1.​ Suppose the consumption equation is represented by the following: C = 250 + .8(Y-T).

Suppose investment and government spending are exogenous. A fall in taxes by $100
with no other changes,
Increases equilibrium output by $100.9000
Increases equilibrium output by $80.
Increases equilibrium output by $400.
Decreases equilibrium output by $100.

2.​ Suppose the consumption equation is represented by

𝐶=100+.2(𝑌−𝑇)
Investment, government spending, and taxes are exogenous to the model. What is the
marginal propensity to consume?
Group of answer choices
5
.2
1.25
.8

3.​ Suppose Nominal GDP in 2015 is $100,000, the growth rate of Real GDP between 2015
and 2016 using 2015 prices is 2%, and the growth rate of Real GDP between 2015 and
2016 using 2016 prices is 4%. What is Real GDP for 2016 in Chained 2015 prices (also
known as Real Chained GDP for 2016 benchmarked to 2015)?
$100,000
$106,000
$103,000
$104,000

4.​ If nominal GDP rises by 5%, while the GDP deflator falls by 1%, the percentage change
in real GDP is approximately equal to
4%
6%
5%
1%

5.​ Suppose the current nominal interest rate is above the zero lower bound and the central
bank pursues expansionary monetary policy. Which of the following will most likely occur
as a result of this traditional monetary policy action?
the LM curve shifts down and the interest rate falls.
the LM curve shifts up and the interest rate increases.
the IS curve shifts to the right.
the IS curve shifts to the left.

6.​ For a given nominal interest rate, a reduction in expected inflation will cause
a reduction in the real interest rate.
an increase in the real interest rate.
no change in the real interest rate.
an increase in money demand.

7.​ A reduction in unemployment benefits will tend to cause which of the following?
an upward shift in the WS curve and an increase in the natural rate of unemployment.
a downward shift in the WS curve and a decrease in the natural rate of unemployment.
an upward shift in the PS curve and a decrease in the natural rate of unemployment.
a downward shift in the PS curve and an increase in the natural rate of unemployment.

8.In the wage-setting relation, the nominal wage tends to decrease when
the price level increases.
the unemployment rate increases.
unemployment benefits increase.
the minimum wage increases.

9. Suppose the Phillips curve is represented by the following equation:

𝜋𝑡−𝜋𝑡−1=20%−2𝑢𝑡
. Given this information, which of the following is most likely to occur if the actual unemployment
in any period is equal to 6%?
the rate of inflation will not change.
the rate of inflation will tend to decrease.
the rate of inflation will tend to increase.
the rate of inflation will be higher than the target, but will not increase.
10. In the Phillips curve equation, which of the following will cause a reduction in the current
inflation rate?
a reduction in the expected inflation rate
an increase in the unemployment rate
a decrease in the markup
all of these
11. Suppose an economy is currently in the medium run with output equal to the natural level,
unemployment equal to the natural rate, and inflation equal to expected inflation. Suppose
inflation expectations are anchored such that expected inflation is equal to
𝜋¯. What happens to the economy in the short run if there is a decrease in government
spending?
unemployment increases above the natural rate and inflation rises above the target.
unemployment falls below the natural rate and inflation rises above the target.
unemployment increases above the natural rate and inflation falls below the target.
unemployment falls below the natural rate and inflation falls below the target.

12. If output is too high, to achieve the medium run equilibrium, the central bank will
increase the policy interest rate.
decrease the policy interest rate.
increase the money supply.
increase government spending.
13. For this question, assume that a country without technological progress and without growth
in the number of workers, experiences a permanent increase in its saving rate. Which of the
following will occur with certainty as a result of this increase in the saving rate?
a permanent increase in the level of capital per worker and output per worker in the long run.
a permanent increase in consumption per worker in the long run.
a permanent increase in the growth rate of output per worker in the long run.
a permanent decrease in the growth rate of output per worker in the long run

14. Consider two economies currently below their steady state values of output per effective
worker. Suppose the two countries are identical in every way with the following exception,
Economy A has a higher capital stock than Economy B in the current time period. Given this
information, we know with certainty that
Economy A has a higher steady state capital per effective worker than Economy B.
Economy A is growing at a faster rate than Economy B.
Economy B is growing at a faster rate than Economy A.
Economy B has a higher steady state capital per effective worker than Economy A.

