1Name ______________________ Student ID ________________________ Mark on your scantron: Test from A Final Exam - Economics 101 (Fall 2007) You will have 120 minutes to complete this exam. There are 6 pages and 155 points. Section 1: (30 points total, 3 points each) Record the best answer on your scantron. MC#1: If U.S. money supply growth is 1% and output growth is 2 %, and the real interest rate is 2%, then according to the Quantity Theory of money (where velocity is constant), inflation should be a) -1% b) 1% c) 2% d) 3% MC#2: In the problem above, according to the Fisher relation, the nominal interest rate should be a) -1% b) 1% c) 2% d) 3% MC#3: Which of the following might lower the natural rate of unemployment in the U.S.? a) a rise in unemployment benefits b) a rise in money supply c) a cut in the minimum wage d) a cut in government purchases MC#4: Which of the following can generate continued long run growth in real wages and consumption levels per person in the US economy? a) a high saving rate b) a high rate of technological progress c) a high population growth rate d) all of the above MC#5: According to the Neoclassical model, the long-run effect of a cut in government spending is to ___ output and ___ investment. a) lower, raise b) lower, not change c) not change, lower d) not change, raise e) not change, not change MC#6: If money demand is not very responsive to interest rates (the coefficient on interest rates in the money demand equation is small), this will make the a) LM curve steeper b) LM curve flatter c) IS curve steeper d) IS curve flatter MC#7: If expectations are rational in the Phillips Curve, then when the Federal Reserve tries to reduce inflation, this will imply that a) unemployment falls b) output falls c) the sacrifice ratio is zero d) Okun’s law fails to hold MC#8: Which of the following is a weakness of the “sticky wage” model of aggregate supply: it implies that… a) the SRAS curve is flat b) the SRAS cure slopes upward. c) the real wage is fixed. d) the real wage is countercyclical. MC#9: In the Keynesian Cross model, if government spending is cut by $1 million, income must a) fall by $1 million. b) fall by less than $1 million. c) fall by more than $1 million. d) fall, but it is not clear how much MC#10: In the Keynesian Cross model, if taxes are cut by $1 million, income must a) rise by $1 million. b) rise by less than $1 million. c) rise by more than $1 million. d) rise, but it is not clear how much2Problem 1: Neoclassical Model (30 points total) Suppose the real side of the U.S. macroeconomy is characterized as follows: Production: Y = 10 K1/2 L1/2 Factor supply: K = 100 L = 100 Government: G = 200 T = 200 Consumer behavior: C = 100 + 0.5(Y-T) Investment behavior: I = 400 - 1000r Suppose the nominal side of the economy is characterized by the following: Quantity theory of money: MV = PY where V=5 Nominal money supply: M = 400 (Y is real GDP, K capital, L labor, G government purchases, T taxes, C consumption, I invest-ment, r real interest rate, P price level, M money supply, V velocity.) a) (10 points) Compute the equilibrium levels of the following five variables: real interest rate, real GDP, real wage, price level, nominal wage Show your work, and be careful about mathematical accuracy. In a sentence or two, explain the equilibrium condition you used for the goods market, and the economic reasoning why the real interest rate must take the value you computed above. b) (6 points, mark on scantron) Suppose that the government decreases the money supply. What effect will this have on the variables listed below? Mark the answer on your scantron. No computations necessary; no explanation required. MC#11) Price level (a) rise (b) fall (c) no change (d) insufficient information MC#12) Real GDP (a) rise (b) fall (c) no change (d) insufficient information MC#13) Nominal wage (a) rise (b) fall (c) no change (d) insufficient information3c) (10 points, scantron) Assume money supply is back at the original level. Suppose now that immigration raises the labor force. What effect will this rise in labor force have on the variables listed below? Mark the answer on your scantron. No computations necessary; no explanation required. MC#14) Real GDP (a) rise (b) fall (c) no change (d) insufficient information MC#15) real interest rate (a) rise (b) fall (c) no change (d) insufficient information MC#16) real wage (a) rise (b) fall (c) no change (d) insufficient information MC#17) price level (a) rise (b) fall (c) no change (d) insufficient information MC#18) nominal wage (a) rise (b) fall (c) no change (d) insufficient information d) (4 points) Explain in a couple of sentences what is meant by the classical dichotomy, and how accurately it describes this economy. Do any of your results in the preceding sections violate this property? Problem 2: Solow Growth Model: (22 points total) Suppose an economy can be characterized by the production function: Y = F(K,L) = 6K0.5L0.5. Suppose the depreciation rate is 20%, the saving rate is 15%, and the population growth rate is 10%. Assume there is no technological progress. a) (6 points) Using the Solow growth model, compute the steady state value of capital per person and output per person for this economy. b) (8 points) Compute the maximum level of consumption per person that this economy can sustain as a steady state. Explain in words the economic reasoning for why a higher level of consumption is not possible for this economy.4 c) (8 points, record on scantron) Suppose this economy experiences a rise in its population growth rate above the level assumed above. What would happen to the steady state values of the following variables: MC#19) output per person (a) rise (b) fall (c) no change d) ambiguous MC#20) consumption per person (a) rise (b) fall (c) no change d) ambiguous MC#21) steady state growth rate in output per person (a) rise (b) fall (c) no change d) ambiguous MC#22) steady state growth rate in total output (not per person) (a) rise (b) fall (c) no change d) ambiguous Problem 3: Short Run and Long Run (35 points total) Suppose there is a permanent