 40) Risk aversion is defined as. a) The risk one runs of no diversifying b) Preference of savings raher han invesing c) Preference of seady raher han flucuaing income d) None of he above 7

8 PART II MODEL SOLVING Insrucions: This par of he exam consiss of four quesions. Show all your calculaions o ge credis. Quesion 1 (10 poins). Endogenous growh heory Consider an economy wih savings rae s=0.2, depreciaion rae δ=0.08, producion funcion Y = 2 ( Q L ) K + 1 = (1 δ ) K I. Assume ha his economy is closed so ha I. There is no populaion growh. The law of moion for capial is as usual: K + S =, where S = s. Y. Suppose ha Q varies direcly wih he level of capial sock per worker, i.e., Q =K /L for all. (i) Define he seady sae for his economy. (ii) Find he seady sae level of capial sock per capia and seady sae level of GDP per capia in his case. Y +1 (iii) Wha is he growh rae of his economy? (The growh rae is given by 1.) Y 8

9 (iv) Consider wo economies, A and B, wih he same iniial capial sock and same producion funcion. Suppose ha boh counries have he same savings rae, i.e, A B s = s = 0.5 ; bu he depreciaion rae in A is bigger han ha of B, i.e., A B δ = 0.05, δ = Wha is he predicion of he endogenous growh heory in erms of he growh pahs of he wo counries? Provide a graph which suppors your explanaion. 9

10 Quesion 2 (10 poins). Exogenous growh heory Consider an economy wih savings rae s=0.1, depreciaion rae δ=0.05, producion funcion ( ) Y = K Q L, where L =1 for all =0, 1,2,. Assume ha populaion doesn grow. The law of moion for capial is as usual: K + 1 = (1 δ ) K + I. Assume ha his economy is closed so ha S = I, where S = s. Y. Suppose ha ha Q is exogenously fixed a Q = 8for all. (i) Find he seady sae capial sock per capia and GDP per capia in his case. (ii) Provide he graph for his economy ha shows he ransiion of he economy o he seady sae. Make sure ha your graph analyzes wo cases: 1. iniial capial sock k 0, which is below he seady sae level, 2. iniial capial sock k 0, which is above he seady sae level. 10

11 Quesion 3 (10 poins). Savings, invesmen, and capial marke equilibrium in a closed economy Suppose a firm produces curren oupu from invesmen I made he previous period according o he producion funciony = log I. Invesmen is financed by borrowing a a real ineres rae of r. The uiliy funcion of he represenaive household is given byuc ( 1, C2) = logc logC2, where C 1 is he consumpion in he firs period, and C 2 is he consumpion in he second period. The household earns 2 unis of income in he firs period and 0 unis in he second. (a) Wrie down he household s problem and solve for savings and consumpion in each period. (b) Wrie down he firm s problem and solve for he invesmen demand curve. (c) Find he equilibrium ineres r. 11

12 Quesion 4 (10 poins). Exchange raes The following able gives daa on ineres raes and prices in he US and Germany as well as he nominal exchange rae (dollars per euro) beween 2000 and Boh counries are under he flexible exchange rae regime. Year Price index in he US (in $) Price index in Germany (in ) Exchange rae ($ per ) (a) Year 2000 Calculae he real exchange rae for each year. Real exchange rae (b) In which years did he dollar depreciae? (c) Would a German ouris be beer-off in he US in 2001 or 2002? Why? 12