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Second Midterm
Economics 201: Introduction to Macroeconomics
Winter Quarter 2020
Mark Witte
Northwestern University

Do not turn this exam over or begin working until you are told to do so.

We will post scores and grades on Canvas as soon as we can.

The test is out of 150 points and is worth 25% of your class grade. There is no guessing penalty so answer
all the questions. Please be thorough but concise. Verbose answers will not help you. You can use a
calculator. Handing the exam in on time (by 1:50) will gain you a bonus of 4 points. Handing the exam
in after 1:54 will cost you five points with the penalty rising after that.

This exam covers all readings, lectures, sections, and notes through Monday, February 24th. Reading
coverage: Krugman & Wells chapters 7-14, Buchholz chapters VI Marx and IX Keynes, Gordon, Gordon,
Klenow, and Rosling. Yield Curve, Budget Basics, NY Fed History, Radford.
The problems on this page refer to this table and these abbreviations. Consumption = C, Taxes = T,
Investment Demand = ID, Disposable Income = Y-T, Govt. Purchases of Goods and Services = G
Aggregate Expenditure = AE, the MPC is constant, Foreign trade is zero. Autonomous consumption = $195.
AS = Y T Y-T C ID G AE ΔInventories

$1,400 $250 $1,230 $100 $250

$1,600 $250 $1,410 $100 $250

$1,800 $250 $100 $250

$2,000 $250 $100 $250

$2,200 $250 $100 $250

$2,400 $250 $100 $250

$2,600 $250 $100 $250

1. (10 points) Fill in the table.

2. (5 points) How big a rise in autonomous consumption spending would it take to raise equilibrium by $400?

3. (5 points) How much of a tax change would it take to accomplish the same change?

4. (5 points) Tulsi Gabbard wins the 2020 Presidential Election with 105% of the vote. (We really should have been more
careful about those election-hacking trolls.) Because she’s random, she raises taxes and government spending by $100
each, which causes investment spending to fall by $40. What’s the new equilibrium level of output? (You’ll have to do
math here; the answer won’t necessarily hit any of the table choices exactly. Please show enough of your work that we can
understand how you got your answer.)
Put your short answers here:
2. 3. 4.

5. (5 points) What is equilibrium output in this economy? Taxes are $300. A rise in after-tax income of $140 raises
consumption spending by $70. Government Spending on Goods & Services is $350. Autonomous consumption is $40.
Exports are $10. Investment demand is $400. Imports are $15. Please show enough of your work that we can understand
how you got your answer.

6. (5 points) In the previous problem, how much are leakages when output is $2,000? How much are injections? Please
show enough of your work that we can understand how you got your answer.

7. (5 points) Everyone has an MPC of 0.8. Suppose I get a $100 tax cut on Friday. I go to the bank and put a deposit in
my savings account, and then go right to the grand opening of Matt Abitbol’s Commonwealth Running Company (1631
Sherman Avenue), and spend the rest of my tax cut on a pair of shoes (So worth it!). Matt sells me the shoes, takes my
payment, and puts some in the bank. He takes the rest and buys a lot of sandwiches from Soulwich (Also worth it!). How
much does Soulwich get paid as the result of all of this?

Person Δ(Y-T) ΔSaving ΔConsumption

Mark

Matt

Soulwich

Put your short answers here:

5. 6. Leakages = Injections = 7.
8. (5 points) Compute the Roger Stone version of the CPI using for 2020, using 2018 as a base year. Please show enough
of your work that we can understand how you got your answer. (YOUR ANSWER GOES IN BLANK AT BOTTOM)
P2018 Q2018 P2019 Q2019 P2020 Q2020

Foppish suits $74 4 $80 10 $100 5

Bond villain $12 10 $8 15 $10 20

sunglasses

Nixon back tattoos $10 1 $15 2 $20 3

9. (5 points) In the previous problem, what is the simple inflation rate from 2019 to 2020, using 2018 as the base year?

