Aadland – Spring 2020

ECON 3010 Intermediate Macroeconomics

Final Exam
NAME:

Multiple Choice Answers. (120 points; 3 pts each)

#1. #15. #29.

#2. #16. #30.

#3. #17. #31.

#4. #18. #32.

#5. #19. #33.

#6. #20. #34.

#7. #21. #35.

#8. #22. #36.

#9. #23. #37.

#10. #24. #38.

#11. #25. #39.

#12. #26. #40.

#13. #27.

#14. #28.
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Multiple Choice Questions. (120 points; 3 pts each)

1. A production function is a technological relationship between:

A) factor prices and the marginal product of factors.
B) factors of production and factor prices.
C) factors of production and the quantity of output produced.
D) factor prices and the quantity of output produced.

2. The marginal product of labor is:

A) output divided by labor input.
B) additional output produced when one additional unit of labor is added.
C) additional output produced when one additional unit of labor and one additional
unit of capital are added.
D) value of additional output when one dollar's worth of additional labor is added.

3. An increase in the supply of capital will:

A) increase the real rental price of capital.
B) decrease the real rental price of capital.
C) increase the productivity of capital.
D) decrease the real interest rate.

4. If Y = AK0.5L0.5 and A, K, and L are all 100, the marginal product of capital is:
A) 50.
B) 100.
C) 200.
D) 1000.

5. The real interest rate is the:

A) rate of interest actually paid by consumers.
B) rate of interest actually paid by banks.
C) rate of inflation minus the nominal interest rate.
D) nominal interest rate minus the rate of inflation.

6. When a pizza maker lists the price of a pizza as $10, this is an example of using money
as a:
A) store of value.
B) unit of account.
C) medium of exchange.
D) flow of value.
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7. The central bank in the United States is the:

A) Bank of America.
B) U.S. Treasury.
C) U.S. National Bank.
D) Federal Reserve.

8. If there is no currency and the proceeds of all loans are deposited somewhere in the
banking system and if rr denotes the reserve–deposit ratio, then the total money supply
is:
A) reserves divided by rr.
B) 1/rr.
C) reserves times rr.
D) reserves divided by (1 – rr).

9. If currency held by the public equals $100 billion, reserves held by banks equal $50
billion, and bank deposits equal $500 billion, then the monetary base equals:
A) $50 billion.
B) $100 billion.
C) $150 billion.
D) $600 billion.

10. The money supply will increase if the:

A) currency–deposit ratio increases.
B) reserve–deposit ratio increases.
C) monetary base increases.
D) discount rate increases.

11. The rate of inflation is the:

A) median level of prices.
B) average level of prices.
C) percentage change in the level of prices.
D) measure of the overall level of prices.

12. According to the quantity theory of money, ultimate control over the rate of inflation in
the United States is exercised by:
A) the Organization of Petroleum Exporting Countries (OPEC).
B) the U.S. Treasury.
C) the Federal Reserve.
D) private citizens.
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13. If the money supply increases 12 percent, velocity decreases 4 percent, and the price
level increases 5 percent, then the change in real GDP must be ______ percent.
A) 3
B) 4
C) 9
D) 11

14. The costs of reprinting catalogs and price lists because of inflation are called:
A) menu costs.
B) shoeleather costs.
C) variable yardstick costs.
D) fixed costs.

15. The value of net exports is also the value of:

A) net investment.
B) net saving.
C) national saving.
D) the excess of national saving over domestic investment.

16. In a small open economy, if domestic saving exceeds domestic investment, then the
extra saving will be used to:
A) make loans to the domestic government.
B) make loans to foreigners.
C) repay the national debt.
D) repay loans to the Federal Reserve.

17. In a small open economy with perfect capital mobility, the real interest rate will always
be:
A) above the world real interest rate.
B) below the world real interest rate.
C) equal to the world real interest rate.
D) equal to the world nominal interest rate.
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18. (Exhibit Above: Saving and Investment in a Small Open Economy) In a small open
economy, if the world interest rate is r3, then the economy has:
A) a trade surplus.
B) balanced trade.
C) a trade deficit.
D) positive capital outflows.

