Final
Examination
December 11/13, 2000
|
Directions: do all work on the exam itself, answering
the question in the space provided.
If you require extra space, use the back of the exam, indicating that you have done so. Each problem has the indicated weight. |
Name: |
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1-1 |
1-2 |
1-3 |
1-4 |
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2-1 |
2-1 |
3 |
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1
American
gains from international trade because we are more efficient that other
producers around the world.
2
If
wealth goes up, so does welfare.
3
Gold sells for $300 an ounce (US). A good loaf of French bread sells for
$3. In West Endwell, a craftsman will sell
you a gold necklace with 2 ounces of gold in it for 12,000 Umlats. It takes the craftsman 5 hours to make the
necklace, and he expects to earn enough during that period to purchase five
loaves of French bread, which currently sells for 600 Umulats a loaf. The dollar-Umulat exchange rate is 5:1
4
While the type of taxes we use to finance
government has an impact on who pays the taxes and thus matters to the
individual taxpayer, all that matters from an aggregate perspective is the
level of taxation, not the particular taxes
1. The money supply is growing at the biological interest rate
2. The country is in steady state equilibrium
3. There is no national debt.
4. Government purchases consume a fraction n of GDP.
5. Government expenditures are financed by taxes on wage income and money creation.
6. While the people in the country are relatively knowledgeable, they do suffer from time to time from imperfect information.
The country is currently suffering from a recession. The government decides to increase the money supply by 15%. The additional money is handed out at random to MBA students as they complete their exams. The largess comes as a complete surprise.
· Show the effect of this unexpected increase in spending on prices, interest rates, and the short run level of output. (And remember, that a well-labeled and well-explained graph is worth a thousand words). Explain why these effects come about.
· How would your answers change if the largess was fully anticipated? Why?
2 South Freestone, an idyllic Caribbean
island, has a recently developed and thriving tourism industry. About half the
tourists come from the United States, while the other half come from Germany. While
the native tongue is English, the German influx is so pronounced that signs
"Wir Spreche Deutsch" can be found throughout the island. Freestone's
currency is the Peach (P). The nation has a flexible exchange rate, so that the
rate between the Peach and the Dollar and the Deutsche Mark (DM) fluctuates
daily. Right now the Peach is going at 1P = $1, though that rate may change
tomorrow.
There
are proposals from time to time to establish a currency board for Freestone and
peg the peach to the dollar at 1P = $1. To help the island's minister of
finance evaluate the proposal, please prepare a brief position paper explaining
the advantages and disadvantages of switching
1. The money supply is growing at the biological interest rate
2. The country is in steady state equilibrium
3. There is no national debt.
4. Government purchases consume a fraction n of GDP.
5. Government expenditures are financed by taxes on wage income and money creation.
Two countries decide to erect at great expense a monument to their Olympic athletes. The cost of the monument will be 5% of year zero’s GDP. It turns out that – and take this as a given – that erection of this monument will ultimately lead to a 5% increase in the number of effective labor units per worker. (NB: this increase will affect the long run equilibrium, but not your short run analysis). Both countries make the decision to do so at the beginning of year 1. However there are differences between these two countries:
· IMPATIENT erects the monument in year one. It pays for the monument with one-time increase in the money supply sufficient to pay for the cost of the project. That is, additional bills are printed up and used to pay the bills from the contractors.
· PATIENT decides to build the monument in year 2, even though it makes the decision to build the monument in year 1. It decides that it will pay for the project in year 2 by levying a special one-time tax on wage earners. That tax will be levied in year 2.
· A third country, UNGRATEFUL, does nothing but conveniently provides a base case.
·
Show the effect of this policy on the Y and M curves
for year one. Note: no credit on
this question without a well-labeled and well-explained graph. In fact this is a good place to draw your
well-labeled graph. The explanation can
come later. Draw one graph so you can
more easily compare the three countries.
|
|
· Changes in the Y and M curves. Reading from this graph, fill in the following table:
|
In
which country is the Y curve further to the right? Impatient/Patient/Ungrateful |
In
which country is the M curve further to the right? Impatient/Patient/Ungrateful |
|
In which
country is the Y curve further to the left? Impatient/Patient/Ungrateful |
In
which country is the M curve further to the left? Impatient/Patient/Ungrateful |
· Why these shifts in the Y and M curves? What factors are at work leading to these shifts? (This is a good place for your explanation).
