AUBG ECO 302 B FINAL EXAM

Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 35 questions,
each 1.5 points

1) Capital goods are 1)

A) produced in the same year as the related final good, whereas intermediate goods are
produced in different years.
B) produced in one year, whereas final goods are produced over a period of more than one year.
C) a type of intermediate good.
D) final goods, because they are not used up during a given year.

2) If C = $500, I = $150, G = $100, NX = $40, and GNP = $800, how much is NFP? 2)
A) -$10 B) $5 C) $10 D) -$5

3) Monica grows coconuts and catches fish. Last year she harvested 1500 coconuts and 600 fish. She 3)
values one fish as having a worth of three coconuts. She gave Rachel 300 coconuts and 100 fish for
helping her to harvest coconuts and catch fish, all of which were consumed by Rachel. Monica
consumed the remaining fish and coconuts. In terms of fish, total consumption by both Monica and
Rachel would equal
A) 700 fish. B) 1100 fish. C) 2700 fish. D) 900 fish.

4) An increase in the real wage rate will cause 4)

A) a movement along the labor demand curve.
B) the labor demand curve to shift to the left.
C) the labor demand curve to shift to the right.
D) the quantity of labor demanded to rise.

5) Suppose the marginal product of labor is 5)

MPN = 200 - 0.5N
where N is aggregate employment. The aggregate quantity of labor supplied is 300 + 8w, where w
is the real wage. What is the equilibrium quantity of employment?
A) 190 B) 760 C) 380 D) 12

6) The income effect of a higher real wage on the quantity of labor supply is the 6)
A) tendency of workers to supply more labor in response to becoming wealthier.
B) idea that workers feel psychologically wealthier when wages are higher, so they work more.
C) tendency of workers to supply less labor in response to becoming wealthier.
D) effect that income must rise when wages rise.

7) When a person receives an increase in wealth, what is likely to happen to consumption and saving? 7)
A) Consumption decreases and saving increases.
B) Consumption increases and saving increases.
C) Consumption increases and saving decreases.
D) Consumption decreases and saving decreases.

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 8) The yield curve generally slopes upward because 8)
A) longer maturity bonds typically pay higher interest rates than shorter maturity bonds.
B) longer maturity bonds typically pay lower interest rates than shorter maturity bonds.
C) longer maturity bonds are not taxable.
D) shorter maturity bonds have more default risk.

9) If the government cuts taxes today, issuing debt today and repaying the debt plus interest next 9)
year, a rational taxpayer will
A) leave a smaller gross bequest to her or his heirs.
B) spend the full amount of the tax cut today and reduce consumption next year.
C) increase saving today, leaving consumption unchanged.
D) increase consumption today, before taxes go up next year.

10) If a U.S. firm buys tulips from a Dutch firm and the Dutch firm uses the dollars it gets to buy U.S. 10)
stocks, the U.S. trade balance ________ and the U.S. capital and financial account ________.
A) falls; falls B) falls; rises C) rises; rises D) rises; falls

11) Suppose the current account shows debits of $5.3 billion and credits of $4.7 billion. The current 11)
account balance is ________, and the capital and financial account balance is ________.
A) -$0.6 billion; +$0.6 billion B) +$0.6 billion; -$0.6 billion
C) -$0.6 billion; -$0.6 billion D) +$0.6 billion; +$0.6 billion

12) In a large open economy like the United States, an increased government budget deficit which 12)
reduces national saving
A) reduces investment and improves the current account balance.
B) has no effect on investment, but reduces the current account balance.
C) reduces investment and reduces the current account balance.
D) has no effect on either investment or the current account balance.

13) A large open economy has desired national saving of Sd = 1200 + 1000rw, and desired national 13)
d
investment of Id = 1000 - 500rw. The foreign economy has desired national saving of S For = 1300 +

d
1000rw, and desired national investment of I For = 1800 - 500rw. The equilibrium world real

interest rate equals

A) 0.20. B) 0.15. C) 0.05. D) 0.10.