10. (5 points) Suppose that the interest rate were 10%. Which of these three bonds would have the greatest present value,
and how much would that be?
● X1 will pay $200/year forever (starting next year).
● X2 will pay $2,000 one year from today and that’s all.
● X3 will pay $2,500 two years from today and that’s all.

11. (5 points) In the previous problem, what would be your answer if the interest rate were 5%?

Put your short answers here:

8. 9. 10. 11.
12. (5 points) In Germany the inflation rate is 1.67%. The interest rate on their long-term bonds is -0.3%. What is the
growth in purchasing power for Germans who own these bonds?

13. (5 points) In the US, output per hour grew about 2.5% per year from 1891-1972. According to NU economist Bob
Gordon, in the future US output per hour has been growing at closer to 1% since 2004. If current trends continue, using the
Rule of 70, how much longer will it take to double output per hour at our current growth rate than it did from 1891-1972?

NOT ON THE MIDTERM THIS QUARTER 14. (5 points) I put $100 of currency into my savings account. Right away,
how much and in what direction does this change M1? Similarly, how much and in what direction does this change M2?

15. (5 points) For simplicity, suppose that we don’t have diminishing returns to capital. Let output per worker (Y/N) be
given by this function: Y/N = A*(10 + 0.2*(K/N)) “A” stands for productivity and we’ll start with A = 1 and K/N = 100,
so that Y/N = 30. As time goes by, K/N rises to be 200, but Y/N grows to be 125. What is the new level of productivity?

Put your short answers here:

12. 13. 14. △M1 = △M2= 15.
NOT ON THE MIDTERM THIS QUARTER 16. (5 points) When the Federal Reserve raises interest rates….
A. ...it is an example of Fiscal Policy.
B. ...it is a way for the Fed to increase Aggregate Demand.
C. ...it is as a direct result of newly passed authorizing legislation from Congress.
D. ...business finds it more expensive on the margin to borrow for investment, so total spending falls.
E. ...the higher rate of return causes the Investment Demand curve to shift outward.

17. (5 points) A rise in government borrowing is most likely to reduce investment demand when….
A. ...the economy is very weak to begin with.
B. ...interest rates are very high.
C. ...interest rates are very low.
D. ...global savings from places like India and China are very high.
E. ...the Federal Reserve does it quickly, rather than spreading it out over time.

NOT ON THE MIDTERM THIS QUARTER 18. (5 points) Thomas Piketty and Marx have views on economic inequality
that….
A. ...line up perfectly because they’re both French.
B. ...are similar in that Marx predicted rising inequality and Piketty has indeed found that inequality has risen steadily
since the time of Marx.
C. ...over time, inequality would largely continue since it was mostly the same people at the top.
D. ...are largely similar since neither think there’s anything we can do about it.
E. ...agree in that it’s just a matter of time until there’s a revolution.

Put your short answers here:

16. 17. 18.

GRAPH 1. (6 points) On a well-labeled graph of Real Output versus Aggregate Expenditure (a 45o diagram), show an
economy that is in equilibrium at 600. Label that point A. Show what would be happening to inventories at an output level
of 200. Label this point B. What would we expect firms to do in this situation?
GRAPH 2. (6 points) On a LRAS-SRAS-AD graph, draw an economy in an Inflationary Gap. Label this Point A.

GRAPH 3. (6 points) On the above graph, show how fiscal policy could fix the problem. Label this Point B.

GRAPH 4. (6 points) On the above graph, show how the economy’s Self-Correcting Mechanism would get us back to the
long run level of RGDP. Label this point C.
 On-time bonus? Yes: +4. No: + 0. Late: -5. (We will mark this one for you.)

ESSAY 1. (15 points) Caterpillar Tractor is a major exporter based in Peoria, Illinois. The coronavirus has shut down
much of China’s economy. Why might this be bad for business at a local diner in Peoria?

NOT ON THE MIDTERM THIS QUARTER ESSAY 2: (16 points) Why during the Great Depression were banks in
danger of “runs?” If a bank run might make a bank fail, why would people take part in them?