Exam I-Nov-12-2014

Intermediate Macroeconomics: Exam  I Fall 2014 Instructors: Yulei Peng, Xi Wu, and Chuanqi Zhu 8:30-10:30 am, Nov 18, 2014 Please make sure write your answers, name on the answer sheet. In the multiple choice questions, only one choice is the correct answer. 1. (4 points) Assume that apples cost $0.50 in 2002 and $1 in 2009, whereas oranges cost $1 in 2002 and $0.50 in 2009. If 10 apples and 5 oranges were purchased in 2002, and 5 apples and 10 oranges were purchased in 2009, the CPI for 2009, using 2002 as the base year, is: A. 0.75. B. 0.80. C. 1. D. 1.25. 2. (4 points) The CPI differs from the GDP deflator in that A. The CPI is a price index, while the GDP deflator is an inflation index. B. Substitution bias is not a problem with the CPI, but it is a problem with the GDP deflator. C. Increases in the prices of foreign produced goods that are sold to U.S. consumers show up in the CPI but not in the GDP deflator. D. Increases in the prices of domestically produced goods that are sold to the U.S. government show up in the CPI but not in the GDP deflator. 3.  (4 points) The government raises lump-sum taxes on income by $100 billion, and the neoclassical economy adjusts so that output does not change. If the marginal propensity to consume is 0.6, national saving: A. Rises by $100 billion. B. Rises by $60 billion. C. Falls by $60 billion. D. Falls by $100 billion. 4. (4 points) Assume that the consumption function is given by C = 200 + 0.7(Y – T), the tax function is given by T = 100 + t1Y, and Y = 50K0.5L0.5, where K = 100 and L = 100. If t1 increases from 0.2 to 0.3, then consumption decreases by: A. 100. B. 175. C. 350. D. 400 5. (4 points) In the case of an unanticipated inflation: A. creditors with an unindexed contract are hurt because they get less than they expected in real terms. B. creditors with an indexed contract gain because they get more than they contracted for in nominal terms. C. debtors with an unindexed contract do not gain because they pay exactly what they contracted for in nominal terms. D. debtors with an indexed contract are hurt because they pay more than they contracted for in nominal terms. 6.  (4 points)  Assume that equilibrium GDP (Y) is 5,000. Consumption (C) is given by the equation C = 500 + 0.6(Y – T). Taxes (T) are equal to 600. Government spending is equal to 1,000. Investment is given by the equation I = 2,160 – 100r, where r is the real interest rate in percent. In this case, the equilibrium real interest rate is: A. 5 percent B. 8 percent C. 10 percent D. 13 percent 7. (4 points)  According to the quantity theory of money, if money is growing at a 5 percent rate and real output is growing at a 3 percent rate, but velocity is growing at increasingly faster rates over time, the rate of inflation must be: A. increasing. B. decreasing. C. 8 percent. D. constant  8. (4 points)  The ex post real interest rate will be greater than the ex ante real interest rate when the: A. rate of inflation is increasing. B. rate of inflation is decreasing. C. actual rate of inflation is greater than the expected rate of inflation. D. actual rate of inflation is less than the expected rate of inflation. 9.  (4 points)  If Central Bank A cares only about keeping the price level stable and Central Bank B cares only about keeping output at its natural level, then in response to an exogenous increase in the price of oil: A. both Central Bank A and Central Bank B should increase the quantity of money. B. Central Bank A should increase the quantity of money whereas Central Bank B should keep it stable. C. Central Bank A should keep the quantity of money stable whereas Central Bank B should increase it. D. both Central Bank A and Central Bank B should keep the quantity of money stable. 10. (4 points)  If the short-run IS–LM equilibrium occurs at a level of income below the natural level of output, then in the long run the price level will ______, shifting the ______ curve to the right and returning output to the natural level. A. increase; IS B. decrease; IS C. increase; LM D. decrease; LM 11. (15 points)  Suppose a government decides to reduce spending and (lump-sum) income taxes by the same amount, and the marginal propensity to consume (MPC) is smaller than 1. i. Using the long-run model of the economy, graphically illustrate the impact. Be sure to label:  the axes; the curves; the initial equilibrium point; the direction curves shift; and the terminal equilibrium point.