14) Suppose the current level of output is 5000 and the elasticity of output with respect to labor is 0.7. A 14)
10% increase in labor would increase the current level of output to
A) 5035. B) 5700. C) 5070. D) 5350.

15) In the textbook model of endogenous growth, long-run output growth would decline if there were 15)
either a ________ in the saving rate or a ________ in the depreciation rate.
A) rise; fall B) fall; fall C) fall; rise D) rise; rise

16) A good that is used as a medium of exchange as well as being a consumption good is called 16)
A) a commodity money. B) a debased money.
C) a barter money. D) a legal tender.

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17) The interest rate on long-term bonds is somewhat higher than suggested by the expectations 17)
theory because
A) the expectations theory doesn't account for taxes.
B) the Fed can only control short-term interest rates.
C) a risk premium exists.
D) an inflation premium must be added to long-term bonds.

18) An increase in the real interest rate would cause an increase in the real demand for money 18)
A) if expected inflation fell by more than the rise in the real interest rate.
B) if expected inflation fell by the same amount as the rise in the real interest rate.
C) no matter what the change in expected inflation.
D) if expected inflation fell by less than the rise in the real interest rate.

19) If real income rises 4%, prices rise 1%, and nominal money demand rises 4%, what is the income 19)
elasticity of real money demand?
A) 5/6 B) 1 C) 4/5 D) 3/4

20) Which of the following would shift the FE line to the left? 20)
A) A decrease in the capital stock
B) A decrease in the future marginal productivity of capital
C) An increase in labor supply
D) A beneficial supply shock

21) The IS curve will shift down and to the left when 21)
A) government purchases increase.
B) desired saving declines.
C) consumption increases.
D) the expected future marginal product of capital declines.

22) Banks decide to raise the interest rate they pay on checking accounts from 1% to 2%. This action 22)
would
A) decrease money demand, shifting the LM curve up and to the left.
B) decrease money demand, shifting the LM curve down and to the right.
C) increase money demand, shifting the LM curve up and to the left.
D) increase money demand, shifting the LM curve down and to the right.

23) In the classical model, a temporary decrease in government spending would cause a decrease in 23)
A) output, employment, real wages, and the price level.
B) output, employment, the real interest rate, and the price level.
C) output, the real interest rate, real wages, and the price level.
D) employment, the real interest rate, real wages, and the price level.

24) An adverse supply shock would directly ________ labor productivity by changing the amount of 24)
output that can be produced with any given amount of capital and labor. It would also indirectly
________ average labor productivity through changes in the level of employment.
A) increase; decrease B) increase; increase
C) decrease; increase D) decrease; decrease

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25) According to the misperceptions theory, if the Fed wanted to use monetary policy to influence the 25)
real economy it would have to
A) surprise the public with unexpected changes in monetary policy.
B) increase the money supply whenever the economy was in a recession.
C) abide by the monetary targets it announced.
D) decrease the money supply whenever the economy was in an inflationary boom.

26) Friedman and Schwarz argue that money is not neutral because 26)
A) money is a leading, procyclical variable.
B) theoretical models of the economy don't show monetary neutrality.
C) they found several historical incidents in which changes in the money supply were not
responses to macroeconomic conditions, and output moved in the same direction as money.
D) they found no evidence that productivity changes or changes in government spending
contributed to business cycles; only monetary changes preceded every recession.

27) If the menu cost theory is true, then firms that change prices less frequently than other firms are 27)
likely to be in
A) more competitive industries.
B) growing, rather than declining, industries.
C) less competitive industries.
D) service, rather than manufacturing, industries.

28) If firms are price setters, a small decline in the demand for their outputs will cause them to 28)
A) increase price in the short run to offset the effect on profits of a decline in output.
B) reduce price and reduce the level of output produced.
C) reduce output in the short run, but reduce price in the long run.
D) reduce price in the short run, but reduce output only in the long run.

