Aadland Fall 2016

ECON 3010 Intermediate Macroeconomics

Solutions to Exam #1
Multiple Choice Questions. (25 points; 2.5 pts each)
#1. In any closed macroeconomy, saving equals
a.
b.
c.
d.

consumption.
investment.
government spending.
output.

#2. The unemployment rate is the

a.
b.
c.
d.

percentage of the population without a job.

percentage of the population in the labor force.
percentage of the labor force without a job.
percentage of the labor force employed.

#3. In the U.S., the largest portion of consumption is

a.
b.
c.
d.

non-durable goods.
durable goods.
unplanned inventories.
services.

#4. GDP is
a.
b.
c.
d.

the sum of all goods and services purchased at home and abroad.
a flow variable.
excludes exports.
excludes unplanned inventories.

#5. The labor demand curve

a.
b.
c.
d.

is equal to the marginal product of labor.

slopes up.
is parallel to the labor supply curve.
shifts to the left with increases in technology.

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#6. Assume an economy experiences 10% growth in the labor force and the capital stock. If GDP
increases by 10%, the economy has a production function with
a.
b.
c.
d.

an increasing marginal product of labor.

an increasing marginal product of capital.
decreasing returns to scale.
constant returns to scale.

#7. The nominal wage is measured in units of

a.
b.
c.
d.

dollars per hour worked.

output per hours worked.
dollars per unit of capital.
dollars per unit of GDP.

#8. A company with a marginal product of capital lower than the rental price
a.
b.
c.
d.

is maximizing its current profit.

should reduce the size of its capital stock.
should rent more capital.
is maximizing its total revenue.

#9. The demand for investment

a.
b.
c.
d.

depends negatively on output.

depends positively on the nominal interest rate.
depends primarily on the nominal interest rate.
depends primarily on the real interest rate.

#10. The money supply in the U.S. is determined by

a.
b.
c.
d.

Congress.
the President.
the FOMC.
the Secretary of Commerce.

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Problem Solving / Essay Questions. (75 points)

#11. (30 pts) Consider a macroeconomy that produces three goods. Use the information below to
answer the following questions.
Quantity
Product
A
B
C

2000
30
20
10

Price
2010
20
20
10

2000
$20
$15
$10

2010
$30
$20
$10

(a) (10 pts) Calculate nominal and real GDP for 2000 and 2010 using 2000 as the base year. What is the
growth rate in nominal and real GDP over this period? Which growth rate better captures the change
in economic well-being? Why?
= ( $) + ( $) + ( $) = $ + $ + $ = $
= ( $) + ( $) + ( $) = $ + $ + $ = $
= = $

= ( $) + ( $) + ( $) = $ + $ + $ = $

The growth rate for nominal GDP is 10%. The growth rate for real GDP is -20%. The
growth rate for real GDP better captures economic well-being because it holds prices constant
and directly measures the change in the production of goods and services.

(b) (10 pts) Assume that the typical consumers basket of goods is (A=1, B=2, C=3), calculate the CPI
for 2000 and 2010 using 2000 as the base year. What is the inflation rate?
=
=

( $) + ( $) + ( $)
$
=
=
( $) + ( $) + ( $)
$

The CPI inflation rate is 25%.

(c) (10 pts) The FOMC is concerned the inflation rate in part (b) is too high. Describe the
recommended policy to lower inflation assuming the money multiplier is equal to two. It is not
necessary to give exact numbers, but carefully describe the FOMCs procedure and required
adjustment to the monetary base.

Aadland Fall 2016

The demand curve would shift up and to the right, causing to rise.
(c) (10 pts) Assume the tax decrease in part (b) decreases taxes to = 90. Find the new equilibrium
interest rate and show that this new interest rate clears the market for loanable funds (i.e., causes
national saving to equal investment).
To find the new equilibrium interest rate, we again set = + + .
= + . ( ) + +

= + + +
= + + +
=

=
= %

At = %, investment equals = () = .

Saving equals = = , so the loanable funds market clears.

Aadland Fall 2016

#13. (15 pts) True or False. If False, correct the statement to make it true.
(a) (5 pts) The goal of macroeconomic policymakers is to maintain zero growth in the price level and
real GDP.
False. The goal of policymakers is to maintain steady, positive growth in real GDP without
excessive inflation.

(b) (5 pts) If households deposit 2/3 of their money in checking accounts and banks loan out 2/3 of
their deposits, the money multiplier is equal to 3.
/

False. The currency deposit ratio is = / = . and the reserve ratio is = /. This
+(/)

implies that the money multiplier is = (/)+(/) = . .

(c) (5 pts) National saving in the U.S. is negative.

False. Public saving is negative, but private saving is positive. National saving is the sum of
the two and is positive.