COVER PAGE FOR A WRITTEN EXAMINATION/TEST

Name of subject

: Macroeconomics 1 for ECO

Subject code

: 30L102

Date of examination

: 13 January 2013

Length of examination : 3 hours

Lecturer

: H. Gremmen

ANR: 629286

Telephone number of departmental secretariat: 2416 /2019

Students are expected to conduct themselves properly during examinations and to obey
any instructions given to them by examiners and invigilators.
Firm action will be taken in the event that academic fraud is discovered.
Enter ANR!
Each question should be answered on TU exam paper, each furnished with the candidates
name and ANR number. If candidates are unable or unwilling to answer a question, they must
nevertheless submit a sheet of paper containing details of their name and ANR, together with the
number of the question concerned.
The 6 digit ANR number is printed on the TU card.
Specifics:
Simple, non programmable, non graphic calculators are allowed, but dictionaries and translation
computers are not allowed.
This examination consists of multiple-choice questions only. Please give your answers on the
answer form following the instructions at the end of this question form. Choose only one of the
four options (the most appropriate answer) for each question. Please note that a statement is
only correct if all of its elements are correct. In other words, if an answer is not fully correct it
should be regarded as incorrect. Furthermore, if one of the alternatives reads "All of the above
alternatives are true" or an equivalent expression, and you think that all alternatives are indeed
correct, then choose the letter of this alternative that reads "All of the above alternatives are
true".
Please return your answer form after completion.
All multiple-choice questions have equal weight.
Unless indicated or implied otherwise:
- In the first 10 questions:
Assume a long run model of a closed economy
Assume that the economy starts from an overall long term equilibrium. In the long run, all
markets are in equilibrium. Unless stated or implied otherwise, this also applies to the labor
market.
You are asked to compare a new long run equilibrium to the initial one.
- overall:
Assume that, if it is not stated that some exogenous factor changes, this factor is constant.
Assume a Marginal Propensity to Consume that is greater than zero and smaller than one
Constant Returns to Scale and perfectly competitive markets
Where the questions refer to specific chapters of a book, they refer to chapters of the
textbook that is compulsory for this course: Macroeconomics, International Edition, by
N.G.Mankiw, 8th edition.
Symbols are defined in accordance with the above mentioned textbook
The exchange rate is also defined as in the textbook, that is, as the price in foreign currency
of one unit of the home currency.
The decimal sign is . .

Good luck!

1. Consider the graph below that describes the pizza market.

In this standard microeconomic supply and demand model of the pizza market, the
rightward shift of the demand curve may have been caused by:
A. an improved technology used in the production of pizzas
B. a lower price of the substitute good for pizzas
C. a rise in the price of the input used in the production of pizzas
D. None of the above.
2. GDP measures:
A. expenditure on all goods and services that were produced within the country
concerned in a particular time period.
B. expenditure on all final goods and services that were produced within the country
concerned in a particular time period.
C. expenditure on all final goods and services that were produced by the factors of
production that are owned by people of the nationality concerned in a particular
time period.
D. None of the above.
3. Suppose that an ore mining company extracts ore and sells it to a steel company
for $10, the steel company makes steel and sells it to a car producer for $20, and
the car company sells a car to a customer for $30. This series of transactions
increases GDP by:
A. $10.
B. $20.
C. $30.
D. $60.
4. All other things equal, if the price of our currency falls relative to the price of
other currencies, then in our country:
A. the GDP deflator and the CPI will rise by equal amounts.
B. the GDP deflator will rise and the CPI will remain the same.
C. the GDP deflator will remain the same and the CPI will rise.
D. the GDP deflator and the CPI will rise by different amounts.
Explanation: Goods and services produced abroad do not enter the GDP deflator,
but are included in the CPI. If our currency depreciates, then in our currency our
consumers pay more for imported goods.

5. Suppose that a major natural disaster destroys a large part of a country's capital
stock but does not kill anybody. What will happen to the real wage rate?
A. It will not change.
B. It will rise.
C. It will fall.
D. It could rise or fall.
6. Consider the loanable funds market of a closed economy in the long run as
depicted in Chapter 3 of the text book.
A leftward shift of the savings curve CANNOT be caused by a(n):
A. Lower real interest rate
B. exogenous positive shock to consumption
C. increase in the government budget deficit.
D. reduction in taxes.
7. Read the following two statements.
I. If the reserve ratio rr falls and private banks create more money as a result, then,
other things equal, the publics wealth will in the end have gone up.
II. If the public holds no currency, the money multiplier is greater than if the public
does hold currency.
What is correct?
A. Statement I is correct, Statement II is correct.
B. Statement I is correct, Statement II is wrong.
C. Statement I is wrong, Statement II is correct.
D. Statement I is wrong, Statement II is wrong.
8. Assume that banks hold a fraction of deposits equal to rr as reserves, that the
public holds a fraction of deposits equal to cr as currency, that 0 < rr < 1, and that
cr > 0. If the Central Bank lowers the interest rate on reserves that private banks
hold with the Central Bank, it is likely that after some time:
A. The money supply will have grown
B. The amount of deposits that the public holds with private banks will have grown
C. The amount of currency that the public holds, will have grown.
D. All of the above.
9. Assume that real money demand depends on the nominal interest rate and on
income. If the Fisher Effect holds, a rise in the expected rate of inflation does NOT
influence the:
A. demand for real money balances.
B. ex ante real interest rate.
C. nominal interest rate.
If all of the above variables are affected by the rise in the expected rate of inflation,
your answer is D.
Explanation: Fisher: if exp inflation r fixed, i L M/P > L extra spending
P

