Macroeconomics 302a Prof.

Nilsen 1
Exam 2 (Chapters 6 9)
20 Multiple Choice (each 2 1/2 points)

Chapter 6
1. Total factor productivity growth is that part of
economic growth due to
(a) capital growth plus labor growth.
(b) capital growth less labor growth.
(c) capital growth times labor growth.
(d) neither capital growth nor labor growth.

2. The Solow model demonstrates that
(a) in the absence of productivity growth, economic
growth will turn negative in the long run.
(b) in the absence of productivity growth, economic
growth will reach a steady state of zero percapita growth
in the long run.
(c) productivity growth must exceed the rate of growth in
the population to avoid a steady state in the long run.
(d) productivity growth will inevitably decline due to
diminishing marginal productivity.

3. In the very long run, the level of consumption per
worker can grow continually if
(a) the saving rate continually falls.
(b) the population growth rate continually rises.
(c) productivity continually improves.
(d) the depreciation rate continually rises.

4. The Golden Rule capital-labor ratio is the level of the
capital-labor ratio that, in the steady state,
(a) maximizes output per worker.
(b) maximizes investment per worker.
(c) maximizes consumption per worker.
(d) maximizes capital per worker.

Chapter7
5. If there is a financial panic and increased uncertainty
about the returns in the stock market and bond
market, what is the likely effect on money demand?
(a) Money demand declines first, then rises when
inflation increases.
(b) Money demand rises.
(c) The overall effect is ambiguous.
(d) Money demand declines.

6. Suppose a new law imposes a tax on all trades of
bonds and stock. What is the likely effect on money
demand?
(a) Money demand declines first, then rises when
inflation increases.
(b) Money demand rises.
(c) The overall effect is ambiguous.
(d) Money demand declines.

7. If real income rises 4%, prices rise 1%, and nominal
money demand rises 4%, what is the income elasticity of
real money demand?
(a) 3/4
(b) 4/5
(c) 5/6
(d) 1

8. Under a situation of asset market equilibrium,
(a) the quantity of money supplied equals the quantity of
money demanded.
(b) the quantity of money supplied equals the quantity of
nonmonetary assets demanded.
(c) the quantity of nonmonetary assets supplied equals
the quantity of monetary assets demanded.
(d) the quantity of money supplied equals the quantity of
nonmonetary assets supplied.

9. Suppose velocity is constant at 4, real output is 10, and
the price level is 2. From this initial
situation, the government increases the nominal money
supply to 6. If velocity and output remain
unchanged, by how much will the price level increase?
(a) 2.4%
(b) 20%
(c) 24%
(d) 50%

Chapter 8
10. An economic variable that moves in the same
direction as aggregate economic activity (up in
expansions, down in contractions) is called
(a) procyclical.
(b) countercyclical.
(c) acyclical.
(d) a leading variable.

11. A variable that tends to move in advance of aggregate
economic activity is called
(a) a leading variable.
(b) a coincident variable.
(c) a lagging variable.
(d) an acyclical variable.

Macroeconomics 302a Prof. Nilsen 2
12. Which of the following macroeconomic variables is
acyclical?
(a) Real interest rates
(b) Unemployment
(c) Money supply
(d) Consumption

13. The AD, SRAS, and LRAS curves each show a
relationship between which two economic variables?
(a) The aggregate price level and output
(b) The aggregate price level and the interest rate
(c) Output and unemployment
(d) Output and the interest rate

14. A decline in the stock market, which makes
consumers poorer, would cause
(a) the aggregate demand curve to shift to the right.
(b) the aggregate demand curve to shift to the left.
(c) a movement down and to the right along the
aggregate demand curve.
(d) a movement up and to the left along the aggregate
demand curve.

Chapter 9
15. Any change that reduces desired saving relative to
desired investment (for a given level of output) causes
the real interest rate to _____ and shifts the IS curve
_____.
(a) increase; down and to the left
(b) increase; up and to the right
(c) decrease; down and to the left
(d) decrease; up and to the right

16. An increase in wealth that doesnt affect labor supply
would cause the IS curve to _____ and the FE line to
_____.
(a) shift down and to the left; be unchanged
(b) shift down and to the left; shift left
(c) shift up and to the right; be unchanged
(d) shift up and to the right; shift left

17. What adjusts to restore general equilibrium after a
shock to the economy?
(a) The LM curve
(b) The IS curve
(c) The FE line
(d) The labor supply curve

18. Suppose the intersection of the IS and LM curves is to
the left of the FE line. A decrease in the price level
would most likely eliminate a disequilibrium among the
asset, labor, and goods markets by
(a) shifting the LM curve down and to the right.
(b) shifting the IS curve up and to the right.
(c) shifting the IS curve down and to the left.
(d) shifting the FE curve to the left.

19. Under an assumption of monetary neutrality, a
change in the nominal money supply has
(a) no effect on the price level.
(b) a less than proportionate effect on the price level.
(c) a proportionate effect on the price level.
(d) a more than proportionate effect on the price level.

20. Which market adjusts the quickest in response to
shocks to the economy?
(a) The asset market
(b) The labor market
(c) The goods market
(d) The asset, labor, and goods markets adjust at about
the same speed to eliminate a disequilibrium in the
macroeconomy.
4 Short Answers ( 8 points each):
1) Show using graphs of the Solow model the effect of an increase in the rate of savings.












Macroeconomics 302a Prof. Nilsen 3
2) What are the three main determinants of an individuals asset allocation. Why should money be part
of this decision?













3) Explain using an Aggregate Demand & Supply Model (include graphs!!) how Keynesians would
analyze an autonomous decrease in consumer spending (i.e. a decline in consumption spending
unrelated to income) in the short run and the long run.
















4) Define monetary neutrality and what it has to do with the disagreement between the Keynesians and
Classics.













Macroeconomics 302a Prof. Nilsen 4
2 Problems (10 points each):
1. An economy has a per-worker production function
2
1
3k y
t
= where k is capital per worker and y is
output per worker. The depreciation rate is 0.1 and the population growth rate is 0.05. The saving rate is
.3 (that is, each worker saves 3/10 of his/her income).

a) Give the steady-state values of capital per worker, output per worker, and consumption per worker.
b) Using depreciation of 0.1 and population .05, what would be capital per worker, output per worker
and consumption per worker in the steady state if the savings rate was instead 0.4?
c) Using savings rate of 0.3, if depreciation was .1 but the birth rate fell to 0.02, what would be capital per
worker, output per worker and consumption per worker in the steady state?
















Macroeconomics 302a Prof. Nilsen 5
2. a) Calculate real goods equilibrium for an economy having ( ) r T Y C
d
200 5 . 0 1275 + =
r I
d
200 900 =
G = T = 450
(hint: solve to find the relationship between Y & r).

b) Now calculate the money market equilibrium (hint: find the relationship between Y & r where P is
a given). Assume M
S
is 9000 (ignore inflation expectations). M
S
/P = 0.5Y 200r
c) Now find an aggregate demand relationship (solve both equations for goods and asset markets
for a relationship between Y and P)
d) If the full employment level of GDP is 4600, what are the general equilibrium levels of
consumption, investment, the real interest rate and the price level?