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Macroeconom´ıa 1
Second Midterm - 2012
VERSION A
Name Group
Grado de NIF Grade
INSTRUCTIONS - The exam is divided in two sections. Part I contains 14 multiple choice questions (70 points). Part II contains two numerical exercises (30 points). At the end of Part I, there is a table where you should introduce your response to the multiple choice questions. You can ONLY use this table to provide your answers. You will obtain 5 points per correct answer and 1 point will be deducted per incorrect answer. The maximum number of points in the exam is 100. The exam should not be unstapled. You can use the backside of the pages in the booklet to do scratch work. The examination time is 1 hour and 15 minutes
Part I - Multiple Choice Questions
1 - In a closed economy with rigid prices in the short run, if investment does not depend on the interest rate, then
a) Fiscal Policy is ineffective. b) Monetary Policy is effective. c) Monetary Policy is ineffective. d) none of the above.
2 - In a closed economy with rigid prices in the short run, the money demand depends on the real interest rate and disposable income, L (r, Y − T ). Given the money supply, M /P , a decrease in taxes implies a) an increase in the real interest rate. b) an increase in the money supply. c) a decrease in the price level. d) a decrease in the real interest rate.
3 - In a closed economy with rigid prices in the short run, the consumption function of the private sector is C = C + 0,8(Y − T ), investment is I = I 1 − I 2 r, and government purchases are always equal to tax revenue G = T. The real money demand L(r, Y ) depends on income y and the real interest rate, and the real money supply is 1000. Then, a one euro increase in public expenditures financed with a one euro increase in taxes implies that a) output Y remains constant. b) output Y increases by more than one euro. c) output Y increases by less than one euro. d) output Y increase by one euro.
4 - In the short run of a closed economy with rigid prices, a monetary expansion combined with a fiscal contraction will cause a) an increase in output with an increase in the real interest rate. b) a decrease in output with an increase in the real interest rate. c) a decrease in the real interest rate d) an increase in output.
5 - Ronaldovia and Messonia are two small open economies. In the long run the real exchange rate between these two countries is always equal to 1. If the inflation rate is 5 percentage points higher in Ronaldovia than in Messonia, then the nominal exchange rate in Ronaldovia is expected to a) appreciate 5 percent. b) depreciate 5 percent. c) appreciate 0 percent. d) depreciate 10 percent.
6 - Consider the following statements about a closed economy with rigid prices in the short run (but flexible prices in the long run) and a money demand that depends on the real interest rate and income. (i.) The short run effects of an increase in government purchases are an increase in output and in the real interest rate. (ii.) The long run effects of a permanent increase in government purchases are a reduction in investment with no change in output. a) Only the first statement (i) is correct. b) Only the second statement (ii) is correct. c) Both statements ((i) and (ii)) are correct. d) None of the two statements is correct.
7 - The Central Bank and the Government of a closed economy agreed in conducting a combination of economic policies in order to decrease the real interest rate while keeping constant the equilibrium level of output in the short run. Which is the only agreement they could have reached? a) To jointly apply contractionary fiscal and monetary policies. b) To jointly apply a contractionary fiscal policy and an expansionary monetary policy. c) To jointly apply an expansionary fiscal policy and a contractionary monetary policy. d) To jointly apply expansionary fiscal and monetary policies.
8 - In a small open economy, an increase in taxes implies in the long run
a) an increase in national savings and the real exchange rate, and a decrease in net exports. b) an increase in national savings and net exports, and a decrease in the real exchange rate. c) a decrease in national savings and the real exchange rate, and an increase in net exports. d) a decrease in national savings and net exports, and an increase in the real exchange rate.
9 - In a small open economy with flexible prices, the national savings minus investment is lower than net exports (S − I < N X). Hence, a) income will decrease, so that savings will go down restoring the equality between capital outflows and net exports. b) the real exchange will increase in order to restore the equilibrium. c) investment will increase in order to restore the equilibrium. d) none of the above options.
10 - In a small open economy with short run rigid prices and flexible exchange rate, an increase in government purchases implies a) a decrease in the equilibrium level of output. b) a decrease in net exports equal to the increase in government purchases. c) an increase in net exports. d) a reduction in the real exchange rate.
11 - Consider the following statements about the short run of a small open economy with rigid prices. (i) Under a flexible exchange rate regime, an increase in the world interest rate increases output and net exports. (ii) Under a fixed exchange rate regime, an increase in the world interest rate decreases output. a) Only statement (i) is correct. b) Only statement (ii) is correct. c) Both statements are incorrect. d) Both statements are correct.
Part II - Exercises
EXERCISE 1 - In Getafelandia, a closed economy, the consumption function is given by C = 0,4(Y − T ). Government purchases are equal to G = 550 and taxes are equal to zero (T = 0). In a growing economy, firms are likely to increase their investments, while firms may not want to expand their production capacity when the economy is in a recession. Hence, private investment in Getafelandia is given by I = 25 Y − 10 r, where r represents the real interest rate and Y income in Getafelandia.
- If the real interest rate is equal to r = 5, what is the equilibrium level of income?
- Find the level of private consumption and investment when the economy is in equilibrium (with r = 5). What is the level of aggregate expenditure (C+I+G)?
- If public expenditures increase by 100 units, what is the new equilibrium level of income?
- Now assume that the real interest rate is not an exogenous variable and that the real money demand is given by L(r, Y ) = Y − 50 r, money supply is M = 1250, the price level is P = 1, and G = 550. Find the equilibrium level of income and the real interest rate.
EXERCISE 2 - In Getafelandia, a small open economy with a flexible exchange rate, the consumption function is given by C = 35 (Y − T ). Government purchases are equal to G = 500 and taxes are equal to zero (T = 0). Assume that I = 25 Y − 100 r∗^ , the long run level of income is Y = 5000, and the international interest rate is r∗^ = 5.
- Calculate net exports.
- Assuming that imports are given by M = 250 + 250 and exports are given by X = 750 − 250 , where is the real exchange rate, find the equilibrium real exchange rate.
