ECON 3010 Intermediate Macroeconomics Final Exam Multiple Choice Questions. (60 points; 3 pts each) 1. The returns to scale in the production function YY = KK 0.5 LL 0.5 are: A) decreasing. B) constant. C) increasing. D) subject to wide fluctuations. 2. If a production function has the property of diminishing marginal product, then doubling: A) all of the inputs will less than double the output. B) all of the inputs will double the output. C) all of the inputs will more than double the output. D) one of the inputs will reduce its marginal input. 3. A competitive firm hires labor until the marginal product of labor equals the A) real wage. B) rental price of capital. C) price of output. D) capital/labor ratio. 4. In a closed economy, with total output and taxes fixed, if government spending rises: A) consumption falls. B) national saving rises. C) the real interest rate falls. D) investment falls. 5. Suppose that a factory worker turns 62 years old and retires from her job. Which statistic is not affected? A) number of unemployed B) unemployment rate C) labor force D) labor-force participation rate
6. Which is not a part of M1? A) currency B) demand deposits C) saving deposits D) currency and demand deposits 7. How does a bank create money? A) by printing dollar bills and coins B) by taking deposits and making loans C) by charging interest on any loans it makes D) by keeping customer deposits in bank vaults 8. Which of the following is a type of open-market operation? A) The government sells Treasury bills to the public. B) The government prints money and uses it to buy army uniforms C) The Fed sells Treasury bills to the public. D) The Fed buys foreign currency in the exchange market. 9. One possible benefit from inflation is: A) inflation causes restaurants to update their menus more often. B) inflation reduces distortions to relative prices. C) if nominal wages are fixed, inflation decreases real wages. D) if nominal wages are fixed, inflation increases real wages. 10. If net capital outflow is positive, then: A) SS II is negative. B) private savings exceeds private investment. C) NX is positive. D) public saving exceeds public investment. 11. If a country s real exchange rate falls (depreciates), then: A) net exports rise. B) net exports fall. C) exports and imports rise by the same amount. D) exports and imports fall by the same amount.
12. The unemployment rate is 10 percent. The rate of job separation is 5 percent. How high does the rate of job finding have to be to keep the unemployment rate constant? A) 10 percent B) 45 percent C) 50 percent D) 90 percent 13. Efficiency wage theories claim that firms may pay high real wages in order to: A) avoid the threat of unionization. B) make workers more productive. C) discourage unskilled workers from applying. D) reduce the level of frictional unemployment. 14. Which of the following is NOT exogenous in the IS-LM model? A) the interest rate B) taxes C) the price level D) government expenditure 15. If the central bank increased the supply of real money balances, then the LM curve would: A) become steeper. B) become flatter. C) shift inward. D) shift outward. 16. According to the IS-LM model, an increase in government purchases causes a(n): A) increase in income and a decrease in the interest rate. B) decrease in income and a decrease in the interest rate. C) increase in income and an increase in the interest rate. D) decrease in income and an increase in the interest rate. 17. If the government raises taxes and the central bank increases the money supply, then the combined effect of these two policies would cause income to: A) fall. B) stay the same. C) rise. D) It cannot be determined from the information given.
18. In the sticky-price model, if no firms set their price in advance, then the short-run aggregate supply curve will be: A) horizontal. B) upward-sloping. C) downward-sloping. D) vertical. 19. The inside lag is the: A) time between a shock to the economy and the policy action responding to that shock. B) time between a policy action and its influence on the economy. C) time between a shock to the economy and the influence on the economy of a policy action. D) difference between the time it takes to implement monetary policy and the time it takes to implement fiscal policy. 20. Suppose that the government debt at the beginning of a certain year is 1,000, the nominal deficit during that year is 200, and inflation is 5 percent. The real deficit then is: A) 100. B) 200. C) 50. D) 150.
Problem Solving / Essay Questions. (140 points) #21. (30 pts) Consider a macroeconomy that produces three goods. Quantity Price Product 2014 2015 2014 2015 A 10 12 $8 $5 B 15 10 $5 $8 C 15 8 $4 $10 (a) (10 pts) Calculate nominal and real GDP for 2014 and 2015 using 2014 as the base year. What is the GDP deflator in 2014 and 2015? What is the corresponding inflation rate? (b) (10 pts) Assume that the typical consumer s basket of goods is given by (A,B,C) = (1,2,1). Calculate the CPI for 2014 and 2015, as well as the CPI inflation rate. (c) (10 pts) Congress is debating which inflation rate to use as a cost-of-living adjustment for social security recipients. However, the CPI and GDP deflator inflation rates are often different. Provide one argument in favor and one argument against using the CPI as the index for inflation.
#22. (30 pts) Assume the current U.S. adult population (N) is 250 million. The labor force is 157 million and the number of employed workers (E) is 148 million. (a) (10 pts) How many people are unemployed? What is the unemployment rate? How does it compare to the reported U.S. unemployment rate for April 2015? What is the labor force participation rate? (b) (10 pts) The U.S. labor force (LF) participation rate in 2000 was 67%. Give three reasons why the current LF participation rate might be different than the rate in 2000. Also, state two possible policy recommendations that might bring the LF participation rate closer to the 2000 level. (c) (10 pts) The rate of job separation (s) is 0.01 and the rate of job finding (f) is 0.19. What is the natural rate of unemployment? Find the number of people that will become separated from their job, the number that will find a job, and the new unemployment rate. Is the rate moving toward its natural level?
#23. (30 pts) Consider the following short-run, open-economy model of the economy. Goods Market Money Market CC = 100 + 0.9(YY TT) MM = 2000 II = 190 10rr; NNNN = 200 PP = 5 GG = 200; TT = 100 LL(YY, rr) = YY 100rr Aadland Spring 2015 (a) (10 pts) Graph the IS and LM equations and the find the equilibrium values of rr and YY. (b) (10 pts) Policymakers plan to balance the budget and are debating whether to decrease G or increase T. Which is preferable in terms of sacrificing GDP? (c) (10 pts) At equilibrium in part (a), what is the value of national saving? Investment? Net capital outflows? Show the results in a diagram.
#24. (30 pts) AD-SRAS-LRAS model of the economy. Assume the SRAS curve is upward sloping. (a) (15 pts) Political fighting in the Middle East, Iran s nuclear program, and the emergence of ISIS has caused households and businesses to be uncertain about the future of the U.S. economy. In response, households/ businesses are delaying large purchases/projects until the situation is more under control and a new presidential administration is in place. Use the AD-SRAS-LRAS diagram to discuss the predicted short-run and long-run impacts on the price level, real GDP and unemployment. (b) (15 pts) What are the policy options available to the Federal Reserve in the short and long run? Use an AD-SRAS-LRAS diagram to support your discussion.
#25. (20 pts) True or False. If False, explain why. (a) (5 pts) The current U.S. federal government deficit is approximately 70% of GDP. (b) (5 pts) Quantitative easing refers to the gradual reduction in federal taxes. (c) (5 pts) To hit a long-run target of 2% inflation, given 0% real GDP growth, the Fed should maintain 2% growth in the money supply. (d) (5 pts) The Taylor Rule for monetary policy is a simple equation created by John Taylor that recommends a value for the federal funds rate based on the deviations of inflation and output from their optimal levels.