Economics 302, Sec. 001 Menzie D. Chinn Spring 2011 Social Sciences 7418 University of Wisconsin-Madison Notes for Econ 302-001 FALL 2010 Midterm 1 Exam The Fall 2010 Econ 302-001 course used Hall and Papell, Macroeconomics (Norton) as a textbook. The notation differs from Blanchard, Macroeconomics 5/2 (Pearson), and we did not cover all the same material. In addition, for the open economy, we did not solve for a parametric solution. Hence: In Part I, you are not responsible for answering questions 2, 7, 15. For Part II, Question 1, be prepared to answer the questions in either graphical or intuitive form. For Part II, Question 2, be prepared to answer the question using the AD+Okun’s Law/Phillips Curve framework.2Economics 302, Sec. 001 Menzie D. Chinn Fall 2010 Social Sciences 7418 University of Wisconsin-Madison Final Examination This exam is 80 minutes long, and is worth 80 points. You are given 88 minutes to complete it. Part I is multiple choice, Part II is a short answer. The points are allocated in proportion to the time you should spend on each problem. Part I and Part II, Q1 go into bluebook A; Part II, Q2 and Q3 go into bluebook B. BEGIN BLUEBOOK A BEGIN BLUEBOOK A BEGIN BLUEBOOK A PART I: Multiple Choice [40 minutes total, 2.5 points each]. Do NOT explain. (16 problems) 1. Suppose the Fed decides to restrict the rate of growth of the money supply in the United States. You should expect to see a) an initial increase in the value of the dollar that is diminished somewhat over the long run. b) an initial increase in the value of the dollar that is swamped by a second round depreciation. c) an initial increase in the value of the dollar that continues until the Fed changes policy again. d) an initial decline in the value of the dollar that is offset somewhat over the long run. e) an initial decline in the value of the dollar that continues until the Fed changes policy again. 2. With markup pricing and multiyear contracts staggered across three-year intervals, a) monetary policy cannot influence real GDP even if expectations are rational. b) monetary policy cannot influence real GDP even if wages are otherwise flexible. c) monetary policy can influence real GDP even if expectations are rational. d) monetary policy cannot influence real unemployment even if wages are otherwise flexible. e) none of the above. 3. Which of the following is a source of growth in potential GDP? a) Growth in the labor force b) Growth in the capital stock c) Growth in labor productivity d) All of the above e) None of the above 4. The income tax system of the United States can discourage investment. This tendency, however, can be offset by the stimulative effects of a) increasing the tax credit percentage that firms can subtract from their tax liabilities. b) allowing interest payments to be deducted from income before tax liability is computed. c) allowing depreciation to be deducted more quickly from income before tax liability is computed. d) lowering the real rate of interest through macroeconomic policy. e) all of the above. 5. Purchasing power parity does not hold up as well in the short run as it does in the long run because a) prices are fixed in the short run and the resulting inflexibility is hard to describe theoretically. b) substitution among similar goods is nearly impossible when an international transaction is involved. c) goods arbitrage is not an instantaneous, costless process. d) its conclusions are drawn from price stability, a long-term phenomenon. e) all of the above.36. Housing investment is more sensitive to interest rates than business investment because a) the price of housing trends up over time. b) the rate of physical depreciation is greater for houses. c) the rate of physical depreciation is greater for business investment. d) all of the above. e) both a and c. 7. Suppose that the desired capital stock is always equal to three times total output for any year. In that case, the accelerator principle implies that investment should always a) equal some constant multiple greater than 3 times the annual change in GDP to accommodate depreciation. b) be precisely equal to three times the annual change in GDP regardless of the rate of depreciation. c) equal some constant multiple less than three times the annual change in GDP to accommodate depreciation. d) be proportional to the annual change in GDP, but the information provided is insufficient to compute the multiple exactly. e) none of the above. 8. For the purposes of integrating forward-looking business investment decisions into a model of macroeconomic behavior, capital employment decisions proceed along at least two dimensions. The most important of these considerations are a) how much capital stock to maintain and how much to depreciate. b) how much capital stock to maintain and how quickly to achieve that stock by a flow of investment expenditure. c) how much capital to rent and how much to purchase. d) how much of the capital that is rented should be depreciated and how much should be sent back. e) how fast to expand the capital stock of a growing division and how fast to contract the capital stock of a failing division. 9. If point A represents an economy’s initial position away from equilibrium at point E, which of the panels of the figure below displays a recovery trajectory from a materials price shock that produced unexpected inflation? a) A b) B c) C d) D e) none of the panels410. Given the monetary policy rule, **3)(5.0ˆ5.0ttttttYr +−++=πππand assuming 0ˆ=tY and *ttππ= , let inflation increase by 2 percentage points. By how much would the Fed increase interest rates? a) 6 percentage points b) 2 percentage points c) 3 percentage points d) 5 percentage points e) Less than 2 percentage points 11. Assume an expectations augmented Phillips curve holds, and expected inflation equals lagged inflation. Then a) the unemployment rate must exceed the natural rate if actual GDP falls short of its potential. b) the unemployment rate is independent of any accelerated inflation caused by outside price shocks. c) the unemployment rate must fall short of the natural rate if actual GDP exceeds its potential. d) any attempt to keep actual GDP above its potential must produce accelerating rates of inflation. e) unemployment can be maintained at the natural rate even given accelerating inflation. 12. Purchasing power parity does not hold up as well in the short run as it does in