ECON5002MacroeconomicsSemester 2ECON5002Mid Semester TestANSWERS.docx
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ECON5002MacroeconomicsSemester2ECON5002MidSemesterTestANSWERS
UNIVERSITYOFSYDNEY
MACROECONOMICS
ECON5002
Mid-semesterTest
5September2007
Instructions:
Thisisaclosedbooktest.Itconsistsof3sections.SectionIisworth50points,sectionIIandsectionIIIareworth25pointseach.Thetotalexamisworth100points.
SectionIincludes20compulsorymultiplechoicequestionsworth2.5markseach.Toanswerinthissection,marktheletterrepresentingthebestanswerontheaccompanyingmultiplechoiceanswersheet.Youmustuseapencilforthemachinetobeabletoreadyouranswer.
SectionIIincludes1compulsoryessayquestionworth25marks.Answerthisessayquestionsintheexaminationbookletprovided.
SectionIIIincludes2essayquestions,ofwhichyoushouldansweronly1,eachisworth25marks.Answeryouressayquestionsintheexaminationbookletprovided.
Youhave10minutestoreadthequestionpaper.Youhave2hourstocompletethetest.
SECTIONI
Answerall20questionsontheanswersheet.Eachisworth2.5points.
1.Supposethecentralbankwishestoconductcontractionarymonetarypolicy.Giventhis,wewouldexpectwhichofthefollowingtooccur?
a.acentralbankpurchaseofbondsandanincreaseintheinterestrate
b.acentralbankpurchaseofbondsandareductionintheinterestrate
c.acentralbanksaleofbondsandanincreaseintheinterestrate*
d.acentralbanksaleofbondsandareductionintheinterestrate
e.noneoftheabove.
2.AccordingtotheIS-LMmodel,whenthecentralbankcontrolsmoneysupplyataxcut:
a.mustcauseinvestmentspendingtodecrease
b.mustcauseinvestmentspendingtoincrease
c.willcausenochangeininvestmentspending
d.maycauseinvestmentspendingtoincreaseordecrease*
e.areductioninmoneydemandandareductionintheinterestrate
3.Supposethereisamonetarycontraction.UsingtheIS-LMframework,whichofthefollowingisacompletelistofthevariablesthatmustdecreaseintheshortrun?
a.consumption
b.consumptionandinvestment
c.consumptionandoutput
d.consumption,outputandtheinterestrate
e.consumption,outputandinvestment*
4.Supposetheminimumwageincreases.Giventhisevent,wewouldexpectwhichofthefollowingtooccur?
a.nochangeintherealwageinthemediumrun
b.outputdecreasesintheshortrun
c.anincreaseintheinterestrateinthemediumrun
d.alloftheabove*
e.noneoftheabove
5.AssumethatcentralbankkeepstheinterestrateconstantandC=c0+c1YD,whereCisconsumption,c0isautonomousconsumption,c1isthemarginalpropensitytoconsume,andYDisdisposableincomeoftheformYD=Y-TwhereYisincomeandTis(alumpsum)tax.AccordingtoIS-LMmodel,anincreaseinc0willcausewhichofthefollowingtoincrease?
a.equilibriumincome
b.equilibriumdisposableincome
c.equilibriuminvestment
d.alloftheabove*
e.noneoftheabove
6.IntheIS-LMmodelwherethedemandformoneyisadecreasingfunctionofinterestratesandthecentralbanksetsthemoneysupply,anincreaseingovernmentspending
a.reducesoutputandreducesinterestrates
b.increasesoutputandraisesinterestrates*
c.leavesoutputunchangedandraisesinterestrates
d.increasesoutputbutleavesinterestratesunchanged
e.noneoftheabove
7.Foraclosedeconomy,whichofthefollowingexpressionsrepresentsprivatesaving(S)?
a.I-T+G*
b.I+T-G
c.I+G
d.G-T–I
e.noneoftheabove
8.Whichofthefollowingwillleadtoanincreaseintherealwageinthemediumrun:
a.decreaseinunemploymentbenefits
b.increaseintheminimumwage
c.increaseinworkerprotection.
d.increaseinthemarkup
e.Noneoftheabove*
9.Supposethatfortheyear2006,acompanyspends$100milliononintermediategoodsand$60milliononwages,withnootherexpenses.Alsoassumethatitstotalsalesare$300million.Thevalueaddedbythiscompanyis:
a.$240million
b.$200million*
c.$140million
d.$40million
e.noneoftheabove
10.Supposetheconsumptionequationandinvestmentequationarerepresentedbythefollowing:
C=100+0.6(Y-T),I=200+0.15Y,whereYisoutputandTis(lumpsum)taxation.Themultiplierinthiseconomyis________.
a.1
b.2
c.3
d.4*
e.5
11.Ifinvestmentspendingisnotverysensitivetotheinterestrate,then:
a.theIScurveshouldberelativelyflat
b.theIScurveshouldberelativelysteep*
c.theLMcurveshouldberelativelyflat
d.theLMcurveshouldberelativelysteep
e.neithertheISnortheLMcurvewillbeaffected
12.IntheIS-LMdiagrambelow,ifaneconomyisatpointBweknowthat
i
LM
A
B
IS
Y
a.themoneymarketandthegoodsmarketareinequilibrium
b.themoneymarketisinequilibriumbutthereisexcesssupplyinthegoodsmarket
c.themoneymarketisinequilibriumbutthereisexcessdemandinthegoodsmarket
d.thegoodsmarketisinequilibriumbutthereisexcesssupplyinthemoneymarket
e.thegoodsmarketisinequilibriumbutthereisexcessdemandinthemoneymarket*
Usethefollowinginformationtoanswerquestions13–15.
