Name: ____________________________ SID : ____________________________ GSI: ____________________________

Econ 100B Macroeconomic Analysis

Professor Steven Wood
Spring 2011

Exam #1
Please sign the following oath: The answers on this test are entirely my own work. I neither gave nor received any aid while taking this test. I will not discuss the questions on this test until after 5:00 p.m. on February 22, 2011. ______________________ Signature Any test turned in without a signature indicating that you have taken this oath will be assigned a grade of zero. Exam Instructions
1. 2. 3. 4. 5. 6. 7. When drawing diagrams, clearly and accurately label all axis, lines, curves, and equilibrium points. Explanations should be written in pencil or black. Legibility is a virtue; practice good penmanship. Explanations should be succinct and to the point; make use of bullet points and common mnemonics. If you have a question, ask one of the GSIs. If you need to re-draw a diagram or need more room to write your answers, use pages 2, 13 and/or 14. When time is called, STOP writing and CLOSE your exam packet immediately. You WILL BE PENALIZED if you continue to write past the official end of the exam. If you finish your exam before 4:55 p.m. you may turn your exam into your GSI and quietly exit the room. If you finish your exam after 4:55 p.m., close your exam packet but remain seated until time is called. Once time is called, pass your exam to the nearest aisle where a GSI will collect it.

Do NOT open this test until instructed to do so. Good Luck!

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A. Multiple Choice Questions (30 points). Circle the letter corresponding to the best answer. (3 points each.) 1. Because government services are not sold in markets: a. b. c. d. They are valued at their cost of production. They are excluded from the measurement of GDP. The government estimates what their market value would be. They are valued by the tax revenues the government collects.

2.

Suppose that a disease suddenly kills one-third of the workforce. The would result in: a. b. c. d. An increase the real wage rate and an increase the real (rental) cost of capital. An increase the real wage rate but a decrease the real (rental) cost of capital. A decrease the real wage rate but an increase the real (rental) cost of capital. A decrease the real wage rate and a decrease the real (rental) cost of capital.

3.

In an open economy: a. b. c. d. Saving equals investment Saving equals investment Saving equals investment Saving equals investment in equilibrium. if the economy has no exports. if the economy has no imports. if the economy has no net exports.

4. When the central bank increases the money supply, interest rates generally decline. It is widely believed that lower interest rates cause an increase in real economic output. This observation: a. b. c. d. Contradicts the Fisher effect. Contradicts the classical dichotomy. Contradicts the equation of exchange. Contradicts the constant velocity of money assumption.

5. Suppose that the central bank is committed to maintaining a fixed price level. If the economy starts below its steady state, then according to the Solow growth model and the Quantity Theory of Money: a. b. c. state. d. state. Inflation will accelerate as the economy approaches its steady state. Inflation will decelerate as the economy approaches its steady state. The money supply growth rate will accelerate as the economy approaches its steady The money supply growth rate will decelerate as the economy approaches its steady

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6. Suppose that the central bank engages in open market purchases of government securities. However, the money supply does not change. This could be due to: a. b. c. d. An increase in the velocity of money. Banks increasing their holdings of excess reverses. Banks decreasing their holdings of excess reserves. Households decreasing their currency holding ratio.

7. Suppose that total investment spending is a fixed share of economic output but that an increased share of investment spending goes into non-productive assets. In the Solow growth model this would best be represented as: a. b. c. d. A decline in the saving rate. An increase in the depreciation rate. A decline in total factor productivity. A sudden decline in the size of the capital stock.

8.

A key difference between human capital and technology is that: a. b. c. d. Human capital is nonrival. Human capital is excludable. Technology is an input in the production of new technology. Scarce resources are used in the production of human capital.

9.

Private businesses tend to spend too little on research and development because: a. b. c. d. Technology is often nonexcludable. Patent laws make it difficult to reap the full benefits of such spending. Governments tend to spend too much on research and development. Investments to increase the capital stock are a better way to boost productivity.

10.

The Romer model suggests that there may be a trade-off between: a. The size of the total population and the saving rate. b. The saving rate and the long-run growth rate of the economy.. c. Per-worker output in the short-run and per-worker output in the long-run. d. The use of resources in research and development and the productiveness of research and development.

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B. Answer BOTH of the following questions based on the standard models of analysis developed in class.
The information in the various parts of the questions is sequential and cumulative.

1.

SavingInvestment Model (35 points). New Zealand is a small open economy with perfect capital mobility and net capital inflows. a. Based only on this information, use a Saving-Investment Model diagram to clearly and accurately show New Zealands initial equilibrium situation. This diagram should be drawn in BLACK.

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b.

Provide an economic explanation of what you have drawn in your diagram above.

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c.

Now suppose that governments in the U.S. and the Euro region, which are large open economies, adopt significant contractionary fiscal measures in order to reduce substantial budget deficits. Based only on this additional information, clearly and accurately show the subsequent effects of these contractionary fiscal measures on New Zealands real interest rate, desired saving, desired investment, and net export balance on your diagram above. These effects should be drawn in RED. Provide an economic explanation of what you have drawn in your diagram above.

d.

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e.

Now suppose that there is a large earthquake in New Zealand that destroys 25% of the countrys capital stock. Fortunately, very few people are killed. Based only on this additional information, clearly and accurately show the subsequent effects of the earthquake on New Zealands real interest rate, desired saving, desired investment and net export balance in your diagram above. These effects should be drawn in BLUE.

f.

Provide an economic explanation of what you have drawn in your diagram above.

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2.

The Solow Growth Model (35 points). Suppose that the Cuban economy is initially at its steady state. a. Use a Solow growth model diagram to clearly and accurately show the economys initial equilibrium position. This diagram should be drawn in BLACK.

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b.

Provide an economic explanation of you what you have shown in your diagram above including a discussion of how fast the economy is growing.

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c.

In 1980, about 100,000 workers left Cuba for Miami, Florida. Based only on this information, clearly and accurately show the effects of this emigration on output-per-worker and the capitalto-labor ratio in Cuba in your diagram above. This effect should be drawn in RED. Provide an economic explanation of the changes you have shown in your diagram above.

d.

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e.

Now suppose that the workers who left Cuba had human capital endowments that were well above the median for workers in Cuba. Based only on this additional information, clearly and accurately show the subsequent effects of this emigration on output-per-worker and the capitalto-labor ratio in Cuba in your diagram above. This effect should be drawn in BLUE. Provide an economic explanation of the changes you have shown in your diagram above. Be sure to discuss the adjustment process that occurs during the transition period from the economys post-emigration situation to its final steady state. This discussion should include what happens to the level of income-per-worker, the capital-to-labor ratio, the rate of economic growth both during the transition period and once the final steady state is achieved, as well as a comparison of the rate of economic growth at the economys initial and final steady states.

f.

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THE END

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