Economics II/Intermediate Macroeconomics (No. 5025) Prof. Dr. Gerhard Schwödiauer/ Prof. Dr. Joachim Weimann. Semester: Winter Semester 2002/03

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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: Winter Semester 2002/03 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. Okun s Law states that a) the inflation rate is a falling function of the unemployment rate; b) the growth rate of real GDP is a falling function of the increase in the unemployment rate; c) the unemployment rate is a falling function of the growth rate of real GDP. 2. Assume that the prices of imported raw materials increase. All other things being equal, this will a) have no impact on current GDP;. b) increase current GDP; c) reduce current GDP. Economics II/Intermediate Macroeconomics, page 1

2 3. Assume that the previous year is the base period for calculating the real GDP of the current year. Then the annual inflation rate of the implicit GDP-price index is a weighted average of the inflation rates of the various final goods entering GDP, where the weights are a) the currently produced quantities of the respective goods; b) the value shares of the respective goods in the real GDP of the previous year; c) the value shares of the respective goods in the real GDP of the current year. 4. Assume that real GDP is explained by a Cobb-Douglas production function of capital and labor inputs. Firms try to maximize profits and are, like households, price takers in all markets. From one year to the other the labor force increases because of less attractive leisure opportunities. As a consequence, the share of capital income in GDP will a) rise unless the trade unions prevent a fall in real wages;. b) not change as long as the market for capital services clears; c) fall if the additional labor force is employed at market-clearing wages. 5. Walras Law states that a) in a general competitive equilibrium demand equals supply in all markets; b) even outside of general equilibrium actual total savings are always equal to actual total investments; c) there cannot be excess supply in all markets. 6. Assume that real GDP is a function of capital and labor with the property that a 10-percent increase in both capital and labor inputs results in an 8-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; 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 government consumption fully financed by an increase in (lump-sum) taxes 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 rise of the savings rate will a) increase the steady-state growth rate;. b) not affect the marginal productivity of capital; c) temporarily generate higher real growth rates of GDP. 9. For an economy with a production function Y = K 0.2 N 0.8, a savings rate of 0.2, a zero depreciation rate, and a steady-state growth rate of GDP of 2 % the steady-state capital intensity is a) smaller than 10;. b) 10; 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 overaccumulation; c) characterized by underaccumulation. 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 smaller 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; c) the share of capital income will be higher than before. 12. Assume that for a constant labor force 10 % of the unemployed persons find a job every month, while during the same time 2 % of the employed individuals are losing their job. In this case, the steady-state ( natural ) unemployment rate is a) b) c) 1 / 10 ; 1 / 6 ; 1 / 5. Economics II/Intermediate Macroeconomics, page 3

4 13. By courageous reforms the government succeeds in reducing permanently the natural rate of unemployment. Under otherwise unchanged circumstances the Solow-model predicts that this would lead to a) temporarily higher growth rates of GDP at the cost of temporarily lower real wages; b) no additional growth of real GDP; c) temporarily higher GDP growth but a permanently lower real wage level. 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 wrong? a) The real wage grows at the rate of technical progress. b) The real capital rental is declining. c) Capital and labor earn constant shares of GDP. 15. What is fiat money? a) Money which is issued by the government. b) Money which the government issues but is not prepared to convert on demand into a certain quantity of precious metal. c) Money the purchasing power of which is decreed by the government. 16. Money in the definition of M1 comprises a) banknotes and coins; b) banknotes, coins and demand deposits (with domestic banks) held by the domestic non-banking sector; c) banknotes, coins, demand and time deposits (with domestic banks) held by the domestic non-banking sector. 17. Money is called 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; 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; 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 2 to 1. The banks hold 25 % of the deposits as reserves with the central bank. An increase in the monetary base by 1 billion increases the money supply to the non-banking sector by a) 1.5 billion ; b) 2 billion ; c) 2.5 billion. 20. According to the Baumol-Tobin model the income elasticity of money demand of an optimising individual is a) ½. b) ¾. c) Assume that the interest elasticity of money demand is positive. Then for an unchanged equilibrium real GDP and a given money supply a rise in the expected future inflation rates will, in equilibrium, a) bring about an increase in the current price level; b) have no effect on the current price level; c) bring about a fall in the real interest rate. 22. Assume that the marginal propensity to consume is 0.8 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 a) increases by 1.2 billion ; b) increases by 1.6 billion ; c) increases by 1.8 billion. Economics II/Intermediate Macroeconomics, page 5

6 23. Assume for the economy described in problem 22 that an increase in the interest rate by 1 percentage point (e. g., from 4 % to 5 %) causes investment and the demand for money to fall by 1 billion each, respectively. The income elasticity of money demand is 1. Under these assumptions, the increase in effective demand due to the fiscal measure described in problem 22 will lie a) below 1.2 billion ; b) in the range between 1.2 and 1.8 billion ; c) above 1.8 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; 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, an increase in the expected rate of inflation by 1 percentage point a) leaves the nominal interest rate unchanged; b) decreases 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. 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 = 2N ½ N 2, where N denotes current employment. Total labor supply is N = 1½. 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) ¼. c) ⅓. 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; 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 is false? a) The marginal productivity of capital is constant over time. b) Production is characterized by increasing returns to scale in capital and labor. c) A permanent rise in the savings rate will only temporarily increase the growth rate of real GDP. 30. The Phillips-curve is an empirical relationship according to which a) higher inflation rates are in the long run positively connected with higher growth rates of money supply; b) higher inflation rates are in the long run negatively related to lower growth rates of real GDP; c) higher inflation rates are positively related to lower unemployment rates. Economics II/Intermediate Macroeconomics, page 7