Economics II/Intermediate Macroeconomics (No. 5025) Prof. Dr. Gerhard Schwödiauer/ Prof. Dr. Joachim Weimann. Semester: Summer Semester 2004

Transcription

1 Matr.-Nr. Name: Examination Examiners: Economics II/Intermediate Macroeconomics (No. 5025) Prof. Dr. Gerhard Schwödiauer/ Prof. Dr. Joachim Weimann Semester: Summer Semester 2004 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. In order to pass this exam at least 20 points are needed. 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. The cyclically most volatile component of GDP in a typical OECD economy is x a) investment; b) public consumption; c) private consumption. 2. Due to an increase in unemployment the government has to spend 1 billion more on social benefits. In order to prevent a rise in the budget deficit it cuts its spending on investment by 1 billion. The private households marginal propensity to consume (mpc) is 0.4, the marginal tax rate is 0.5. Effective aggregate demand (at unchanged interest rates) a) does not change; b) falls by 0.5 billion; x c) falls by 0.75 billion. Economics II/Intermediate Macroeconomics, page 1

2 3. Suppose that aggregate investment rises by 50 billion. Since the private households become less pessimistic about their future incomes they reduce their saving by increasing autonomous consumption by 20 billion (while keeping their mpc unchanged at 0.4). As a consequence, aggregate saving in equilibrium a) falls by 20 billion. b) rises by 30 billion. x c) rises by 50 billion. 4. Assume that monetary policy succeeds in keeping the quantity of money constant, and that the interest elasticity of money demand is positive. Investment does not depend on current GDP but falls with rising interest rates. The private households mpc is 0.4. The marginal tax rate is 0.5. The government increases social transfers to households by 1 billion. As a consequence, aggregate effective demand increases by a) more than 0.5 billion; b) 0.5 billion; x c) less than 0.5 billion. 5. The Baumol-Tobin model implies an interest elasticity of aggregate money demand of a) bigger than ½ ; b) zero; x c) between ½ and zero. 6. According to the speculative motive hypothesis the demand for money x a) falls with a rise in the yield on longer-term bonds because people then expect bond yields to fall again in the future; b) rises with a rise in the yield on longer-term bonds because people then expect future bond prices to rise; c) rises with a fall in the yield on longer-term bonds because people then expect future bond yields to fall even further. 7. 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 the interest rate. 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. Economics II/Intermediate Macroeconomics, page 2

3 8. Suppose that aggregate investment falls with rising interest rates. Then additional government expenditure crowds out investment the less x a) the higher is the interest elasticity of money demand; b) the higher is the income elasticity of money demand; c) the lower is the interest elasticity of money demand. 9. Money supply in the definition of M2 comprises (in a closed economy) a) banknotes and coins in the possession of commercial banks and the non-banking public plus demand deposit held by the public; b) in addition to the items under a), the demand deposits of commercial banks with the central bank; x c) banknotes and coins in the possession of the non-banking public plus the latter s demand and time deposits with commercial banks. 10. Suppose that the non-banking sector holds 20 % of its total money demand in cash, and the commercial banks keep reserves of 25 % of their checkable deposits. If the central bank purchases financial assets from the commercial banks in the amount of 1 billion, the money supply to the public increases by a) 1 billion; b) 1.5 billion; x c) 2.5 billion. 11. In the short-run equilibrium described by the standard IS-LM model, a fall in the expected longer-run inflation rate by 1 percentage point a) lowers the nominal interest rate by 1 percentage point; b) leaves the nominal interest rate unchanged; x c) raises the real interest rate by less than 1 percentage point. 12. Suppose that the government wants to raise investment but keep aggregate effective demand constant. According to the IS-LM model, what would be an appropriate mix of fiscal and monetary policy? a) Increase in public investment, fully financed by cuts in social expenditures, keeping the money supply unchanged. b) Cut in social transfer expenditure while keeping the money supply constant. x c) Cut in government consumption, while increasing the money supply. Economics II/Intermediate Macroeconomics, page 3

4 PYP PYP P ; P. 13. The aggregate-demand function (AD-curve) is the less price elastic x a) the higher is the interest elasticity of money demand; b) the higher is the interest elasticity of aggregate investment; c) the lower is the interest elasticity of money demand. 14. The natural rate of unemployment, other things being equal, x a) rises with an increase in the producers mark-up on marginal cost. b) falls with an increase in the mark-up. c) is independent of the firms mark-up. 15. Assume that the marginal productivity of labor is constant in the short-run and equal to 1. The firms mark-up on marginal costs is 20 %. The real wage ϖ that is implicitly agreed upon in labor markets is determined by ϖ = 1- u, where u is the current rate of unemployment. The natural rate of unemployment is a) 7 ½ %; b) 12 ¼ %; x c) 16 ⅔ %. 16. For the model of problem 15, suppose that the wage contracts are based on an expected price level of 100. In order to attain an actual unemployment rate of 8 ⅓ %, the actual price level would have to be a) 96.5; x b) 110 c) For the model of problem 15 replace the assumption of constant marginal productivity by ⅔ one of a short-run production function Y = N P P, where Y is output and N employment. In this case the short-run aggregate supply function (AS-curve) is given by (for some parameter a > 0) a) P = app PY ; x b) P = app c) P = app e e e 2 3 Economics II/Intermediate Macroeconomics, page 4

