Student Name: 1Econ 352 Fall 2011 Midterm Exam (Form 1)October 5, 2011Instructor: Kanda NaknoiSession 1: 9:00-10:15, Session 2: 10:30-11:45Part OneInstruction: Answer all the following questions. Depict appropriate diagrams as required.1. (10 points) Country A is currently a borrower in the world capital market. SupposeCountry A’s government would like to use fiscal policy to reduce the size of loans from theworld capital market.(a) (5 points) Suppose Country A is a small open economy. What fiscal policy wouldyou recommend Country A’s government? Explain using a diagram.(b) (5 points) How will your answer in Part (a) change if Country A is a large openeconomy? Explain using a diagram.Student Name: 2Suppose the central bank permanently sells long-term US government bonds. Assumethat there are no changes in the required reserves ratio, the excess reserves ratio and thecurrency ratio.2. (10 points)(a) (5 points) Explain the immediate effects of this policy on inflation, money supply, monetarybase, required reserves and excess reserves on the central bank’s balance sheet.(b) (5 points) Explain the long-run effects of this policy on inflation, money supply, monetarybase, required reserves and excess reserves on the central bank’s balance sheet.Student Name: 33. (10 points) Suppose the US welcome a large number of unskilled migrants from India.(a) (5 points) Use the Solow model to discuss the effects of migrants on US capital stockper worker and the US income per worker, both in short run and in the long run.Display an appropriate diagram.(b) (5 points) Use the Romer model or the endogenous growth model to discuss the effectsof migrants on US capital stock per worker and the US income per worker, both inshort run and in the long run.Student Name: 4Part TwoInstruction: In the answer sheet, mark the test form as ”01.” Choose one answer and mark theanswer sheet accordingly. Note that you must use pencil no. 2. (1 point each)1. Suppose the production is Y = AK0.3L0.7. What is the share of labor income in nationalincome?(a) 0.3(b) 0.5(c) 0.7(d) None of the above2. Suppose the production is Y = AK0.3L0.7. Which of the following statement is false?(a) A rise in A raises the marginal product of labor.(b) A rise in A raises the marginal product of capital.(c) A rise in K raises the marginal product of labor.(d) A rise in K raises the marginal product of capital.3. Suppose the production is Y = AK0.3L0.7. Which of the following statement is false?(a) This production function exhibits increasing returns to scale.(b) This production function exhibits constant returns to scale.(c) This production function exhibits decreasing returns to scale.(d) None of the above4. Suppose the production is Y = AK0.3L0.7. Assume a closed economy in which both laborsupply and supply of capital are inelastic. What is an effect of a rise in the level oftechnology?(a) Real wage rises.(b) Real interest rate falls.(c) Labor input increases.(d) Capital input increases.5. What characterizes the principle of diminishing returns?(a) The return to capital falls as firms increase demand for capital.(b) The return to labor falls as firms increase demand for capital.(c) The return to capital falls as firms increase demand for labor.(d) All of the above6. What is an effect of income tax cut in a small open economy?Student Name: 5(a) A fall in government saving(b) A fall in investment(c) A fall in real interest rate(d) None of the above7. What is NOT an effect of income tax cut in a large open economy?(a) A fall in government saving(b) A fall in investment(c) A fall in real interest rate(d) None of the above8. Which of the following is consistent with the fact that the US national saving is smallerthen the US domestic investment.(a) The US is a net exporter of capital.(b) The US is a net exporter of goods and services.(c) If the US is shut down from the international capital markets, the domestic realinterest rate will rise.(d) The US government saving is smaller than the US private saving.9. The US national saving is smaller then the domestic investment. What happens when thegovernment increases incentives for investment?(a) The US net export decreases.(b) The US net capital outflows increases.(c) The US government saving increases.(d) The US national saving increases.10. Suppose that Country A is a closed economy, of which the domestic real interest rate isabove the world real interest rate. What will happen if this country joins the world capitalmarket?(a) The domestic real interest rate will rise.(b) This country will become a borrower.(c) The net export of this country will turn from surplus to deficit.(d) All of the above11. Suppose the long-term nominal interest rate is 4%, and the expected long-run inflationrate is 5%. Which of the following statement is true?(a) The real interest rate is 1%.(b) Money supply is expected to grow at a faster than the growth rate of output.Student Name: 6(c) The savers are rewarded while the borrowers are punished.(d) All of the above.12. Which of the following is considered an open market operation?(a) The central bank purchases short-term domestic government bonds.(b) The central bank purchases long-term domestic government bonds.(c) None of the above(d) All of the above13. Suppose the money growth rate in the US is lower than Japan and the output growth ratein the US is higher than Japan. What is predicted by the Quantity Theory of Money?(a) Inflation rate in Japan is higher than that in the US.(b) Velocity of money in Japan is higher than that in the US.(c) None of the above(d) All of the above14. What is an immediate effect of an open-market purchase of government bonds by thecentral bank? Assume that that the currency ratio, the excess reserves ratio and therequired reserves ratio are constant.(a) An increase in required reserves(b) An increase in excess reserves(c) An increase in discount loans(d) An increase in money multiplier15. What is a long-run effect of an open-market purchase of government bonds by the centralbank? Assume that that the currency ratio, the excess reserves ratio and the requiredreserves ratio are constant.(a) An increase in output(b) An increase in inflation(c) None of the above(d) All of the above.16. Which of the following results in a fall of the money multiplier?(a) A rise in required reserves ratio(b) A rise in excess reserves ratio(c) Banking panic causes the public to withdraw deposits from banking system(d) All of the aboveStudent Name: 717.