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Grade /100 Midterm Exam Fall 2017 Supervisor
Date: Monday, November 6, 2017. signature
Course Title: Introduction to Macroeconomics
(BCOR 240)
Duration: 2 Hours
Groups: All groups.
Number of pages: 6

INSTRUCTIONS
1. Books and notes are not permitted.
2. Calculators (only basic) are permitted.
3. Cell phones are not permitted.

MULTIPLE CHOICE QUESTIONS (30 marks; 1.5 each)

Choose the right/best answer. Choosing more than one answer will receive zero.

Question 1: Question 11:

1.A 1.B 1.C 1.D 11.A 11.B 11.C 11.D 11.E
Question 2: Question 12:
2.A 2.B 2.C 2.D 12.A 12.B 12.C 12.D 12.E
Question 3: Question 13:
3.A 3.B 3.C 3.D 13.A 13.B 13.C 13.D
Question 4: Question 14:
4.A 4.B 4.C 4.D 14.A 14.B 14.C 14.D 14.E
Question 5: Question 15:
5.A 5.B 5.C 5.D 15.A 15.B 15.C 15.D
Question 6: Question 16:
6.A 6.B 6.C 6.D 16.A 16.B 16.C 16.D 16.E
Question 7: Question 17:
7.A 7.B 7.C 7.D 17.A 17.B 17.C
Question 8: Question 18:
8.A 8.B 8.C 8.D 18.A 18.B
Question 9: Question 19:
9.A 9.B 9.C 9.D 19.A 19.B 19.C 19.D
Question 10: Question 20:
10.A 10.B 10.C 10.D 20.A 20.B

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1. Macroeconomics focuses on the performance of
a. Individual consumers.
b. Government agencies.
c. The overall economy.
d. All of the choices are correct.

2. Economic models are used by economists to

a. Predict economic behavior.
b. Develop economic policies.
c. Explain economic behavior.
d. All of the choices are correct.

3. The opportunity cost of something is:

a. Greater during periods of rising prices.
b. Equal to the money cost.
c. Less during periods of falling prices.
d. What is given up to acquire it.

4. Double counting would occur if:

a. GDP were calculated by adding together C, I, G, and NX.
b. Used goods were included in the GDP calculation.
c. Imports were subtracted from GDP.
d. Inventories were added to the GDP calculation.

5. The real GDP is a function of

a. The total expenditures of consumers, investors and government.
b. The sum of wages, salaries, corporate profits, rents and interest.
c. Only the state of technology.
d. The quantities of labor, capital and the state of technology.

6. Real GDP is more accurate than nominal GDP in making comparisons of output
over time because
a. Nominal GDP can increase simply because of price increases over time.
b. Real GDP is not affected by output changes.
c. Nominal GDP is the hypothetical output that would be produced at full
employment.
d. Real GDP is not affected by changes in productivity or the size of the labor force.

7. If real GDP falls from one period to another and the price level stays the same, we can
conclude that
a. Nominal GDP increased.
b. Inflation increased.
c. Nominal GDP decreased.
d. NDP decreased.

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 8. If nominal GDP decreases from one year to the next:
a. Prices must have fallen from one year to the next.
b. Real GDP must have fallen from one year to the next.
c. Prices and real GDP must have fallen from one year to the next.
d. Either output or prices or both must have fallen from one year to the next.

9. Which of the following is investment, according to an economist?

a. The purchase of U.S. savings bonds.
b. A collection of rare coins.
c. An increase in business inventories.
d. The purchase of a new family car.

10. An increase in business inventories during a time period, ceteris paribus, will
a. Decrease GDP during that period.
b. Increase GDP during that period.
c. Not affect GDP during that period but will increase GDP in later periods when the
inventory is sold.
d. Never affect GDP because changes in inventories are not included in the calculation
of GDP.

11. If there is an increase in the price of apples which causes consumers to purchase fewer
kilograms of apples and more kilograms of oranges, the Consumer Prices Index (CPI) will suffer
from
a. Consumer preference bias.
b. Substitution bias.
c. Base year bias.
d. Bias due to unmeasured quality change.
e. Bias due to the introduction of new goods.

12. If government spending exceeds tax collections,

a. There is a budget deficit.
b. Public debt will fall
c. There is a budget surplus.
d. Private saving is positive.
e. Public saving is positive.

13. Disposable income is equal to

a. Personal taxes + personal income.
b. Personal taxes - personal income.
c. Consumption - saving.
d. Consumption + saving.

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 14. The "basket" on which the Consumer Prices Index (CPI) is based is composed of
a. Consumer production.
b. Products purchased by the typical consumer.
c. Raw materials purchased by firms.
d. Total current production.
e. A selection of consumer goods typically purchased over the last 30 years.

15. The most important factor affecting a household’s consumer spending is:
a. Its expected future disposable income.
b. Its current disposable income.
c. Its wealth.
d. The current interest rate.

16. At an income of $100,000, I spent $90,000 on consumer goods. When my income rose to
$200,000, I spent $160,000 on consumer goods. My marginal propensity to consume is:
a. 0.9
b. 0.8
c. 0.7
d. 1
e. $70,000

17. Does the Tunisian Finance Law (Loi de Finances) 2018 have
a. A macroeconomic impact.
b. A microeconomic impact.
c. Both macroeconomic and microeconomic impacts.

