ECO 209Y MACROECONOMIC THEORY AND POLICY

Transcription

1 Department of Economics Prof. Gustavo Indart University of Toronto October 18, 2013 ECO 209Y MACROECONOMIC THEORY AND POLICY Term Test #1 LAST NAME FIRST NAME STUDENT NUMBER Indicate your section of the course: Monday, 2-4 L0101 Wednesday, 2-4 L0301 Tuesday, 2-4 L0201 Thursday, 2-4 L0401 INSTRUCTIONS: 1. The total time for this test is 1 hour and 50 minutes. 2. Aids allowed: a simple, non-programmable calculator. 3. Use pen instead of pencil. DO NOT WRITE IN THIS SPACE Part I /30 Part III 1. /10 Part II /20 2. /10 3. /10 TOTAL /80 Page 1 of 12

2 PART I (30 marks) Instructions: Enter your answer to each question in the table below. Table cells left blank will receive a zero mark. Each question is worth 2.5 marks. No deductions will be made for incorrect answers Consider an open economy without depreciation of the capital stock, without government transfer payments, and where personal income tax is the only source of government revenue. If GDP is $1000 billion, consumption is $650 billion, private savings is $150 billion, government purchases is $220 billion, and net exports is -$50 billion, which of the following is true in this economy? A) Disposable income is $900. B) Investment is $150. C) The budget deficit is -$20. D) Personal income tax is 250. E) None of the above. 2. Justin buys a newly-built house on July 1, for which he pays $350,000. Knowing that the rent for a similar house is $20,000 per year and that Justin previously lived rent-free with his parents, what is the impact of this transaction on this year s GDP? A) Consumption rises by $10,000 and investment rises by $350,000. B) Consumption rises by $350,000 and investment is unchanged. C) Consumption rises by $20,000 and investment rises by $350,000. D) Consumption is unchanged and investment rises by $350,000. E) Consumption rises by $10,000 and investment is unchanged. Use this space for rough work. Page 2 of 12

3 3. Suppose that an economy produces only apples, bananas, and oranges, and that prices (in dollars) and quantities (in millions of pounds) are as shown in the following table: Year 2011 Year 2012 Good Quantity Price Quantity Price Apples 20 $6 15 $5 Bananas 10 $8 15 $10 Oranges 5 $10 8 $12 Using the chain method of estimating real GDP growth, between 2011 and 2012 real GDP increased by approximately A) 16.0 percent. B) 19.8 percent. C) 23.5 percent. D) 20.6 percent. E) None of the above. 4. Consider an open economy in equilibrium where private savings equals private investment and the government has a balanced budget. Given the above, which of the following is true? [Note: The notation is as used in class.] A) C + I + G > Y. B) C + I + G < Y. C) NX < 0. D) X = Q. E) None of the above is true. 5. Consider the AE model of an open economy as developed in class. Suppose that the economy is initially in equilibrium and autonomous exports increase. All else equal, which of the following will be true in the new equilibrium? A) Government budget deficit will increase. B) Imports will decrease. C) Private investment will decrease. D) Consumption will decrease. E) Private savings will increase. Use this space for rough work. Page 3 of 12

4 Use the following data of a hypothetical economy to answer questions 6 and 7. Consumption expenditures 600 Government debt 0 Government expenditure on goods and services 220 Net exports 55 Capital consumption allowance (depreciation) 135 Corporate profits before taxes 150 Indirect taxes minus subsidies 125 Government transfer payments 100 Net income from abroad 75 Corporate and personal income taxes 180 Gross investment Given the information in the table above, what is the level of net domestic income? A) 950. B) 815. C) D) E) None of the above is correct. 7. Given the information in the table above, what is the level of gross national product (GNP)? A) B) 850. C) 975. D) E) None of the above is correct. 8. In a model with income taxes, an increase in exogenous imports will A) not affect the level of private saving. B) increase overall aggregate expenditure. C) increase the budget deficit. D) increase the level of consumption. E) decrease the trade deficit. Use this space for rough work. Page 4 of 12

