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Macroeconomics 302c Prof.

Nilsen 1
Exam 2 (Chapters 6 9)

20 Multiple Choice (each 2 points)

Chapter 6
1. Suppose the current level of output is 5000 and the
elasticity of output with respect to capital is 0.4. A 10%
increase in capital would increase the current level of
output to
(a) 5020.
(b) 5050.
(c) 5200.
(d) 5500.

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. Conditional convergence means that in the long run,
(a) living standards converge only within groups of
countries having similar characteristics.
(b) living standards converge only for countries that have
the same initial capital-labor ratio.
(c) living standards around the world become the same.
(d) living standards converge even if countries have
different population growth rates.

Chapter7
5. A 10% decrease in real income usually leads to _____
in money demand.
(a) an increase
(b) no change
(c) a decrease of less than 10%
(d) a decrease of 10%

6. Whats the most common way for a central bank to
reduce the money supply?
(a) Collect higher taxes
(b) Sell bonds to the public
(c) Buy bonds from the government
(d) Buy bonds from the public

7. If the interest elasticity of money demand is 0.1, by
what percent does money demand change if the nominal
interest rate rises from 2% to 3%?
(a) 0.1%
(b) 5%
(c) 0%
(d) 5%

8. Suppose velocity is 3, real output is 9000, and the
price level is 1.5. What is the level of real money demand
in this economy?
(a) 2000
(b) 3000
(c) 6000
(d) 30,000

9. Suppose the real money demand function is Md/P
= 2400 + 0.2 Y 10,000 (r +
e
). Assume M = 4000, P
= 2.0,
e
= 0.03, and Y = 5000. The real interest rate that
clears the asset market is
(a) 3%.
(b) 6%.
(c) 11%.
(d) 14%.

10. If nominal money supply grows by 3% and real
money demand grows by 8%, the inflation rate is
(a) 5%.
(b) 8/3%.
(c) 5%.
(d) 11%.

Chapter 8
11. 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.

12. A variable that tends to move in advance of aggregate
economic activity is called
(a) a leading variable.
Macroeconomics 302c Prof. Nilsen 2
(b) a coincident variable.
(c) a lagging variable.
(d) an acyclical variable.

13. A variable that tends to move at the same time as
aggregate economic activity is called
(a) a leading variable.
(b) a coincident variable.
(c) a lagging variable.
(d) an acyclical variable.

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. You have just read that the Federal Reserve has
increased the money supply to avoid a recession. For a
given price level, you would expect the LM curve to
(a) shift up and to the left as the real money supply falls.
(b) shift up and to the left as the real money supply rises.
(c) shift down and to the right as the real money supply
falls.
(d) shift down and to the right as the real money supply
rises.

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. An increase in expected inflation causes the real
interest rate to _____ and output to _____ in the short
run, before prices adjust to restore equilibrium.
(a) rise; rise
(b) rise; fall
(c) fall; rise
(d) fall; fall

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.

Short Answers (8 points each):
1) Explain the criticism of the Solow model by the adherents of the endogenous growth literature.













Macroeconomics 302c 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 302c 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) What are 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 302c Prof. Nilsen 5
2. An economy has desired consumption and investment: Y r C
d
8 . 500 200 + =
r I
d
500 200 =
Let full-employment output be 1000 and G = 100.
The money market is described by r
P
M
S
300 540 = where money supply is 900.
(a) Find the real interest rate giving general equilibrium. What is C, I, and P?
(b) Let government spending increase to 200. Find the new levels of the real interest rate,
consumption, investment and price level at general equilibrium.

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