Economics II/Intermediate Macroeconomics (No. 5025) Prof. Dr. Gerhard Schwödiauer/ Prof. Dr. Joachim Weimann. Semester: Summer Semester 2003

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1 Matr.-Nr. Name: Examination Examiners: Economics II/Intermediate Macroeconomics (No. 5025) Prof. Dr. Gerhard Schwödiauer/ Prof. Dr. Joachim Weimann Semester: Summer Semester 2003 The following aids may be used: Non-programmable pocket calculators; English language dictionaries without any marking. This exam comprises 30 problems. For each problem exactly one of the three optional answers is correct. Do not mark more than one answer to any of the questions, otherwise the solution will be considered false. For every correct answer you obtain 2 points, for every false answer 1 point is subtracted. If no answer is marked you neither obtain nor lose a point. Make sure that this copy of the exam bears your matriculation number and name in the appropriate fields at the top of this page! Examination Questions: 1. Assume that real GDP is produced by labor and capital according to a Cobb-Douglas production function, there is perfect competition in all markets, and the prices of capital and labor services adjust instantaneously to clear the respective factor markets. Under these circumstances, a wave of labor immigration into the economy will a) cause real wages to fall and the share of capital income in GDP to rise; b) leave real wages unchanged and increase total real labor income; x c) cause real capital rentals and total real capital income to rise. 2. Under the conditions given in problem 1, a destruction of part of the capital stock by a war will, when war is over and the labor force is unchanged, result (compared to before the war) in x a) higher real capital rentals but lower total real capital income; b) higher real wages but lower total real wage income; c) lower real wages and an unchanged real wage sum. Economics II/Intermediate Macroeconomics, page 1

2 3. Assume that the macroeconomic production function is characterised by an elasticity of substitution between capital and labor of 0.8 and that an epidemy has reduced the labor force by 10 %. As a result, the distribution of income between capital and labor will, in the short run, a) remain unchanged; x b) change in favor of wage income; c) change in favour of capital income. 4. Walras Law states that a) all prices are flexible enough to clear the markets instantaneously; x b) there cannot be excess demand in all markets; c) aggregate planned savings equal aggregate planned investments. 5. The quantity theory of money claims that a) the velocity of circulation is always equal to the value of transactions divided through the quantity of money; x b) a change in the stock of money results in the longer run in a proportional change in the price level; c) the velocity of circulation is independent of interest rates. 6. Assume that real GDP is a function of capital and labor with the property that an 8-percent increase in both capital and labor inputs results in an 10-percent increase in output. In this case profit maximization and price-taking behavior of all economic agents a) imply market-clearing factor prices above the respective marginal productivities of labor and capital; x b) are incompatible with general competitive equilibrium; c) imply positive economic profits in equilibrium. 7. In the standard, classical macroeconomic equilibrium model an increase in the government deficit due to a cut in (lump-sum) taxes x a) will cause the interest rate to rise; b) will not affect the interest rate if aggregate savings are an increasing function of the interest rate; c) will cause the interest rate to fall if the marginal propensity to consume is zero. Economics II/Intermediate Macroeconomics, page 2

3 8. Assume that an economy with a constant savings rate is growing at a steady-state growth rate g. The Solow-model predicts that a permanent fall of the savings rate will a) decrease the steady-state growth rate; x b) cause the marginal productivity of capital to rise; c) temporarily generate higher real growth rates of GDP. 9. For an economy with a production function Y = K 0.5 N 0.5, a savings rate of 0.2, a zero depreciation rate, and a steady-state growth rate of GDP of 4 % the steady-state capital intensity is a) smaller than 10;. b) 10; x c) larger than For the economy of problem 9, the steady-state equilibrium is a) optimal in the sense of the Golden Rule;. b) characterized by over-accumulation; x c) characterized by under-accumulation. 11. The growth rate of an economy s labor force is permanently reduced from 1 % to zero. Assume that the other relevant parameters remain unchanged. If the elasticity of substitution between labor and capital is bigger than 1, the Solow-model predicts that in the long run a) the capital intensity will be lower than before;. b) the share of capital income in GDP will be lower than before; x c) the share of capital income will be higher than before. 12. For a Cobb-Douglas production function with a production elasticity of labor of ⅔, a rate of Harrod-neutral technical progress of 3 % is equivalent to a rate of a) Hicks-neutral technical progress of 1.5 %; x b) Solow-neutral technical progress of 6 %; c) Hicks-neutral technical progress of 2.5 %. 13. Assume that over-regulation of labor markets increases the natural rate of unemployment permanently. Under otherwise unchanged circumstances the Solow-model predicts x a) temporarily higher real wages at the cost of temporarily lower growth rates of GDP; b) no additional growth of real GDP; c) temporarily lower GDP growth and a permanently lower real wage level. Economics II/Intermediate Macroeconomics, page 3