19. If the number of employed workers equals 200 million and the number of unemployed
workers equals 20 million, the unemployment rate equals ______ percent (rounded to
the nearest percent).
A) 0
B) 9
C) 10
D) 20

20. If the steady-state rate of unemployment equals 0.10 and the fraction of employed
workers who lose their jobs each month (the rate of job separations) is 0.02, then the
fraction of unemployed workers who find jobs each month (the rate of job findings)
must be:
A) 0.02.
B) 0.08.
C) 0.10.
D) 0.18.

21. One reason for unemployment is that:

A) it takes time to match workers and jobs.
B) all jobs are identical.
C) the labor market is always in equilibrium.
D) a laid-off worker can immediately find a new job at the market wage.
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22. The unemployment resulting from wage rigidity and job rationing is called ______
unemployment.
A) frictional
B) structural
C) minimum-wage
D) insider

23. Okun's law is the ______ relationship between real GDP and the ______.
A) negative; unemployment rate
B) negative; inflation rate
C) positive; unemployment rate
D) positive; inflation rate

24. Most economists believe that prices are:

A) flexible in the short run but many are sticky in the long run.
B) flexible in the long run but many are sticky in the short run.
C) sticky in both the short and long runs.
D) flexible in both the short and long runs.

25. The aggregate demand curve tells us possible:

A) combinations of M and Y for a given value of P.
B) combinations of M and P for a given value of Y.
C) combinations of P and Y for a given value of M.
D) results if the Federal Reserve reduces the money supply.

26. In the Keynesian-cross model, actual expenditures differ from planned expenditures by
the amount of:
A) liquidity preference.
B) the government-purchases multiplier.
C) unplanned inventory investment.
D) real money balances.
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27. (Exhibit Above: Keynesian Cross) In this graph, if firms are producing at level Y1, then
inventories will ______, inducing firms to ______ production.
A) rise; increase
B) rise; decrease
C) fall; increase
D) fall; decrease

28. An explanation for the slope of the IS curve is that as the interest rate increases, the
quantity of investment ______, and this shifts the expenditure function ______, thereby
decreasing income.
A) increases; downward
B) increases; upward
C) decreases; upward
D) decreases; downward

29. Changes in fiscal policy shift the:

A) LM curve.
B) money demand curve.
C) money supply curve.
D) IS curve.
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30. (Exhibit Above: IS–LM Fiscal Policy) Based on the graph, starting from equilibrium at
interest rate r1 and income Y1, a tax cut would generate the new equilibrium
combination of interest rate and income:
A) r2, Y2
B) r3, Y2
C) r2, Y3
D) r3, Y3

31. Using the IS–LM analysis, if the LM curve is not horizontal, the multiplier for an
increase in government spending is ______ for an increase in government purchases
using the Keynesian-cross analysis.
A) larger than the multiplier
B) the same as the multiplier
C) smaller than the multiplier
D) sometimes larger and sometimes smaller than the multiplier
 Aadland – Spring 2020

32. (Exhibit Above: IS–LM Monetary Policy) Based on the graph, starting from equilibrium
at interest rate r1 and income Y1, a decrease in the money supply would generate the new
equilibrium combination of interest rate and income:
A) r2, Y2
B) r3, Y2
C) r2, Y3
D) r3, Y3

33. (Exhibit Above: IS–LM Monetary Policy) Based on the graph, starting from equilibrium
at interest rate r1 and income Y1, a decrease in the money supply would generate the new
equilibrium combination of interest rate and income:
A) r2, Y2
B) r3, Y2
C) r2, Y3
D) r3, Y3

34. (Exhibit Above: Policy Interaction) Based on the graph, starting from equilibrium at
interest rate r3, income Y2, IS1, and LM1, if there is an increase in government spending
that shifts the IS curve to IS2, then in order to keep the interest rate constant, the Federal
Reserve should _____ the money supply shifting to _____.
A) increase; LM2
B) decrease; LM2
C) increase; LM3
D) decrease; LM3
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35. An increase in consumer saving for any given level of income will shift the:
A) LM curve upward and to the left.
B) LM curve downward and to the right.
C) IS curve downward and to the left.
D) IS curve upward and to the right.

