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Department of Economics

Intermediate Macroeconomics I
Economics 152a – 001
Midterm Exam

Student ID: ___________________________________

Name:        ___________________________________

EXAM CODE: 222

TIME: 2 hours (7:00 – 9:00pm)
INSTRUCTIONS:
1. Make sure that the exam code indicated above matches the one on your
scantron sheet.
2. Make sure to fill in the blanks at the top of the Scantron sheet: your
NAME, your SIGNATURE, you STUDENT NUMBER, your
INSTRUCTOR’S NAME (Chiu), your COURSE NUMBER (Ec152a), your
SECTION (001).
3. The exam consists of 50 multiple choice questions, 10 true/false
questions.
questions on the Scantron sheet. Please use PENCIL only to fill in the
5. Programmable, graphing and cell phone calculators as well as translation
dictionaries are NOT allowed.
6. GOOD LUCK!

NOTE: QUESTIONS CONTINUE ON THE BACK OF EACH PAGE

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Exam Code: 222

(A) Multiple Choice Questions (50 points)
Choose the most suitable answer for each multiple-choice question in the
appropriate space on the scantron sheet.

1. Consider a static optimization model with consumption-leisure choice. Labor
supply is increasing in wage rate if
a. the substitution effect dominates the income effect
b. the income effect dominates the substitution effect
c. the substitution effect dominates the price effect
d. the income effect dominates the price effect

2. Real GDP per capita is a better measure of the living standard than real
GDP because

3. To analyze the time series yt, we should
a. decompose the time series log yt into trend and growth components.
b. decompose the time series log yt into growth and business cycle
components.
c. decompose the time series yt into growth and business cycle components.
d. decompose the time series yt into trend and growth components.

4. Consider a dynamic optimization model with consumption-saving choice of a
consumer. Suppose an agent is neither a lender nor a borrower, then
a. Saving is positive
b. Current consumption equals current income if current lump sum tax is positive
c. Current disposable income equals current consumption
d. Current consumption equals current lump um tax
Remarks: y-t=c+s, if s=0  y-t=c

5. The difference between GDP and GNP is
a. Net factor payment
b. Gross factor payment
c. Cost of intermediate input
d. Current account payment

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6. The relationship between observation and model is that
a. we use observation to explain models
b. we use observation to deduce model implications
c. we use an economic model to test observation
d. we use an economic model to explain observation

7. A lump-sum tax is a tax that
a. can be avoided by strategic behavior.
b. does not depend on the actions of the government.
c. distorts economic decisions.
d. does not depend on the actions of the economic agent being taxed.

8. The advantage of applying log-transformation to time series yt is that
a. yt and log yt can give the same growth rate when the growth rate is small
b. yt and log yt can give the same slope when the growth rate is small
c. the slope of the graph of log yt can be interpreted as the growth rate of
yt
d. the slope of the graph of yt can be interpreted as the growth rate of log yt

9. A real and dynamic model is
a. a single-period model without money
b. a multi-period model with money
c. a single-period model without money
d. a multi-period model without money

10. When consumption and leisure are both normal goods, an reduction in real
dividend income minus taxation, the rational consumer
a. increases consumption and increases leisure.
b. increases consumption and reduces leisure.
c. reduces consumption and increases leisure.
d. reduces consumption and reduces leisure.
Remarks: Income reduction induces normal goods consumption to drop.

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11. To have export (X) higher than national output (Y)
a. is impossible because a country cannot export more than the amount it can
produce
b. is impossible because consumption cannot be negative
c. is possible when import is high.
d. is possible when actual output is higher than the potential level
Remarks: Y=C+I+G+X-M  X-Y=M-C-I-G  X-Y>0 when M is large

12. Consider two time series: X and Y
Period         X        Y
1           1       -4
2           2       -2
3           3        0
The correlation coefficient between X and Y is
a. -3
b. -1
c. 0
d. 1

13. In a one-period economy, all of the following are equivalent expressions of
the budget constraint except
a. C  w( N s  l )    T
b. C  wN s    T
c. C  w(h  l )    T
d. C  wl  wh    T

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Use the national expenditure account to answer the following question.
\$
Gross domestic product                                                    ?
Personal expenditure on consumer goods and services                      40
Durable goods                                                          21
Semi-durable goods                                                      5
Non-durable goods                                                       3
Services                                                                ?
Government current expenditure on goods and services                      6
Total Investment                                                          ?
Government gross fixed capital formation                                4
Government inventories                                                  4
Business gross fixed capital formation                                  6
Residential structures                                             4
Non-residential structures and equipment                           2
Exports of goods and services                                             4
Goods                                                                   2
Services                                                                2
Imports of goods and services                                             2
Goods                                                                   1
Services                                                                1