29) In the Keynesian model in the short run, a decrease in government purchases causes output to 29)
________ and the real interest rate to ________.
A) fall; fall B) rise; rise C) rise; fall D) fall; rise

30) Easy monetary policy and tight fiscal policy lead to 30)
A) roughly unchanged real interest rates only when Ricardian equivalence holds; otherwise, low
real interest rates.
B) high real interest rates.
C) roughly unchanged real interest rates.
D) low real interest rates.

31) In the extended classical model, an unexpected decrease in aggregate demand would cause 31)
unanticipated inflation to be ________ and cyclical unemployment to be ________.
A) positive; positive B) negative; positive
C) positive; negative D) negative; negative

32) The Friedman-Phelps analysis shows that a negative relationship between inflation and 32)
unemployment holds
A) even if both the expected inflation rate and the natural rate of unemployment change.
B) even when expected inflation changes.
C) even when the natural rate of unemployment changes.
D) as long as the expected inflation rate and the natural rate of unemployment are
approximately constant.

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33) The costs of disinflation would be low if 33)
A) expected inflation falls as inflation falls.
B) wage and price controls were used.
C) the Phillips curve adjusted slowly to changes in inflation.
D) the Phillips curve were nearly horizontal.

34) When actual inflation is greater than expected inflation 34)

A) cyclical unemployment rises, according to Phillips-curve analysis.
B) the natural rate of unemployment rises, according to Phillips-curve analysis.
C) there are transfers from lenders to borrowers.
D) there are transfers from borrowers to lenders.

35) Which of the following disinflationary monetary policies would classical economists prefer? 35)
A) A cold turkey approach that is announced, but not credible.
B) A gradual approach that is unannounced.
C) A gradual approach that is announced and credible.
D) A cold turkey approach that is announced and credible.

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SHORT ANSWER/PROBLEMS: 4 problems, each 12.5 points. ANSWER ONLY 4. I will correct the first four responses so
CROSS OUT THE ANSWER you don't want me to grade.

36) Suppose the marginal product of labor in the economy is given by MPN = 200 - 0.5 N, while the supply of labor
is 100 + 4w.
(a) Find the market-clearing real wage rate.
(b) What happens if the government imposes a minimum wage of 40? Is there involuntary unemployment?
(c) What happens if the government imposes a minimum wage of 60? Is there involuntary unemployment?

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37) A large open economy has desired national saving of Sd = 20 + 200rw, and desired national investment of Id = 30
d
- 200rw. The foreign economy has desired national saving of S For = 40 + 100rw, and desired national

d
investment of I For = 75 - 400rw.

(a) Calculate the equilibrium values of rw, CA, CAFor, S, I, SFor, and IFor.
(b) Suppose Sd rises by 45, so that now Sd = 65 + 200rw. Calculate the equilibrium values of rw, CA, CAFor, S, I,
SFor, and IFor.
(c) Suppose, with Sd back to Sd = 20 + 200rw, as in part (a), that Id rises by 45, to Id = 75 - 200rw. Calculate the
equilibrium values of rw, CA, CAFor, S, I, SFor, and IFor.

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38) A country has the per-worker production function
0.5
yt = 5 k t ,

where y t is output per worker and kt is the capital-labor ratio. The depreciation rate is 0.2 and the population
growth rate is 0.05. The saving function is
St = 0.2Y t,
where St is total national saving and Yt is total output.
(a) What is the steady-state value of the capital-labor ratio?
(b) What is the steady-state value of output per worker?
(c) What is the steady-state value of consumption per worker?

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39) A Keynesian economy is described by the following equations.
Cd = 250 + 0.5(Y - T) - 250r
Id = 250 - 250r
G = 300
T = 300
L = 0.5Y - 500r + e
M = 3000
Y = 1250
e = 0
(a) Calculate the values of the real interest rate, the price level, consumption, and investment for the economy
in general equilibrium.
(b) Now suppose government purchases increase to 350 with no change in taxes. What will be the real interest
rate, the price level, output, consumption, and investment in the short run?
(c) What will be the real interest rate, the price level, output, consumption, and investment in the long run?

