Second exam. Principles of Macroeconomics. Professor Guillermo Vuletin.
Student Name:____________________________________________
Student ID:_______________________________________________
I) Answer each of the following multiple choice questions (please fill your answers using the
table that is at the end of this question). (2 points each correct question)
1) Carla lost her job and immediately started looking for another job. As a result the
a) unemployment rate increases.
b) labor force increases.
c) labor force decreases.
d) unemployment rate remains constant.
Refer to the information provided in Table A below to answer the questions 2 and 3.
Table A
2) The labor force equals
a) 13,000 people.
b) 12,500 people.
c) 13,500 people.
d) 15,500 people.
3) The unemployment rate is
a) 20%.
b) 18.5%.
c) 16.1%.
d) 35.5%.
4) Which of the following is a desirable characteristic in an economy?
a) High inflation.
b) Rapid increase in the general price level
c) Low unemployment
d)Low employment.
5) The economy is in a recession and the housing market is in a slump. As a result of this, a real estate firm lays off half of
its real estate agents. This is an example of
a) frictional unemployment.
b) structural unemployment.
c) cyclical unemployment.
6) If the price index in 2002 is 120 and the price index in 2003 is 110, the rate of inflation between 2002 and 2003
a) is -10%.
b) is -8.3%.
c) is -4.2%.
d) is -6.6%.
7) If the MPS is .20, MPC
a) is 1.20.
b) is .85.
c) is .80.
d) cannot be determined with the given information.
8) In a closed economy with no government, aggregate expenditure is
A) consumption plus investment.
B) saving plus investment.
C) consumption plus the MPC.
D) MPC + MPS.
9) Fiscal policy refers to
a) the techniques used by a business firm to reduce its tax liability.
b) the behavior of the nation's central bank, the Federal Reserve, regarding the nation's
money supply.
c) the spending and taxing policies used by the government to influence the economy.
d) the government's ability to regulate a firm's behavior in the financial markets.
10) The difference between what a government spends and what it collects in taxes in a year is
a) revenue.
b) monetary policy.
c) the government debt.
d) the government budget deficit or surplus.
Use this table to answer the previous multiple choice. Mark with an “X” the correct answer.
a)
X
1)
2)
3) X
4)
5)
6)
7)
8) X
9)
10)
b)
c)
d)
X
X
X
X
X
X
X
II) Answer which country experiences higher average growth rates based on the following
sequence of graphs.
1) Country A or Country B? Country B
30
25
GDP per capita
20
15
10
5
0
1978
1980
1982
1984
1986
1988
1990
1992
1988
1990
1992
year
Country A
Country B
2) Country A or Country B? Country B
25
GDP per capita
20
15
10
5
0
1978
1980
1982
1984
1986
year
Country A
Country B
3) Country A or Country B? Country A
120
100
GDP per capita
80
60
40
20
0
1978
1980
1982
1984
1986
1988
1990
1992
1988
1990
1992
year
Country A
Country B
4) Country A or Country B? Country A
120
100
GDP per capita
80
60
40
20
0
1978
1980
1982
1984
1986
year
Country A
Country B
III) Considering the following figure, answer which country has higher volatility for each type
of unemployment.
140
120
GDP per capita
100
80
60
40
20
0
1978
1980
1982
1984
1986
1988
year
Country A
Country B
1) Which country has higher volatility of frictional unemployment?
a) Country A
b) Country B
c) Cannot be determined without more information
2) Which country has higher volatility of structural unemployment?
a) Country A
b) Country B
c) Cannot be determined without more information
3) Which country has higher volatility of cyclical unemployment?
a) Country A
b) Country B
c) Cannot be determined without more information
1990
1992
IV) Given the following for the economy of a country:
a) Consumption function: C  a  b(Y  T )
b)
c)
d)
e)
Investment function: I
Taxes: T
Government spending: G
Equilibrium output: Y  C  I
1)
Solve for equilibrium income.
Y
2)
G
1
a  bT  I  G 
1 b
Suppose that a  100 ,
equilibrium income?
b  0.5 , I  100 , T  100 and G  50 , what is the specific value of
Y  400
3)
Calculate the general expression (i.e. as a function of
b ) of the investment multiplier.
Y
1

I 1  b
4)
Using the fact that
b  0.5 find the numeric value of the investment multiplier.
Y
2
I
5)
If investment increase in 1 unit (i.e. I  1 ), by how much does income and consumption change?
(use the fact that b  0.5 )
Change in Y:
Y  2I
Y  2
Change in C:
C  a  b(Y  T )
C  bY
C  0.5  2
C  1
This makes sense since:
Y  C  I G
Y  C  I  G
2  11 0
V) Given the following for the economy of a country:
a) Consumption function: C  a  b(Y  T )
b) Investment function: I
c) Taxes: T
d) Government spending: G  gY
e) Equilibrium output:
1)
Y  C  I G
Interpret in economic terms the equation G  gY . What does g captures?
g is the marginal propensity to spend of the government.
2)
Solve for equilibrium income.
3)
1
a  bT  I 
1 b  g
Suppose that a  100 , b  0.5 , g  0.25 I  100 , T  100 , what is the specific value of
Y
equilibrium income?
Y  600
4)
Calculate the general expression (i.e. as a function of
b and g ) of the investment multiplier.
Y
1

I 1  b  g
5)
Using the fact that
b  0.5 and g  0.25 find the numeric value of the investment multiplier.
Y
4
I
6)
Compare the investment multiplier obtained in V)5) with the one you got in IV)4). Explain the economic
intuition for such difference (full points will be given for a complete description of the difference in the
transmission mechanisms). Hint: You might want to take a look at the general expressions obtained in
V)4) and IV)3).
The multiplier obtained in V)5) is higher than the one from IV)4). First, notice that in the economy
described in IV G is exogenous while in the economy described in V G is endogenous. The behavior of
the government is such that for every increase in income the government also increases government
spending, adding fuel to the increase in output. That is to say, in a similar way to the consumer’s behavior
the government also increases its spending every time income increases. For this reason and given the
initial shock of increase in investment, output tends to increase more in the economy described in V than
in IV.
7)
If investment increase in 1 unit (i.e. I  1 ), by how much does income and consumption change?
Chance in Y:
Y  4I
Y  4
Chance in C:
C  a  b(Y  T )
C  b Y
C  0 . 5  4
C  2
Change in G:
G  gY
G  g Y
G  0.25  4
C  1
This makes sense since:
Y  C  I G
Y  C  I  G
4  2 11