4 14. Consider an economy with constant labor force, savings rate and rate of Harrod-neutral technical progress. Which of the following statements about its long-run equilibrium is true? x a) The real wage grows at the rate of growth of real GDP. b) The real capital rental is declining. c) The real capital rental grows at the rate of technical progress. 15. The credible announcement of a future increase in the growth rate of money supply leads to a increase in the current price level x a) unless the money demand does not depend on interest rates; b) even if the money demand is independent of interest rates; c) only if current GDP does not respond to changes in monetary conditions. 16. Money in the definition of M2 comprises a) banknotes and coins; b) banknotes, coins and demand deposits (with domestic banks) held by the domestic non-banking sector; x c) banknotes, coins, demand and time deposits (with domestic banks) held by the domestic non-banking sector. 17. Money is called super-neutral if a) an unanticipated once-and-for-all change in the stock of money leads to a proportional change in the money prices of all goods and assets without affecting any real variables in equilibrium; x b) a perfectly foreseen change in the future growth rate of the money supply would not affect any equilibrium real variables (except for the nominal interest rate and the velocity of circulation); c) the so-called quantity equation holds. Economics II/Intermediate Macroeconomics, page 4

5 18. The monetary-base multiplier is the ratio a) of the amount of currency held outside the banks to the bank reserves; b) of the amount of demand deposits to the total amount of central bank money; x c) of the amount of currency and demand deposits outside the banks to the total amount of central bank money. 19. Suppose that the non-banking sector holds its money balances in the form of bank deposits and cash in the proportion of 3 to 1. The bank reserves with the central bank do not depend on the volume of deposits. An increase in the monetary base by 1 billion increases the money supply to the non-banking sector by a) 2.5 billion ; b) 3 billion ; x c) 4 billion. 20. According to the Baumol-Tobin model the interest elasticity of aggregate money demand is a) ½. x b) > ½ but < 1. c) Assume that the interest elasticities of money demand and investment demand are positive. Then for a given money supply a rise in the expected future inflation rates will, in short-run macroeconomic equilibrium, bring about a) an increase in the current price level while leaving the nominal interest rate unchanged; b) a fall in the current price level and the real rate of interest; x c) a fall in the real interest rate and a rise in the current price level. 22. Assume that the marginal propensity to consume is 0.4 and the marginal tax rate on household income is 50 %. The government increases lump-sum transfers to households by 1.2 billion. As a consequence, all other things being equal, effective demand x a) increases by 0.6 billion ; b) increases by 1.2 billion ; c) increases by 1.8 billion. Economics II/Intermediate Macroeconomics, page 5

6 23. Assume for the economy described in problem 22 that money demand is proportional to income but completely inelastic with respect to interest rates. Money supply is kept unchanged. Under these assumptions, the increase in effective demand due to the fiscal measure described in problem 22 will lie x a) below 0.3 billion ; b) in the range between 0.3 and 0.6 billion ; c) above 0.6 billion. 24. In the standard Keynesian model, an expansionary fiscal policy is crowding out private investment because a) the increased demand for new credit by the government causes an increase in interest rates; x b) the expanding effective demand is accompanied by a rising demand for money balances; c) investors expect higher taxes on profits in the future. 25. In the short-term macroeconomic equilibrium, described by the IS-LM model, a fall in the expected rate of inflation by 1 percentage point a) leaves the nominal interest rate unchanged; x b) increases the real interest rate by less than 1 percentage point; c) leaves the real interest rate unchanged. 26. Suppose that the government wants to raise investment but keep output constant. In the IS-LM model, what mix of monetary and fiscal policy will achieve this goal? a) Cut in taxes, increase in the money supply. x b) Cut in government expenditure, increase in the money supply. c) Cut in taxes without increasing the budget deficit, keeping the money supply unchanged. 27. Suppose that the short-run aggregate production function is given by Y = N ½ N 2, where N denotes current employment. Total labor supply is N = 1. The employers are profit maximizing price takers in output and labor markets. Assume that the trade unions succeed, at the end of the previous period, in setting the nominal wage rate W for the current period at a level that maximizes the expected aggregate real wage income. This implies a normal ( natural ) rate of unemployment of a) 0. b) ⅓. x c) ½. Economics II/Intermediate Macroeconomics, page 6

7 28. Assume that for the economy of problem 27 the actual price level in the current period, due to a previously unexpected upward shift in the aggregate demand curve, is higher than the expected price level on which the negotiated wage W was based. In this case, the actual current unemployment rate would a) not deviate from the natural rate; x b) drop below the natural rate; c) rise above the natural rate. 29. Assume that potential real GDP is given by Y = K ⅓ (EN) ⅔, where the labor force N = 3 and labor efficiency E is dependent on the size of the capital stock K according to E = ⅓K. The saving rate is constant and bigger than the depreciation rate. Which of the following statements holds? a) The marginal productivity of capital is declining over time. b) Production is characterized by constant returns to scale in capital and labor. x c) A permanent rise in the savings rate will permanently increase the growth rate of real GDP. 30. The Phillips-curve is a relationship according to which a) higher inflation rates are in the long run positively connected with higher growth rates of money supply; b) higher unemployment rates are related to lower growth rates of real GDP; x c) higher inflation rates are in the short run positively related to lower unemployment rates. - End - Economics II/Intermediate Macroeconomics, page 7