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40) The expectations-augmented Phillips curve is
= e - 2(u - 0.06).
(a) Graph the long-run Phillips curve and the short-run Phillips curve for an expected inflation rate of 0.04. Be
precise about the intercepts. If the Fed chooses to keep the actual inflation rate at 0.04, what will be the
unemployment rate? Label the equilibrium point "A". What is the numerical value of the natural rate of
unemployment?
(b) An aggregate demand shock (resulting from increased exports of goods) raises the inflation rate to 0.06 (the
natural rate of unemployment and the expected inflation rate are not affected). Show what happens on your
graph. Label the equilibrium point "B". What is the numerical value of the unemployment rate?
(c) In response to the aggregate demand shock, suppose the Fed allows the inflation rate of 0.06 to persist.
Show what happens on your graph, labeling the equilibrium point "C". In the long run, what is the numerical
value of the unemployment rate?
(d) From the situation in part (c), suppose a supply shock raises the natural rate of unemployment by .01 from
its original value. If both the inflation rate and the expected inflation rate do not change, show what happens in
your graph, labeling the equilibrium point "D". What is the numerical value of the unemployment rate?

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Answer Key
Testname: 302B.FINAL.15

1) D
2) C
3) B
4) A
5) C
6) C
7) C
8) A
9) C
10) B
11) A
12) C
13) D
14) D
15) C
16) A
17) C
18) A
19) D
20) A
21) D
22) C
23) B
24) C
25) A
26) C
27) C
28) C
29) A
30) D
31) B
32) D
33) A
34) C
35) D
36) (a) The market-clearing real wage rate equates the demand and supply of labor. Setting w = MPN = 200 - 0.5 N and
solving for N gives N = 400 - 2w, which represents labor demand. Equating labor demand to labor supply gives 400 -
2w = 100 + 4w, or 300 = 6w, or w = 50.
(b) A minimum wage of 40 has no effect, as it is below the market wage, so involuntary unemployment is 0.
(c) A minimum wage of 60 is binding, as it is above the market wage. At w = 60, labor demand is 400 - (2 60) = 280,
while labor supply is 100 + (4 60) = 340. So unemployment is 60 workers.

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Answer Key
Testname: 302B.FINAL.15

d d
37) (a) In equilibrium, Sd + S For = Id + I For so that 60 + 300rw = 105-600rw, or 900rw = 45, so rw = 0.05. Using this in the

formulas, we get S = 30, I = 20, CA = 10, SFor = 45, IFor = 55, and CAFor = -10.
(b) Now 900rw = 0, so rw = 0.0. Using this in the formulas, we get S = 65, I = 30, CA = 35, SFor = 40, IFor = 75, and C
AFor = -35.
(c) Now 900rw = 90, sorw = 0.10. Using this in the formulas, we get S = 40, I = 55, CA = -15, SFor = 50, IFor = 35, and C
AFor = 15.
Notice that the current account may swing from positive to negative, depending on the value of the real interest rate.
38) (a) sf (k) = (n + d)k, so 0.2 5k0.5 = 0.25k; or k0.5 = 4, so k = 16.
(b) y = 5k0.5 = 20.
(c) c = (1 - s)y = 0.8y = 16.
39) (a) r = 0.05, P = 5, C = 712.5, I = 237.5
(b) r = 0.10, P = 5, Y = 1300, C = 725, I = 225
(c) r = 0.15, P = 5.4545, Y = 1250, C = 687.5, I = 212.5
40) (a) Long run: vertical line at u = 0.06. Short run: downward sloping line (curve) crossing the long-run curve at =
0.04. The natural rate of unemployment is 0.06.
(b) Move up along same short-run Phillips curve; now unemployment rate = 0.05.
(c) Now, expected inflation rises to 0.06, with a shift to a higher short-run Phillips curve. The unemployment rate
rises to 0.06 as well.
(d) The long-run Phillips curve now shifts to the right at an unemployment rate of 0.07. With inflation and expected
inflation remaining the same, the short-run Phillips curve shifts to the right.

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