14. What is the GDP of the economy
a. \$65=40 + 6 + (4+4+6+3)+4-2
b. \$69
c. \$71
d. \$75

15. In an economy with zero investment and zero government spending:
a. consumption smaller than national output implies that export equals to import
b. consumption smaller than national output implies that export is smaller than
import
c. consumption smaller than national output implies that import is smaller
than export
d. there is insufficient information to answer this question
Remarks: Y=C+I+G+X-M & I=G=0  Y=C+X-M  C-Y=M-X  C<Y implies
M<X

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16. The diagram below describes the employment decision of a firm.

Which one of the points in the diagram indicates the situation MPN < w?
d, Remarks: slope of production function = MPN < w = slope of total cost
curve

17. Consider a static optimization model of a consumer. A rise in real wage rate
a. an income effect only
b. a substitution effect only
c. an income effect and a substitution effect
d. neither an income effect nor a substitution effect

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Use the information given below to answer the following question:

1.50

1.00

0.50
GDP
0.00
M
0      1    2    3        4          5       6    7       8    9
-0.50

-1.00

-1.50
time

Volatility                           Cross Correlation of Real GDP

Variable         (%        X(t-2)              X(t-1)       X(t)        X(t+1)     X(t+2)
Std.
Dev.)
GDP             0.80    -0.74               -0.32         1.00       -0.32      -0.74
(a)            0.56     0.30                0.32         0.56        1.00      0.60
(b)            0.56    -0.32                1.00        -0.56       -0.61      0.60
(c)            1.56    -0.32                1.00        -0.56       -0.61      0.60
(d)            1.56     0.30                0.32         0.56        1.00      0.60

Remarks: counter-cyclical and less volatile

18. The above figure plots the cyclical behaviors of GDP and variable M.
The first row of the above table reports the cross-correlation pattern of GDP.
Among the remaining rows, which one best describes the pattern of variable
M?

19. Consider a static optimization model of a consumer. The marginal rate of

substitution MRSl,c
a. is always equal to the wage rate
b. is equal to the wage rate only for perfect substitutes
c. is equal to the wage rate at the optimal consumption point
d. is diminishing in the wage rate
Remarks: at the optimal point: tangency of I-curve and budget line 
MRS=w

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Use the information given below to answer the following two questions:

Cross correlation of real GDP
Variable      S.D.          X(t-1)               X(t)              X(t+1)
GDP            0.3            0.5                 1                    -0.5
Y          0.2            0.3                 0.9                   0.1
Z          0.7           - 0.5                0.2                   0.4

20. Which one of the following statements is correct?
a. Both Y & Z are pro-cyclical, but only Z is leading.
b. Both Y & Z are pro-cyclical, but only Z is lagging.
c. Both Y & Z are more variable than GDP and pro-cyclical.
d. Both Y & Z are more variable than GDP, but only Y is co-incident.
Remarks: Pro-cyclical: 0.9>0, 0.2>0; Z leading: |-0.5| largest in the row

21. In Canada, which one of the following variables has the same business cycle
features as variable Y?
a. Consumption
b. Investment
c. Money
d. Price level
Remarks: pro-cyclical, coincident, less volatile

22. The biggest expenditure component in the national expenditure account of
a. Consumption
b. Investment
c. Government spending
d. Export

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Consider the cyclical behavior of economy Q and answer the following two
questions.
Volatility                                          Cross Correlation of Real GDP
Variable      (% Std. Dev.)   X(t-5)   X(t-4)   X(t-3)   X(t-2)    X(t-1)     X(t)      X(t+1)  X(t+2)   X(t+3)       X(t+4)   X(t+5)
Real GDP          2.00        0.02      0.15     0.38     0.63       0.85     1.00       0.85    0.63     0.38         0.15    -0.03
Consumption       1.00        0.25      0.41     0.56     0.71       0.81     0.82       0.66    0.45     0.21        -0.02    -0.21
Investment        8.00        0.04      0.19     0.39     0.60       0.79     0.90       0.75    0.50     0.21        -0.05    -0.26
Employment        2.00        -0.18    -0.04     0.14     0.36       0.61     0.82       0.89    0.82     0.67         0.47     0.25
Price level       0.80        -0.50    -0.58    -0.60    -0.60      -0.84    -0.68      -0.43   -0.31    -0.17        -0.04     0.09
Money             1.50        0.30      0.30     0.50     0.65      -0.50    -0.65      -0.70   -0.80    -0.90        -0.50    -0.24