5 18. During a phase of disinflation the unemployment rate rises above its natural level to an extent which is x a) the smaller the more comprehensive is wage indexation; b) the smaller the less comprehensive is wage indexation; c) independent of the extent of wage indexation. 19. An equilibrium in which GDP is at its natural level is disturbed by the central bank s increasing the money supply by 20 %. No further government action is undertaken. The private sector, however, expects that monetary policy in the future will be more expansionary than previously. In this case, the economy in the medium run approaches an equilibrium in which, compared to the previous equilibrium, a) the price level has risen by 20 %, real GDP is back at its natural level, and the interest rate remains unchanged. x b) real GDP is back at its natural level, but the price level has risen by more than 20 %, and the interest rate has risen too. c) real GDP is restored to its natural level, but the price level has gone up by less than 20 %, the interest rate has fallen. 20. The expectations-augmented Phillips curve is a relationship according to which a) higher unemployment rates are positively related to lower expected growth rates of GDP; x b) lower expected inflation rates are, for any given actual inflation rate, positively related to lower unemployment rates; c) higher inflation rates are in the longer run positively related to lower unemployment rates. 21. Suppose that during the medium-run adjustment process following the policy shock described in problem 19 economic agents hold static price expectations such that P t e = Pt-1. This implies a Phillips curve a) of the accelerationist type; x b) completely independent of inflation expectations; c) of the expectations-augmented type with slowly adjusting inflation expectations. Economics II/Intermediate Macroeconomics, page 5

6 gbyb and and denote, denote, ubtb πbtb BgBmt P NP 22. An economy is described by u Bt-1B = 0.4 (gbytb 0.03) π Bt-1B= (ubt B 0.05) gbyt B=B B πbtb where ubtb πbtb respectively, unemployment and inflation rates in period t, and gbmb respectively, the growth rates of real GDP and money supply. Which of the following statements is correct? a) The natural rate of unemployment is bigger than 5 %. b) If a medium-run equilibrium with a 13 % growth rate of money supply is disturbed by a permanent reduction of money-supply growth to 3 %, unemployment rates first go up and later on down again, while inflation rates converge monotonically to their medium-run equilibrium level of 0. x c) The policy shock described under b) temporarily generates deflation (negative inflation rates). 23. In an economy with a constant savings rate, real GDP is growing at a steady-state growth rate g. The Solow model predicts that a permanently lower savings rate would result in a) a lower steady-state growth rate of GDP per capita; x b) a permanently higher real rental price of capital; c) an unchanged growth rate of real GDP both in the medium and long run. 24. For an economy with a production function Y = KP P, a savings rate of 0.5, a depreciation rate of 0.03, and a steady-state growth rate of GDP of 2 %, the steady-state capital intensity is a) smaller than 10; b) 10; x c) bigger than 10. ½ ½ 25. For the economy of problem 24, the steady-state equilibrium is x a) optimal in the sense of the Golden Rule; b) an under-accumulation equilibrium; c) an over-accumulation equilibrium. 26. For a Cobb-Douglas production function with a production elasticity of capital of ⅓, a rate of Harrod-neutral technical progress of 2 % is equivalent to a rate of a) Hicks-neutral technical progress of ⅔ %. b) Solow-neutral technical progress of 3 %;. x c) Hicks-neutral technical progress of 1⅓ %. Economics II/Intermediate Macroeconomics, page 6

7 27. Suppose that in an economy with competitive markets and flexible, market-clearing goods and factor prices the average worker wishes to enjoy 5 additional hours of leisure per week. For otherwise unchanged circumstances the Solow model predicts a) some additional growth of real GDP; x b) temporarily higher real wage rates and lower real growth rates of GDP; c) permanently higher real wage rates and lower real capital rentals. 28. Assume that a steady-state growth equilibrium is disturbed by a once-and-for-all increase in total factor productivity. The elasticity of substitution between capital and labor is bigger than 1. The Solow model predicts that a) in the medium and long run the distribution of income changes in favor of wages; b) in the medium run the distribution changes in favour of capital incomes but does not change in the long run; x c) the distribution changes in the medium and long run in favour of capital incomes. 29. An economy with a growth rate of population and labor force of 2 % displays a steadystate growth rate of real GDP of 2 %. Assume that the population and labor-force growth rate drops permanently to 1 %. As a long-run consequence a) GDP per capita remains unchanged; x b) GDP per capita will be higher than before; c) the real rental price of capital increases. 30. Suppose that real GDP is in the long run explained by Y = K ¼ (EN) ¾, a constant labor force N = 100, and an effectivity of labor E = 2 K/N. Which of the following statements holds? a) Production is characterized by increasing returns to scale in capital and labor inputs. b) A positive growth rate of the labor force would generate a permanent positive growth rate of GDP. x c) An increase in the savings rate above the depreciation rate would yield a permanent positive growth rate of GDP. End of text Economics II/Intermediate Macroeconomics, page 7