36. (Exhibit Above: AD–AS Shifts) Starting from long-run equilibrium at A with output
equal to Y and the price level equal to P1, if there is an unexpected monetary
contraction that shifts aggregate demand from AD1 to AD3, then the long-run neutrality
of money is represented by the movement from:
A) A to B
B) A to G
C) A to C
D) A to D

37. (Exhibit Above: AD–AS Shifts) Starting from long-run equilibrium at A with output
equal to Y and the price level equal to P1, if there is an unexpected monetary
contraction that shifts aggregate demand from AD1 to AD3, then the short-run non-
neutrality of money is represented by the movement from:
A) A to B
B) A to G
C) A to C
D) A to D
 Aadland – Spring 2020

38. The Phillips curve depends on all of the following forces except:
A) the current exchange rate.
B) expected inflation.
C) the deviation of unemployment from its natural rate.
D) supply shocks.

39. The Phillips curve shows a ______ relationship between inflation and unemployment,
and the short-run aggregate supply curve shows a ______ relationship between the price
level and output.
A) positive; positive
B) positive; negative
C) negative; negative
D) negative; positive

40. After the fiscal stimulus to address the COVID-19 pandemic, the CBO predicts the debt-
to-GDP ratio in 2021 will be approximately
A) 50%
B) 10%
C) 100%
D) 200%
 Aadland – Spring 2020

Short Answer Question. (80 points)

#41. Use the information in Tables 1 and 2 below to answer the following questions.

Table 1. Quantities and Prices for Goods X, Y and Z

Quantity (in millions) Price (in $)
Product 2019 2020 2019 2020
X 10 15 $40 $50
Y 15 15 $20 $10
Z 8 10 $10 $10

Table 2. Goods and Money Market Equations (with r in percentage terms)

Money Market Goods (and Services) Market
𝑀𝑀 = 10,000 𝐶𝐶 = 100 + 0.8(𝑌𝑌 − 𝑇𝑇)
𝐿𝐿(𝑌𝑌, 𝑟𝑟) = 0.3𝑌𝑌 − 𝑟𝑟 𝐼𝐼 = 140 − 2𝑟𝑟; 𝑁𝑁𝑁𝑁 = −50
𝑃𝑃2020 𝐺𝐺 = 50, 𝑇𝑇 = 50

(a) (10 pts) Use Table 1 to calculate real GDP (𝑌𝑌) and the GDP deflator (𝑃𝑃) in 2020 using 2019 as the
base year.

(b) (10 pts) Calculate the IS and LM equations and put them on a graph with the real interest rate (𝑟𝑟)
on the vertical axis and real GDP (𝑌𝑌) on the horizontal axis. Superimpose the 2020 real GDP
value from part (a) as the vertical LRAS curve. Then calculate the short-run equilibrium values, 𝑟𝑟∗
and 𝑌𝑌∗ .

(c) (10 pts) Holding the real interest rate fixed (or equivalently ignoring the money market), how much
would fiscal policymakers need to increase 𝐺𝐺 to get us back to the LRAS curve? Show this on your
graph and show your calculations.

(d) (10 pts) Holding the real interest rate fixed (or equivalently ignoring the money market), how much
would fiscal policymakers need to decrease 𝑇𝑇 to get us back to the LRAS curve? Provide an
intuitive explanation for why the increase in 𝐺𝐺 (from part (c)) is different than the decrease in 𝑇𝑇.

(e) (BONUS 10 pts) Find the necessary increase in the money supply (𝑀𝑀) and the resulting equilibrium
real interest rate (𝑟𝑟) that returns the economy to the LRAS curve assuming no change in 𝐺𝐺 or 𝑇𝑇.
 Aadland – Spring 2020

#42. (40 pts) Use an AD-SRAS-LRAS to answer the two questions below.

(a) (20 pts) Assume that OPEC starts enforcing oil production quotas and the global supply of oil
declines. As a result, energy prices start to increase. This causes the costs of production for U.S.
firms to increase. Use the AD-SRAS-LRAS diagram to describe the transition of the macroeconomy
from the short-run to the long-run without government intervention.

(b) (20 pts) Now assume the Federal Reserve and Congress are concerned about future inflation, output
and unemployment. Describe in words, using the AD-SRAS-LRAS diagram as a guide, the possible
stabilization strategies for Congress and the Fed. In particular, discuss the tradeoffs they face.