23. Which of the following business cycle descriptions is wrong?
Cyclicality       Lead/Lag          Variability Relative to GDP
a      Consumption          Procyclical       Coincident                    Smaller
b      Investment           Procyclical       Coincident                     Larger
c      Employment           Procyclical         Lagging                      Same
d      Price level          Procyclical        Leading                      Smaller
e      Money              Countercyclical       Lagging                     Smaller

24. Which of the following business cycle facts of economy Q is different from
d. Variability of consumption

25. Use the information given below to answer the following question:
Consider an economy with 2 goods. There are 2 firms and 2 consumers.
Moreover, there is a government that employs workers and finances the wage
payment by taxation.
The income and expenditure flows in this economy in year 2000 are as follows:
Firm 1                                   Firm 2
Output of good 1     = 1 units           Output of good 2     = 2 units
Price of good 1      =\$?                 Price of good 2      =\$?
Interest payment     =\$1                 Interest payment     =\$0
Wage payment         =\$1                 Wage payment         =\$1
Tax payment          =\$0                 Tax payment          =\$1

Consumer 1                                        Consumer 2
Wage income                       =\$3             Wage income                             =\$0
Interest income                   =\$1             Interest income                         =\$0
Profit income                     =\$0             Profit income                           =\$2
Expenditure on good 1             =\$4             Expenditure on good 1                   =\$0
Expenditure on good 2             =\$0             Expenditure on good 2                   =\$2
Tax payment                       =\$0             Tax payment                             =\$0

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We use year 1999 as the base year to compute the implicit GDP price deflator of
2000. Suppose in 1999, the price of good 1 is \$3, the price of good 2 is \$2 and
the wage rate is the same as in 2000. The implicit GDP price deflator is
_____________ . If we use chain-weighting method, the implicit GDP price
deflator is _____________ .

a.   114.29; 93.33
b.   114.29;107.14
c.   87.5;93.33
d.   87.5;107.14

26. The major difference between the growth component and the business cycle
component of an economic time series is that
a. the growth component is always increasing while the business cycle
component is fluctuating over time.
b. the growth component is constant over time while the business cycle
component can change over time.
c. the business cycle component captures the long run trend while the growth
component captures the short run fluctuations of the trend.
d. the growth component is the long run trend while the business cycle
component is the deviation from the trend.

27. The log-approximation of growth rate of y t is accurate when
a. y t is small
b. log yt is small
c. growth rate of yt is small
d. growth rate of log yt is small

28. That indifference curves are downward sloping
a. is not true.
b. follows from the property that more is preferred to less.
c. follows from the property that the consumer likes diversity in his or her
consumption bundle.
d. follows from the property that consumption and leisure are normal goods.

29. In a competitive equilibrium, the absolute value of the slope of the PPF is
NOT
a. equal to the marginal rate of transformation
b. equal to the marginal rate of substitution
c. equal to the marginal product of labor
d. equal to the marginal utility of consumption

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30. Consider a static optimization model of a consumer,
a. wage rate is an endogenous variable
b. leisure choice is an exogenous variable
c. consumption choice is an endogenous variable
d. dividend income is an endogenous variable

31. Assuming all consumers are identical
a. is realistic because agents are homogeneous
b. lacks micro-foundation because it ignores the inequality issue
c. is unrealistic but it can simplify the model
d. is realistic because it can match real world data

32. Consider a two period model. Other things being equal, suppose the
government increases current tax by T and reduces future tax by T/(1+r).
Which of the followings is true?
a. Higher current consumption
b. Lower future consumption
c. Lower saving
d. Higher saving
Remarks: y - t = c + s  higher t implies lower s because c is unchanged
according to Ricardian Equivalence Theorem

33. The basic components of a macroeconomic model involve all of the following
except
a. the available technology
b. the preferences of consumers
c. the available resources
d. the optimal choices of firms

34. Consider a static optimization model of a consumer. Which of the following
changes will lead to an income effect that increases consumption and leisure?
a. decrease in wage rate w
b. increase in lump sum tax T
c. increase in dividend 
d. increase in consumption c

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35. Which of the followings is NOT a condition for the competitive equilibrium?
a. MRT=w
b. G=T
c. MRS= w
d. h=l