10. Read the following two statements.

I. If a country has a progressive direct taxation system, then, owing to positive
inflation, the ratio of direct taxation to indirect taxation falls.
II. A mild positive rate of inflation may go out of hand since through a higher
nominal interest rate inflation promotes spending.
What is correct?
A. Statement I is correct, Statement II is correct.
B. Statement I is correct, Statement II is wrong.
C. Statement I is wrong, Statement II is correct.
D. Statement I is wrong, Statement II is wrong.
Explanation: Fisher: if exp inflation r fixed, i L M/P > L extra spending
P statement II is correct.
11. In the small open economy model of Chapter 6, starting from balanced trade, an
increase in the world real interest rate leads to which of the following?
A. negative net capital outflow and a trade surplus
B. positive net capital outflow and a trade surplus
C. positive net capital outflow and a trade deficit
D. negative net capital outflow and a trade deficit
Note:
r* r I (S-I) CF >0 real depreciation NX> 0
12. Consider a small open home economy called country A that is structured along
the lines of the small open economy described in Chapter 6. At a certain moment
foreign governments are willing to allow more cars produced in country A to be
exported to their markets. As a result, when comparing the new long run equilibrium
to the initial one, we will NOT find that:
A. net exports by A would have gone up
B. the currency of country A would have appreciated in nominal terms
C. the currency of country A would have appreciated in real terms
If none of the above alternatives would result, your answer is D.
Note: because saving and investment would not change, CF is unaffected and,
hence, NX is unaffected.

13. A comparison of the Large open economy as pictured in the Appendix to Chapter
6 of the book to the small open economy as described in the main text of that
Chapter, on the one hand, and to the closed economy case as given in Chapter 3, on
the other hand, learns:
A. higher government purchases cause an interest rate increase in the large open
country case and in the closed country case, but not in the small open country
case.
B. an exogenous government spending increase causes an appreciation of the home
currency in the large open country case, but not in the small open country case
C. an exogenous increase in investments causes a depreciation of the home
currency in both the large open country case and the small open country case
D. a trade policy to promote net exports will leave the home rate of interest
unaffected in the small open country case, but not so in the large open country
case.

14. An adult is not able to find a job because the legal minimum wage is higher than
the wage that firms are willing to offer. This situation is an example of:
A. frictional unemployment.
B. structural unemployment.
C. cyclical unemployment.
D. efficiency unemployment.
15. Which of the following holds in the Solow growth model (as discussed in the book)?
A. Countries with a larger population size will have a higher GDP growth rate in steady state than
countries with a lower population size, all else equal.
B. Countries with a larger population size will have a lower level of income per worker in steady
state than countries with a lower population size, all else equal.
C. Countries with a higher saving rate will have a higher GDP growth rate in steady state than
countries with a lower saving rate, all else equal.
D. None of the above.
16. Consider the Solow growth model without population growth and without technological
progress, as discussed in chapter 8 of the book. Which of the following statements is NOT true?
A. In the steady state, the real wage rate is constant.
B. In the steady state, the capital stock is constant.
C. In the steady state, production per worker is equal to savings minus depreciation.
D. In the steady state, consumption is equal to production minus depreciation.
17. Suppose the economy is initially in its steady state. At a certain moment, the saving rate
decreases to a lower level, and stays at that lower level. What will be the consequences
according to the Solow growth model without population growth and without technological
progress?
A. Income per worker will first grow and then decrease.
B. Income per worker will gradually decrease to a permanently lower level.
C. Income per worker will first decrease and then gradually return to its initial level.
D. Income per worker will not change.
18. Consider the Solow growth model with population growth but without technological progress,
as discussed in chapter 8 of the book. Production is given by Y = 20K1/2L1/2. Population growth is
equal to 2% per year, capital depreciates by 4% per year. Suppose the economy is initially in a
steady state that corresponds to the golden rule. At a certain moment, the rate of population
growth decreases to 1% per year, and stays at that level forever. What happens with the saving
rate that leads to the golden rule?
A. It does not change.
B. It increases.
C. It decreases.
D. More information is needed to say something about how this golden-rule saving rate changes.
19. Consider the Solow growth model with population growth but without technological progress,
as discussed in chapter 8 of the textbook. The economy is initially in its steady state and
production is given by Y = AF(K,L), where A is a measure of total factor productivity. The figure
below shows the development of consumption per worker over time. As of time t=1, something
has happened to the economy.

