Final Examination Summer 2008 Macroeconomics Page Total = 12 I. Short Essay Questions (20 points each) DIRECTIONS: Answer one of the following questions. 1. Define economic growth. What are the long­run determinants of growth in our simplest Romer model? Is it possible to increase the long­run growth rate in the model? (Present the model, and explain in detail.) 2. Give a detailed analysis of the effects of monetary and fiscal policy in our short­run ``Keynesian'' IS­MP model. Be sure to discuss any short­run effects on inflation and unemployment. (Use our Phillips curve (output version) and Okun's ``Law'', and explain in detail.) II. Multiple Choice Questions (1 point each) DIRECTIONS: Answer all multiple choice questions. Pick a single answer for each question: there is one best answer. 1. Consider our Classical ``quantity theory'' model of the macroeconomy. A one­time, permanent increase in the money supply will (a) increase real income. (b) increase prices. (c) increase the nominal interest rate. (d) a. and b. (e) b. and c. 2. Consider our Classical ``quantity theory'' model of the macroeconomy. A one­time doubling of the money supply will (a) double the price level. (b) double nominal income. (c) double the nominal interest rate. (d) increase real income (e) a. and b. 3. Consider our short­run ``Keynesian'' IS curve. This IS curve slopes down because (a) i must rise to clear the market for loanable funds given a fall in Y. (b) Y must rise to clear the market for loanable funds given a rise in i. (c) i must rise to clear the money market given a fall in Y. (d) Y must rise to clear the money market given a fall in i. (e) None of the above. 4. A decrease in the ex ante real interest rate will (a) reduce desired investment. (b) lower desired expenditure. (c) lower equilibrium income. (d) shift the IS curve right. (e) none of the above. 5. Which of the following is the ``narrowest'' measure of money? (a) MB (the monetary base) (b) M1 (c) MZM (d) M2 (e) all of the above (which are different names for the same quantity) 6. In 1982 the economy of Shikasta had 25,000 people, of whom 20,000 were in the labor force. The unemployment rate was 10%. What was the employment rate? (a) 72% (i.e., 18,000/25,000) (b) 80% (i.e., 20,000/25,000) (c) 90% (i.e., 100%­10%) (d) 87.5% (i.e., 17,500/20,000) (e) none of the above 7. The increased budget deficits of the U.S. federal government in the 1980's were financed mainly by (a) increases in investment. (b) increases in domestic consumption. (c) increased borrowing from abroad. (d) increases in domestic savings. (e) none of the above 8. The increased budget deficits of the U.S. federal government in the 2000's were financed mainly by (a) increases in investment. (b) increases in domestic consumption. (c) increased borrowing from abroad. (d) increases in domestic savings. (e) none of the above 9. Consider our short­run ``Keynesian'' IS­MP model. A one­time decrease in the interest rate has the following effects: (a) output increases (b) inflation increases (c) unemployment decreases (d) a. and b. (e) All of the above. 10. Consider our short­run ``Keynesian'' IS­MP model. In response to an increase in government spending on domestic final goods and services, (a) output increases (b) inflation increases (c) unemployment decreases (d) a. and b. (e) All of the above. ... 58. Which of the following can increase the rate of growth in our simple Romer model? (a) An increase in the productivity of researchers. (b) An increase in the fraction of the labor force doing research. (c) An increase in the total population. (d) all of the above (e) none of the above 59. Which of the following is not ``rivalrous'' in consumption? (a) a Nokia cell phone (b) a chocolate ice cream cone (c) a new BMW automobile (d) a hit song by Bébé (e) none of the above 60. Economists tend to love the effciency characteristics of competitive markets. The simple Romer model reminds us (a) just how great these effciency gains can be. (b) that microeconomic effciency does not imply macroecnoomic effciency. (c) that some important goods will not be provided in competitive markets. (d) that saving is the fundamental source of growth. (e) all of the above 61. Since WWII, which of the following has tended to be the most important source of growth in the US economy? (a) Increases in the capital labor ratio. (b) Changes in the ``composition'' of the labor supply. (c) Changes in total factor productivity. (d) a. and b. (e) all of the above. 62. Consider our Classical model of a competitive labor market. Given an cut in the marginal tax rate on wages, we expect (a) the real wage paid by firms will fall (b) the real wage received by workers will rise (c) the employment­population ratio will rise (d) a. and b. (e) all of the above 63. Give a 3% interest rate, the value of $100 per year forever (starting immediately) is (a) $100 (1.03/0.03) (b) $100 (0.03/1.03) (c) $100 (1.03 × 0.03) (d) $100 (0.03 ^ 1.03 ) (e) none of the above 64. Under reasonable assumptions (including a 3% interest rate), we can guess the present value of your lifetime future wages to be about (a) $0.5 million (b) $1.5 million (c) $3.5 million (d) $5.5 million (e) $7.5 million 65. Lately the growth rate of the money supply is averaging about 10% annually, while real gross domestic product has been growing at about 2% annually. Our simple quantity theory says we should expect to see inflation rates around (a) 20% (b) 12% (c) 8% (d) 5% (e) none of the above 66. In the U.S., decades of high money growth have tended to be decades of (a) high inflation (b) low inflation (c) high real income growth (d) a. and c. (e) b. and c. 67. In the U.S., negative real interest rates (on 3­month T­bills) occured (a) in the late 1970s. (b) in the early 1980s. (c) in the mid 2000s. (d) a. and c. (e) b. and c.