15. A reduction in the saving rate will NOT affect which of these variables in the long run?
the level of output per worker
the growth rate in output per worker
the level of investment per worker
the level of consumption per worker

16. In the production function Y = f(K, AN), for a given state of technology, constant returns to
scale implies that output (Y) will increase by 7% when
K and AN both increase by 7%.
K increases by 7%.
AN increases by 7%.
K and AN both increase by more than 7%.

17. Suppose
𝑌=𝐾13(𝐴𝑁)23
, the growth rate of output in decimal form is .03, the growth rate of the capital stock is .02 and
the growth rate of the number of workers is .01. What is the Solow Residual?
017
0
.03
.01
18. Which of the following would decrease the gap in wages between skilled and unskilled
workers?
skill-biased technological change
a greater fraction of the population graduating from college
globalization
fewer public colleges.

19. The money demand curve will shift to the right when which of the following occurs?
an increase in the money supply
an increase in income
a decrease in income
an increase in the interest rate

20. We would expect which of the following to occur when the central bank pursues
expansionary monetary policy? (Suppose the change is permanent and consumers don't
anticipate any other changes).

an increase in bond prices and a decrease in the interest rate.

a decrease in bond prices and a decrease in the interest rate.
an increase in bond prices and an increase in the interest rate.
a decrease in bond prices and a increase in the interest rate.

21. Use the information provided to answer questions 21 and 22. Suppose an economy is
characterized by the following equations:
𝐶=400+.25(𝑌−𝑇)

𝐼=100+.5𝑌−800𝑖

𝐺=200

𝑇=40

a) Write the expression for Z(Y,i) and simplify. (2pts)

b) Derive the IS curve. (2pts)
c) Solve for equilibrium output if the Fed sets i=.05. (2pts)
d) What is real money supply if real money demand is given by the following equation
𝑀𝑃=𝑌−2000𝑖
and the IS-LM model is in equilibrium (i=.05)? (2pts)
e) Solve for equilibrium national saving (2pts)
f) Suppose there is an increase in taxes to T=50. Solve for the equilibrium output if the Fed
keeps the interest rate unchanged. (2pts)
g) What is real money supply after the change in taxes if real money demand is still given by the
following equation
𝑀𝑃=𝑌−2000𝑖
and the IS-LM model is in equilibrium, and the Fed keeps the interest rate at i=.05? (2pts)

Describe in words the impact of the increase in taxes as the economy moves to the new
equilibrium output in Question 21.

Suppose an economy produces output according to

𝑌=𝐾17(𝐴𝑁)67

a) Write the equation for output per effective worker (2pts)

b) Solve for capital per effective worker in steady state, given
𝐼𝐴𝑁=(𝛿+𝑔𝐴+𝑔𝑁)𝐾𝐴𝑁
in steady state and
𝐼=𝑠𝑌
. (2pts)
c) Solve for output per effective worker in steady state (2pts)
d) Solve for consumption per effective worker in steady state (2pts)
e) Suppose the economy is on a balanced growth path. At time period zero
𝑔𝑁
decreases to
𝑔𝑁′
. Draw the result of this change on the Solow Diagram. Label the initial steady state capital per
effective worker,
𝐾∗𝐴𝑁
and output per effective worker
𝑌∗𝐴𝑁
. Label the capital per effective worker and output per effective worker at the time of the
change,
𝐾0𝐴𝑁
and
𝑌0𝐴𝑁
. Finally label the final steady state capital per effective worker and output per effective worker
𝐾2∗𝐴𝑁
and
𝑌2∗𝐴𝑁
. (4 pts)
f) What happens to the growth rate of output and the growth rate of output per worker in the long
run? (2pts)

Assume the Phillips curve is the post 1990's Phillips curve where
𝜋𝑡𝑒=𝜋¯
 . Start with the economy in the medium run. Draw the IS-LM diagram and the PC diagram
directly below. Label the medium run level of output
𝑌𝑛
in both diagrams, the corresponding real interest rate
𝑟𝑛
, and your corresponding value
𝜋−𝜋¯=0
on the vertical axis of your PC diagram. Label the medium run equilibrium point, A in both
diagrams. You will draw parts a) and b) from Question 24 on this diagram and will use the
diagram to answer Question 25.