36. Consider a static optimization model of a consumer. Suppose U(c, l) = 2c+3l,
h=10, w=2, =2,T=2, then optimal leisure is
a. any l between 0 and h
b. l=5
c. l=10
d. l=0
Remarks: w = 2 > slope of indifference curve = 3/2  leisure = 0

37. Consider a static optimization model of a consumer. Suppose the utility
function is given by U(c, l) = min {c, al}. A reduction in parameter “a” leads to
a. higher c and lower l
b. higher c and higher l
c. lower c and higher l
d. lower c and lower l

38.
\$
GDP = 19
Consumption = 10
Government Spending = 4
Tax = 2
Net Export = 0
Net Factor Payment 1
The national saving of the above economy is
a. 4
b. 5
c. 6 = Y + NFP –C –G =19 + 1 – 10 - 4
d. 7

39. Consider a static equilibrium model. Which one of the following conditions is
not part of the competitive equilibrium?
a. Optimal choices of consumers
b. Optimal choices of firms
c. Optimal choices of government
d. Government budget constraint

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40. Consider the production decision of an individual firm. The condition for
optimal employment of a firm is described by
a. MRT=w
b. MPK=w
c. MPN=w
d. MRS=MPN= w

41. Consider a static equilibrium model:
Production function:         Y=zKN
Utility function:            U=min[C,al]
Moreover, K=2,z=1,G=2,h=10,a=1
What is the PPF and the MRT?
a. C=18-2l and 2
b. C=18-2l and 1
c. C=20-l and 2
d. C=20-l and 1

42. What is the effect of a reduction in government spending on the PPF?
a. Upward parallel shift
b. Downward parallel shift
c. Change the slope
d. No change

43. Consider the consumption-saving choice of a borrower. What is the effect of
a rise in future income?
a. Lower current consumption due to income effect.
b. Higher current consumption due to substitution effect.
c. Higher future consumption due to income effect.
d. Lower future consumption due to substitution effect.

44. Consider a two period model. If the government sells zero amount of bonds,
then
a. Current government spending is bigger than current taxation.
b. Future government spending is bigger than future taxation.
c. Future government spending equals future taxation.
d. Current government spending equals future taxation.
Remarks: T’=G’+B(1+r) & B=0  G’=T’

45. Consider the employment choice of a firm, which of the following variables is
exogenous?
a. profit
b. capital stock
c. labor employment
d. output

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Use the budget line given in the graph below to answer the following 3 questions.
Consider a static optimization model of a consumer. Suppose U(c, l) = min {c, al}
with a=2:

46. What is the optimal choice of consumption C?
a. 5
b. 6
c. 6.66
d. 8

47. What are the values of h, w?
a. h=10, w=1.5
b. h=10, w=2
c. h=8, w=1.5
d. h=8, w=2
Remarks: x-intercept = 8, |slope| = 1.5

48. Which one of the following values of  and T are not consistent with the
graph?
a. =10, T=6
b. =10, T=8
c. =12, T=10
d. =2, T=0
Remarks: when leisure = h = 8, C =  - T =2

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49. Consider a static equilibrium model. PPF moving from FD to ED is a result of

a.   a rise of T
b.   a reduction in 
c.   a rise in z
d.   a rise in w

50. Consider a static equilibrium model, a reduction in productivity z will lead to
a. higher consumption
b. lower wage rate
c. higher output
d. higher employment if substitution effect dominates

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(B) True/false Questions (10 points): Determine whether the following
statements are true or false. If the statement is “true”, answer “A” on the
scantron. If the statement is “false”, answer “B” on the scantron.

(51) The value added of a firm in the U.S. owned by a Canadian is included in
the GDP of US but not included in the GDP of Canada. T

(52) Comparative statics studies the effect of endogenous variables on
exogenous variables. F

(53) In Canada, investment is a procyclical and coincident variable. T

(54) Other things being equal, if the nominal GDP is overestimated, then the
implicit GDP price deflator is under-estimated. F

(55) The correlation coefficient between X and Y is equal to the covariance
between X and Y divided by the sum of the standard deviation of X and the
standard deviation of Y. F

(56) Consider the two period consumption choice of a lender. If the real interest
rate goes up, the current consumption may rise or fall. T

(57) A correlation coefficient of zero indicates that the variables under study are
unrelated. T

(58) A firm operating at MPN > w should increase employment of labor. T

(59) Assuming a preference of perfect substitutes satisfies the assumption that
agents love diversity. F

(60) Unemployment rate is defined as the number of unemployed divided by the
total working age population. F

*** END ***

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