Intermediate Macroeconomics
Midterm Exam
March 6, 2003

Answer KEY

Answer the following essay questions in three to four blue book pages or less. Be sure to fully explain your answers using economic reasoning and any equations and/or graphs needed to make your point.

Essay 35 points each

1. Suppose you have graduated with your economics degree and have been appointed to head the Ministry of Finance of a small open economy such as Thailand. The President of this small open economy has asked for your analysis of the impact of U.S. fiscal policy on your economy. George Bush has proposed that the U.S. government cut taxes and increasing federal spending on defense and homeland security. Provide a detailed explanation of the impact of these U.S. policy changes on your small economy. In particular, show graphically and fully explain (tell the story) the impact on:

2. In the general equilibrium model of chapter 3, Mankiw assumes that consumption is a function of disposable income alone: C = C(Y-T). Modify the consumption function to make consumption depend on both after tax income and the real interest rate. Explain why you think this might make sense.

Multiple Choice (2 points each)

  1. The consumer price index (CPI)
    A. measures the price of a fixed basket of goods and services.
    B. measures the price of a basket of goods and services that constantly changes as the composition of consumer spending changes.
    C. measures the amount of money that it takes to produce a fixed level of utility.
    D. is one of the many statistics in the National Income Accounts.

  2. The supply of loanable funds, or "national saving," is equal to
    A. income - consumption.
    B. income - consumption - taxes.
    C. income - consumption - government spending.
    D. income - consumption - government spending - taxes.


  3. Which of the following events will cause the unemployment rate to decrease?
    A. An increase in population, with no change in the size of the labor force
    B. A proportinately equal decrease in the labor force and the number of unemployed workers
    C. A decrease in the labor force with no change in the number of unemployed workers
    D. A decrease in the number of unemployed workers with no change in the number of employed workers.

  4. Suppose that a consumer has a marginal propensity to consume of 0.7. If this consumer earns an extra $2, her consumption spending would be expected to increase by
    A. $0.60.
    B. $0.70.
    C. $1.40.
    D. $1.70

  5. If a production function has two inputs and exhibits constant returns to scale, then doubling both inputs will cause the output to
    A. reduce by half.       B. stay the same.
    C. double.                   D. quadruple.

  6. A competitive firm hires labor until the marginal product of labor equals the
    A. real wage.
    B. rental price of capital.
    C. price of output.
    D. capital/labor ratio.

  7. GDP measures
    A. expenditure on all final goods and services.
    B. total income of everyone in the economy.
    C. total value-added by all firms in the economy.
    D. all of the above.

  8. In the full model of the economy presented in chapter 3, the variable that adjusts to equilibrate the supply and demand for goods and services is
    A. government spending.
    B. consumption.
    C. taxes.
    D. the real interest rate.

  9. According to the quantity equation, if M increases by 3 percent and V increases by 2 percent, then
    A. real income increases by approximately 5 percent.
    B. the price level increases by approximately 5 percent.
    C. the nominal interest rate increases by approximately 5 percent.
    D. nominal income increases by approximately 5 percent.

  10. Consider the following data on inflation and nominal interest rates
    Year Inflation Rate Nominal Interest Rate
    By how much has the real interest rate changed between year 1 and year 2?
    A. It has increased 5 percent.         B. It has decreased 5 percent.
    C. It has increased 10 percent.       D. It has decreased 10 percent.



  12. According to the classical dichotomy, which of these magnitudes is affected by monetary policy?
    A. The price level
    B. The real wage
    C. The real interest rate
    D. The rate of growth of real GDP.

  13. Consider the following table
    Consumption of foreign goods and services
    Consumption of domestic goods and services
    Investment of foreign goods and services
    Investment of domestic goods and services
    Government purchases of foreign goods and services
    Government purchases of domestic goods and services
    Based on the data, what are total imports?
    A. 0
    B. 120
    C. 1,000
    D. 1,580

  14. Consider the following data on the Transalpinian economy
    Y = 1,000
    C = 700
    G = 150
    I = 250 - 10r*
    The world interest rate is 5 percent. What are net exports of Transalpinia?
    A. 50
    B. -50
    C. 150
    D. -150

  15. The price of one currency in terms of another currency, such as 150 yen for $1, is an example of
    A. a nominal exchange rate.
    B. a real exchange rate.
    C. purchasing-power parity.
    D. a constant world interest rate.

  16. If net exports are positive, which of the following is false?
    A. Domestic output exceeds domestic spending.
    B. Domestic saving exceeds domestic investment.
    C. Net capital outflow is positive.
    D. There is a balance of trade deficit.