SupposethefollowingequationsrepresenttheexpectationsaugmentedPhilipscurverelationandtheOkun’slawinChina
PhilipsCurve:
πt–πt-1=4–0.5ut
Okun’sLaw:
ut–ut-1=–0.25(gyt–5)
DynamicAggregateDemandCurve:
gyt=5–0.5(πt–πT)
whereπt,utandgytdenotetheinflationrate,unemploymentrateandthegrowthrateofoutputinthetimeperiod“t”respectively.Supposeinitiallyπt=πt-1=πT=8%,NotethatπTistheinflationratetargetsetbytheCentralBankoftheRepublicofChina.
13.WhatisthenaturalrateofunemploymentinChina?
a.4%
b.5%
c.6%
d.7%
e.8%*
14.WhathastobethegrowthrateofoutputinChinatokeeptheunemploymentrateconstant?
a.4%
b.5%*
c.6%
d.7%
e.8%
15.IftheCentralBankoftheRepublicofChinalowerstheinflationtarget(πT)to6%(i.e.areductionof2%),whatwillbetheshortrungrowthrateofoutputinChina?
a.4%*
b.5%
c.6%
d.7%
e.8%
16.Adecreaseinthecentralbank’spricetargetwillleadto
a.adecreaseininvestmentandoutputinshortrun*
b.anincreaseininvestmentandoutputinshortrun
c.adecreaseininvestmentinthemediumrun
d.anincreaseininvestmentinthemediumrun
e.noneoftheabove
17.Whenthecentralbanktargetsthepricelevel,withitstargetpricelevelunchanged,anincreaseinoilpriceswilltendtocausewhichofthefollowinginmediumrun?
a.areductioninthenaturalrateofunemployment
b.areductioninthepricelevel
c.anincreaseintheinterestrate*
d.alloftheabove
e.noneoftheabove
18.ConsidertheSolow-Swanmodelwithzeropopulationgrowthandzerotechnicalchange.Inthelongrun,anincreaseinthedepreciationofcapitalrateleadsto
a.lowerconsumptionperworker
b.loweroutputperworker
c.lowercapitalstockperworker
d.alloftheabove*
e.noneoftheabove
19.Assumetheeconomyisatthenaturallevelofoutput.Ifthecentralbankfollowsapricesettingtargetrule,theninthemediumrun,adecreaseinthebudgetdeficitwill
a.increaseoutput
b.increasethepricelevel
c.increasetheinterestrate
d.alloftheabove
e.noneoftheabove*
20.Assumethatthegoodsmarketingrowthtermscanbedefinedasgyt=
y-git,wheregytisthegrowthofoutput,
yisthenormalgrowthrate,andgitisthegrowthofthenominalinterestrate.Ifthecentralbankfollowadynamicinterestruletargetingtheinflationratesuchasgit=Ф(πt–πT),whereπtisinflationattimet,πTistheinflationtargetandФisaparameter.Thenanincreaseinπtwillleadto
a.anincreaseingitandanincreaseingytinthemediumrun
b.anincreaseingitandadecreaseingytinthemediumrun
c.adecreaseingitandanincreaseingytinthemediumrun
d.adecreaseingitandadecreaseingytinthemediumrun
e.noneoftheabove*
SECTIONIII
Thefollowingquestioniscompulsory.Itisworth25points.
1.Considerthefollowinginformationonaneconomy
Ct=100+0.2(Yt-T)
It=50+0.3Yt-1000it
G=350
T=100
(Mt/Pt)D=2Yt-5000it
it=0.03+2(Pt-PT),wherePT=10
Wagesettingrelation:
Wt=Pte(1-50ut+4.8)
Priceexpectations:
Pte=Pt-1
Pricesettingrelation:
Pt=1.25Wt
Productionfunction:
Y=N
Labourforce:
L=1000
whereCisconsumption,Yisincome/output,Gisgovernmentspending,Tistaxation,Misnominalmoneysupply,Pisthepricelevel,PTisthetargetpricelevel,Peistheexpectedpricelevel,iisthenominalinterestrate,uistheunemploymentrate,Wisthenominalwage,Nisemployment,andListhelabourforce.Timeisdenotedbysubscriptst,t-1,etc.
Assumetheeconomyisinitiallyinthemediumrunequilibrium.
i)UsingthemodelabovefindmediumrunvaluesofY,u,i,M,CandI
ii)WritetheASrelationforthiseconomy
iii)WritetheADrelationforthiseconomy
Nowsupposethegovernmentisconcernedaboutthebudgetdeficitanddecidestointroduceabalancedbudgetpolicybyincreasingthetaxes.
iv)UsingtheAS-ADdiagramexplainwhatwillhappentoprices,output,andtheinterestrateintheshortrunandthemediumrun
v)Usingthemodelabovecalculatethenewmediumrunlevelsofconsumptionandinvestment.Aretheythesameasbeforethechangeinfiscalpolicy?
Why?
i)Y=900,u=0.1,i=0.03,M=16500,C=260,andI=290.
(TostartsolvingthisquestionitisusefultonotethatinthemediumrunPt=PT.Thisallowsyoutosolvefortheinterestrate,thenincome,theninvestment,consumption,nominalmoney,and(aftersolvingforthenominalwage)unemployment).
ii)TosolveforASproceedasfollows:
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