18. The inflation rate computed using the GDP deflator has to be exactly equal to the inflation
rate computed using the CPI.
a. True.
b. False.

19. The current inflation rate in Tunisia is about

a. 5.5%.
b. 1.5%.
c. 10.5%.
d. very close to zero.

20. Are the Alcoholic Beverages and Tobacco part of the Tunisian CPI basket ?
a. Yes.
b. No.

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EXERCICE 1 (20 marks)
Let L denotes the factor of production labor and K denotes the factor of production capital. Given
two parameters α and β, the function f(.,.) is defined as:

f(K, L) = Kα Lβ.

1.1 If α=0.3 and β=-0.7 (β is negative), could the function f represent a production function Y=
f(K, L)? (1 mark) Explain. (3 marks)

1.2 If α=1.3 and β=0.7, could the function f represent a production function Y= f(K, L)? (1 mark)
Explain. (3 marks)

1.3 Choose α and β such that the function f does represent a production function Y= f(K, L). (2
marks) Suppose that immigration increases the labor force by 10 percent.
1.3.1 What happens to total output Y (in percent)? (4 marks)
1.3.2 Competitive profit-maximizing firms hire labor until its marginal product equals the
real wage (W/P), and hire capital until its marginal product equals the real rental rate (R/P). Use
these facts to find what happens to the rental price of capital (in percent)? (3 marks) And what
happens to the real wage (in percent)? (3 marks)

EXERCICE 2 (15 marks)

"Bitcoin is an innovative payment network and a new kind of money" (source www.bitcoin.org).
"Bitcoin, introduced in 2009, is a worldwide cryptocurrency and digital payment system called the first
decentralized digital currency, as the system works without a central repository or single administrator."
"In spite of the fact that a lot of virtual currencies have been created in recent years, bitcoin is the best
known from all of them and regularly reported in the news. Currency without identified creator is
appreciated by its user for non-centralized running, without any chance of governments to influence the
money supply. The advantages of bitcoin, such as very quick payments worldwide, stop of inflations caused
by governments trying to solve their own problems or high level of transactions privacy are widely
mentioned."
"According to the opinion of Bitcoin supporters the store of value function is not fulfilled by fiat currencies
and in fulfilling this function virtual currencies are the most competitive. There is also the argument that
whole success of virtual currencies is based on the fact of non-inflation character."

2.1 Is Bitcoin a commodity money? (1 mark) Explain. (3 marks)

2.2 Is Bitcoin a fiat money? (1 mark) Explain. (3 marks)
2.3 Does Bitcoin fulfill the store of value money function? (1 mark) Explain using the definition
of the function store of value. (2 marks for the definition and 2 marks for the explanation)
2.4 In the context of Bitcoin, what is money supply? (1 mark) and how to conduct monetary
policy? (1 mark)

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PROBLEM (35 marks)
P.1 Given the following consumption schedule, compute the Marginal Propensity to Consume
(MPC). (2 marks)
Consumption Income Taxes
500 TND 1200 TND 200 TND
800 TND 1800 TND 300 TND
1100 TND 2400 TND 400 TND

P.2 The Investment Function, denoted by I(r), relates investment (denoted by I) to interest rate
(denoted by r).
P.2.1 Should r be the nominal interest rate or the real interest rate? (1 mark) Explain. (1
mark)
Does the relationship between I and r capture the relationship between:
P.2.2 the sales of new residential housing in Tunisia and the mortgage rate in Tunisia? (1
mark) Explain. (1 mark)
P.2.3 the promised USD 60 billion investments at TUNISIA2020 (an international
investment conference held in November 2016) and the return rate of those investments? (1 mark)
Explain. (1 mark)

P.3 Are government purchases, denoted by G, part of the supply side or the demand side of the
market for goods and services? (1 mark) Explain (1 mark). Is Tunis Business School’s
expenditure part of G? (1 mark) Explain. (1 mark)

P.4 For the Finance Law 2018, Tunisia plans to cut its budget deficit to 4.9 percent of GDP in
2018, down from about 6 percent expected in 2017. Define budget deficit and write its expression
(1 mark). Enumerate two solutions aiming to cut budget deficit (one sentence for each solution).
(2 marks)

P.5 What are the two types of savings? (2 marks) Write the expression of National Saving
(denoted by S). (1 mark)
Derive the expression of S as a function of I in a closed economy, using the national income
accounts identity. (2 marks)

P.6 What are the necessary assumptions to show that the interest rate adjusts to equate demand
with supply in the market for goods and services? (2 marks)

P.7 Under the assumptions of question P.6, plot - in the market for loanable funds – the supply,
the demand and the equilibrium. (axes and variables: 1 mark, supply: 1 mark, demand: 1 mark,
equilibrium graphical characterization: 1 mark).

P.8 Show how a fiscal policy shock could lead to a decrease in the equilibrium interest rate. (graph
3 marks, explanation 2 marks)

P.9 Use the equilibrium model in the market for loanable funds to find the long run impact of the
investment conference TUNISIA2020 on Tunisian GDP. (graph 2 marks, explanation 2 marks)
GOOD LUCK
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