Which of the following could have happened at time t=1 that can explain this development?
A. The economy was hit by a disaster which destroyed part of its capital stock (K) at time t=1.
B. The rate of depreciation () has increased to a permanently higher level.
C. The rate of population growth (n) has decreased to a permanently lower level.
D. All of the above are possible explanations.

20. Consider the Solow growth model with labor-augmenting technological progress, as
discussed in chapter 9 of the book. The population size (L) is constant. Production is given by
Y=5K1/3(EL)2/3. Capital depreciates by 5% per year, the rate of labor-augmenting technological
progress is 1% per year, and the saving rate equals 30%. How high will the consumption per
labor efficiency unit be in steady state?
A. C/(EL) = 7.5
B. C/(EL) = 17.5
C. C/(EL) = 25
D. C/(EL) = 125
21. In what respect does endogenous growth theory (as briefly discussed in chapter 9 of the
book) differ from the Solow growth theory?
A. In endogenous growth theory, diminishing returns to scale are absent.
B. In endogenous growth theory, the savings rate is an endogenous variable.
C. In endogenous growth theory, the amount of output produced per unit of capital is not
constant.
D. All of the above.
22. Consider the AS-AD model as discussed in chapter 10 of the book (where the SRAS-curve is
horizontal). Initially, the economy is in its long-run equilibrium and the price level is P0. Due to a
one-time technological development, the short-run price level decreases to P1 < P0. What will be
the central banks reaction if it wants the price level to be P0?
A. Decrease the money supply immediately.
B. Increase the money supply immediately.
C. First decrease the money supply, then gradually increase the money supply as time passes
by.
D. Do nothing.

23. Consider the Keynesian Cross model of a closed economy as described in chapter 11 of the
book (where the interest rate and investments are constant). The government decides to

increase both its purchases of goods and its taxes by the same amount. What will be the effect
on private consumption?
A. Private consumption increases.
B. Private consumption does not change.
C. Private consumption decreases.
D. More information on the size of the marginal propensity to consume is needed to say
something about the change in private consumption.
For questions 24-29 below, consider the IS-LM model of a closed economy as discussed in
chapters 11 and 12 of the book. Assume that neither the IS-curve nor the LM-curve is horizontal
or vertical and that the economy is initially in its long-run equilibrium.
24. Suppose autonomous real money demand falls. How will this affect national savings in the
short run?
A. National savings will increase.
B. National savings will not change.
C. National savings will decrease.
D. The change in national savings is ambiguous.

25. Which of the following statements about the IS-LM model is correct?
A. A change in the saving rate is a movement along the IS-curve.
B. Because the price level is exogenous, a change in the price level has no effect in this model.
C. If the interest rate increases, the LM-curve will shift upward.
D. None of the above statements is correct.

26. The central bank has two possible policies:

Policy 1: keep the money supply constant and have a flexible interest rate
Policy 2: adapt the money supply to keep the interest rate constant
Which of the following statements is correct?
A. If there are only exogenous shocks to the real money demand, then policy 1 will lead to a
more stable production level than policy 2.
B. If there are only exogenous shocks to the demand for goods, then policy 1 will lead to a more
stable production level than policy 2.
C. If there are only exogenous shocks to the demand for goods, then policy 1 and policy 2 will
lead to an equally stable production level.
D. None of the above statements is correct.
27. Consider the IS-LM model with the following specifications:
C = 40 + (Y T)/2
I = 40 r/2
G = 50
T = 50
Real money demand = 2Y 10r
M = 3000

If the long-run level of real output is equal to 200, what will be the long-run price
level?
A. 0.1
8

B. 7.5
C. 8
D. 10
28. The Great Depression of the 1930s can be explained by the spending hypothesis. Which of
the following is NOT part of this hypothesis?
A. Because of an increasing number of bank bankruptcies in the United States, firms could get
less credit which caused a drastic decrease in investment.
B. Because national income decreased, the US government cut expenditures to prevent a further
increase of its budget deficit.
C. Consumers in the United States could spend less because the money supply decreased.
D. Because of the stock market crisis in 1929, many households lost part of their financial wealth,
which led to a reduction in private spending.
29. Suppose the government increases taxes. In which of the following models will this have the
strongest effect on production?
A. The closed economy in the long run, as discussed in chapter 3 of the book.
B. The small open economy in the long run, as discussed in chapter 6 of the book.
C. The closed economy in the short run described by the Keynesian Cross model, as discussed
in chapter 11 of the book.
D. The closed economy in the short run described by the IS-LM model, as discussed in chapter
11 and 12 of the book.
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