5 9. Consider a hypothetical open economy with a marginal propensity to import (m) equal to 0.15 and an aggregate expenditure multiplier (α AE ) equal to 2.5. If the government of this country were to close the economy, i.e., to forbid any imports or exports, the corresponding aggregate expenditure multiplier (α AE ) would then be A) B) C) D) E) none of the above. 10. The Globe and Mail (Oct. 1, 2013) reported that the Bank of Canada was slashing its growth forecast for the Canadian economy from an expansion of 3.8 percent in the third quarter to a milder growth of only 2.0 percent. This less optimistic view was mainly the result of A) a reduction in consumption expenditure due to a loss of confidence. B) poor export performance due to the economic weakness of Canada s trading partners. C) a lack of growth in business fixed capital investment. D) a decrease in government expenditure in line with fiscal deficit reduction targets. E) both B) and C). 11. The ultimate objective of the so-called starve the beast theory is A) to eliminate government deficits. B) to reduce wasteful expenditures by the government. C) to improve efficiency in the economy. D) to minimize the size of the government. E) none of the above. 12. According to the September monthly report of the U.S. Congressional Budget Office, the U.S. federal deficit for the first 11 months of fiscal year (October through August) was $753-billion, which represented a massive $411-billion decrease over the same period a year earlier. Which of the following might account for most of this 35 percent decrease in the U.S. federal budget deficit? A) A reduction in transfer payments due to significant increases in employment. B) Substantial spending cuts as directed by Congress. C) Greater government revenues as a result of increases in national income and corporate profits. D) Greater government revenues due to the expiration of the payroll tax cuts in January. E) Both B) and C). Use this space for rough work. Page 5 of 12

6 PART II (20 marks) Consider the following model of a closed economy: Desired consumption expenditure C = YD 10i Desired investment expenditure I = i Y Desired government purchases G = 260 Government transfer payments TR = 100 Taxes TA = Y Full-employment income Y fe = 3200 a) As a function of Y and i, what is the equation for private saving (S) in this model? As a function of Y, what is the equation for public saving (BS)? As a function of Y and i, what is the equation for national saving (S N )? (3 marks) Page 6 of 12

7 b) If equilibrium income (Y*) is 3000, what is the equilibrium rate of interest (i*) in this economy? Show all your work. (2 marks) c) What are the values of private saving (S), public saving (BS), national saving (S N ), and investment (I) at the equilibrium income of part b) above? Show all your work. (4 marks) d) Suppose now that the central bank implements expansionary monetary policy and reduces the rate of interest to 4 percent (i.e., i = 4). At Y = 3000, what will be the values of private saving (S), national saving (S N ), and desired investment (I) when i = 4? Show all your work. (3 marks) Page 7 of 12

8 e) At i = 4 and Y = 3000, is the economy in equilibrium? Why or why not? If not, how is equilibrium to be restored? Briefly explain. (2 marks) If the economy is not in equilibrium at i = 4 and Y = 3000, what will be the level of equilibrium income if the central bank keeps the rate of interest constant at 4 percent? Show all your work. (2 marks) f) What are the values of private saving (S), public saving (BS), national saving (S N ), and investment (I) at the level of equilibrium income of part e) above? Show all your work. (4 marks) Page 8 of 12

9 PART III (30 marks) Instructions: Answer the following three questions in the space provided. Each question is worth 10 marks. 1. Critically comment on the following statement: A policy of greater government purchases and an unchanged budget surplus will have no impact on the level of income. Show your answer algebraically and explain the economics. Consider the aggregate expenditure model of a closed economy as developed in class, and assume that taxes are independent of income (i.e., t = 0) and there are no transfer payments (i.e., TR = 0). Page 9 of 12

10 2. Critically comment on the following statement: The simple expenditure multiplier would be smaller if desired investment expenditure were an increasing function of the level of income. Show your answer algebraically and explain the economics. Consider the aggregate expenditure model of a closed economy as developed in class. Page 10 of 12

11 3. Critically comment on the following statement: Government deficits reduce business and consumer confidence and thus governments should aim to keep a balanced budget at all times. Page 11 of 12

12 Use this space for rough work. Page 12 of 12