Intermediate Macroeconomics
Econ 372
Fall 2020
Exam 1
PartI (23 points)
1. (5 points) Starting off easy. List the four components of GDP? Place a star next to the one which makes up the largest share of the US economy.
2. (5 points) During abase year, which will be higher: real or nominal GDP for that year? Why?
3. (5 points) The Fed currently has the Federal Funds Rate target set at 0.00 - 0.25%, as low as it can go without going negative. Low rates are meant to stimulate borrowing and thus demand for consumption and investment. Some economists fear the massive increase in the money supply will result in unexpectedly high inflation. If that happens - inflation goes far beyond the 2 percent long-run target - the Fed likely will be forced to increase interest rates sooner than expected. For a bank primarily making (and keeping) fixed-rate long-term home loans (e.g., 15 - 30 years), what are potential implications for such an increase in the interest rates?
4. (3 points) List three separate groups of people who would not be considered in the labor force.
5. (5 points) Last fall the unemployment rate was 3.5%, the lowest it had been in 50 years. There are two additional measurements of labor market health we discussed which hadn’t even returned to pre-Great Recession levels. What are they? List them simply and explain what could be problematic measuring only the unemployment rate to measure labor market health?
Part II (27 points)
Let the following equations characterize an economy:
Y = C + I + G
Output, Y = 500
Marginal Propensity to Consume, MPC = 0.9
Autonomous Consumption,c(-)= 5
Taxes, T = 250
Government Spending, G = 250
Investment, I = 75 – 5r
6. (3 Points) How much would consumption change if national income increased by 100?
7. (5 points) Compute the national saving.
8. (4 points) What arepublic and private saving?
9. (10 points) Solve for the equilibrium interest rate.
10. (5 points) Apart from the numbers being unrealistic, list two simplifying assumptions, or ways in which the model is too simplistic compared to reality. For one of the items you list, propose a way one could try to incorporate it into your new-and-improved mathematical model of the economy - many directions you could take this one.
Part III (26 points)
Consider a Cobb-Douglas production function of the following form.
Y = AK0.95L0.05
11. (3 points) What would it be like living in an economy taking production in the form. of the equation above? i.e., how would it be different than the economy we live in today?
12. (10 points) Suppose two countries exist that have a production function of the above form, but the country “Proletaria” has twice the number of workers as country “Automacia.” (Assume all else equal.) Calculate the difference in output (in percentage terms) between the two countries. (You can report that Proletaria has X% more or less than Automacia, or viceversa.)
13. (5 points) Suppose Automacia has 100 units of capital and 200 units of labor, and let technology (A) be equal to one. Calculate the real rental rate of capital in the country.
14. (3 points) In the above question, how can you reconcile the fact that capital’s share of national income is 95% (from the production function), but the capital stock is half the size of the labor force? What’s going on?
15. (5 points) Show that the production function above is Constant Returns to Scale.
Part IV (30 points)
16. (5 points) Why do we use Real GDP per Capita to measure economic growth overtime?
17. (5 points) Explain reasons discussed in class why some countries don’t grow at all or get stuck in the “middle income trap.”
18. (5 points) ‘Labor per capita’ is among the factors of production contributing to real GDP per capita. Why is labor per capita not redundant? I.e., why is ‘labor’ and ‘per capita’ not the same, and why/how have we seen increases in labor per capita over the last 75 years?
19. (5 points) Briefly explain the concept of capital deepening. Provide one example of where we have seen capital deepening in the US over the last fifty years or so.
20. (5 points) Productivity is at the heart of economic growth. Aside from computers, the internet, electricity, and cars (easy ones), list one important innovation we have seen in the last 300 years that has substantially increased productivity in the United States in away which transformed the entire nation. How has it increased productivity?
21. (5 points) Finally – and this is, by definition, speculative, but in what area of our modern lives might there be room for substantial increases in productivity? I.e., like electricity, cars, and computers have done in the past, what massive innovation could drastically expand the frontier of productivity and lead to significant economic growth?
BONUS (5 points)
1. (BONUS) Y = AK α L1 – α . Show why the share of income that goes to laboris (1 – α).