NAME: ID # : Intermediate Macroeconomics ECON 302 Spring 2009 Midterm 1

Transcription

1 NAME: ID # : Intermediate Macroeconomics ECON 302 Spring 2009 Midterm 1 Instructions: This exam consists of two parts. There are twenty multiple choice questions, each worth 2.5 points (totaling 50 points). The second part consists of 3 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. Remember to use a No. 2 pencil to fill in the Scantron sheets Good Luck!

2 PART 1 Multiple Choice Questions: Choose the most appropriate answer amongst the four available choices. Only one of them is correct. (20 x 2.5 = 50 points) 1. Which of the following would cause indifference curves graphed over labor effort and consumption (with consumption measured on the x-axis) to become steeper? a. labor becomes less productive (MPL decreases for all values) b. the production functions shifts up in a parallel fashion c. a sudden change in preferences d. labor becomes more productive (MPL increases for all values) 2. According to our model, an increase in consumption expenditures a. increases real demand for money b. decreases real demand for money c. does not change real demand for money d. results in an ambiguous prediction for the real demand for money 3. Tom is paid every week and goes shopping twice a week. If he decides he wants to decrease his average money holdings, he should a. go shopping more often b. go shopping less often c. make no change d. move to a less wealthy neighborhood, so he seems better off in comparison 4. Richard makes $125 this year, $75 the next year and $250 the year after, and then dies. The interest rate is 5%. What is her permanent income? a. $150 b. $125 c. none of the above d. we cannot tell given this information 5. Marty goes to the bank 12 times/year. One day, he decides he loves banks, and so starts going 16 times/year. Both before and after the change he shops continuously and spends P*C for the year. This will cause his average money balance to a. decrease b. increase c. not change d. we cannot tell given this information

3 6. Consider an upward parallel shift to the production function. This causes the level of work effort to, so the MPL at the new level of work effort is the MPL at the old level of work effort. In addition, the level of consumption. a. fall; higher than; rises b. rise; equal to; falls c. fall; equal to; rises d. rise; lower than; falls 7. Which of the following conditions represents someone who has a positive wealth effect from money when the price level goes down? a. m 0 /P > m 1 /P b. m 0 /P < m 1 /P c. Both a. and b. d. Neither a. nor b. 8. In the models we studied in class, a decrease in the price level P a. increases real consumption demand b. decreases real consumption demand c. increases real supply of output d. Does not alter real consumption demand 9. A decrease in the transaction costs the frequency of transactions while an increase in the cost of making shopping trips (e.g. an increase in the cost of gasoline) the real money demand. a. increases; increases b. decreases; increases c. increases; decreases d. None of the above 10. Suppose that the interest rate goes up. Evaluate the wealth effect for a household that has b 0 > 0 and c t = y t in each period. a. positive wealth effect b. no wealth effect c. negative wealth effect d. None of the above

4 11. Two different points on the production function a. May be ranked in terms of their MPL b. Measure higher utility as both work and consumption increase c. Have the same level of utility d. Must have the same MPL 12. Points on the same indifference curves a. Are totally unrelated to one-another b. May be ranked, with a point on the higher indifference curve preferred to a point on a lower indifference curve c. Indicate different Marginal Utilities d. Indicate different combinations of labor and consumption such that the slope of a line between them equals the marginal product of labor 13. Suppose an individual who has access to credit markets becomes aware that next period his production function will shift upward. Also assume that the production function does not shift today. Then in the current period, he will a. Raise his consumption and his labor supply b. Raise his consumption and decrease his labor supply c. Change his consumption and labor supply in a way we cannot predict d. Not change his consumption and labor supply 14. A decrease in the interest rate that causes a pure substitution effect an individual s current quantity of consumption demanded and his current labor supply. a. lowers;lowers b. lowers; raises c. raises; lowers d. raises; raises 15. All of the following increase current period saving except a. A permanent, parallel upward shift in the production function. b. A current period, temporary parallel upward shift in the production function c. A current period, temporary proportional upward shift in the production function d. None of the above; that is, they all increase savings.

5 16. In the model with credit markets, individuals necessarily select the level of consumption and labor supply so that a. Each period s marginal product of labor is as large as it can be b. Each period s total output is as large as it can be c. Each period s marginal utility is maximized d. None of the above 17. Which of the following decreases the nominal demand for money? a. An increase in the price level b. An increase in the interest rate c. An increase in the amount of consumption expenditures d. An increase in the transactions costs of exchanging bonds for money. 18. Which of the following causes a decrease in work effort if Leisure were an inferior good? a. parallel downward shift in the production function. b. The substitution effect from an increase in the MPL schedule. c. Both A and B. d. None of the above 19. A once-and-for-all decrease in the level of the money stock causes the a. Interest rate to rise b. Level of output to fall c. Price level to fall d. All of the above 20. In the diagram showing a person's choice of consumption in two periods, an increase in the person's income in only the second period causes the. a. the budget line to shift out and, when first period consumption is measured along the horizontal axis, the budget line becomes steeper. b. budget line to shift out and not change its slope. c. indifference curves to shift out and not change their slope. d. budget line to shift out and, when first period consumption is measured along the horizontal axis, the budget line becomes flatter.

6 PART 2 I) Optimal Choices of consumption and leisure (20 points) Consider a worker with a utility function given by log(c 1 ) *log(c 2 ) where c 1 represents consumption in period 1 and c 2 represents consumption in period 2. Assume that this consumer has a two period horizon he does not care about his children. Let this consumer s income in the first period be y 1 and his income in the second period be y 2. Assume that the initial stock of bonds is zero. a. Assume that the interest rate is given by R. Derive the optimal choices for consumption in period 1 and period 2. (12 points)

7 b. Now imagine that there are many identical households in the economy with this very same utility function and the same income levels y 1 and y 2. Derive the equilibrium market clearing interest rate in this economy. (8 points)

8 II) Permanent Income (20 points) a. A consumer lives for four years. (You need to assume that his goal in life is to smooth his consumption over time) He receives $15,000 in the first year, $25,000 in the second year, $30,000 in the third year and $25,000 in the fourth year. The interest rate between the first and the second year is 7% while that between the second and the third is 0% and that between the third and the fourth is 100%. The price level is $1 in every. What is his permanent income? What is his annual consumption? What is the amount that he saves in the third year in nominal terms? (15 points) b. Now suppose that he does not have access to credit markets in the first and second year, but he does have access to credit markets in the third year. How much does he consume each year? (5 points)

9 III) Market Clearing (10 points) a. Suppose that farmers experience temporary negative shock to production. Assume that this change does not shift the marginal product of labor. The aggregate quantity of money does not change. Using three graphs, indicate what happens to aggregate output, Y; the interest rate R, the price level P and the real wage rate w/p. Explain intuitively what happens to the interest rate and why? (7 points) b. Suppose instead that the shock was permanent and affected the MPL. How would the commodity market clearing condition be affected? (3 points)