· For each of the following variables, rank the counties. For example, if you think IMPATIENT will have the highest saving rate and UNGRATEFUL the lowest, write I>P>U. If you think (say) that PATIENT and UNGRATEFUL will tie, write I>P=U.
|
Variable |
Rank |
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Saving rate in year one |
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Real interest rate in year one |
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Price level in year one |
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Real wage rate in year one |
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Real output in year one |
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Capital stock in year one |
|
· Explain your answers. Your grade will depend on both your answers and your explanation. NB in the case of the interest rate and the price level, it is enough to say “see above”. It is not enough for the other variables
Variable |
Rank |
|
Saving rate in year one |
|
|
Real interest rate in year one |
See above |
|
Price level in year one |
See above |
|
Real wage rate in year one |
|
|
Real output in year one |
|
|
Capital stock in year one |
|
Life goes on, and eventually the three counties reach steady
state equilibrium. Your task is to
predict the effect of the monument on steady state equilibrium
· Explain why you must determine the change in the equilibrium saving rate to answer most of the questions to follow:
· What does happen to the saving rate? Which country has the highest saving rate? Which country has the lowest saving rate? Why? What are the consequences of t his change in the saving rate on output, wage rates and capital rental rates? (Yes, a graph would be helpful here).
· Now fill in the following table:
For each of the following variables, rank the counties. For example, if you think IMPATIENT will have the highest saving rate and UNGRATEFUL the lowest, write I>P>U. If you think (say) that PATIENT and UNGRATEFUL will tie, write I>P=U.
|
Variable |
Rank |
|
Saving rate in steady state equilibrium |
|
|
Real interest rate in steady state equilibrium |
|
|
Price level in steady state equilibrium |
|
|
Real wage rate in steady state equilibrium |
|
|
Real output in steady state equilibrium |
|
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Capital stock in steady state equilibrium |
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Rate of growth of GDP in steady state equilibrium |
|
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Inflation rate in steady state equilibrium |
|
·
Now explain the basis for these answers.
Final
Examination
December 11/13, 2000
|
Directions: do all work on the exam itself, answering
the question in the space provided.
If you require extra space, use the back of the exam, indicating that you have done so. Each problem has the indicated weight. |
Name: |
|
1-1 |
1-2 |
1-3 |
1-4 |
|
|
2-1 |
2-1 |
3 |
|
1. A
nation that doesn’t like to impose tariffs can have the same economic impact on
trade by using quotas.
2 reR = h
- rN
5
It
is obvious that we have had poor economic leadership for the past 50
years. At the end of World War II, our wage
rates were the envy of the world, but the fact that most European countries now
have comparable wage rates is proof that we have frittered our advantage away
with poor and unwise economic policies.
6
An temporary increase in government spending,
financed by temporary increase in wage taxes, will always lead to both a higher
price level and higher real interest rates in the short run
6. The money supply is growing at the biological interest rate
7. The country is in steady state equilibrium
8. There is no national debt.
9. Government purchases consume a fraction n of GDP.
10. Government expenditures are financed by taxes on wage income and money creation.
11. While the people in the country are relatively knowledgeable, they do suffer from time to time from imperfect information.
The country is currently suffering from a recession. The government decides to increase government purchases of goods and services, for one year and one year only. The additional increase in spending is financed by a tax on wage income. The spending increase comes as a complete surprise.
· Show the effect of this unexpected increase in spending on prices, interest rates, and the short run level of output. (And remember, that a well-labeled and well-explained graph is worth a thousand words). Explain why these effects come about.
· How would your answers change if the increase in spending was fully anticipated? Why?
2 South Freestone, an idyllic Caribbean
island, has a recently developed and thriving tourism industry. About half the
tourists come from the United States, while the other half come from Germany.
While the native tongue is English, the German influx is so pronounced that
signs "Wir Spreche Deutsch" can be found throughout the island.
Freestone's currency is the Peach (P). The nation has a flexible exchange rate,
so that the rate between the Peach and the Dollar and the Deutsche Mark (DM)
fluctuates daily. Right now the Peach is going at 1P = $1, though that rate may
change tomorrow.
There
are proposals from time to time to establish a currency board for Freestone and
peg the peach to the dollar at 1P = $1. To help the island's minister of
finance evaluate the proposal, please prepare a brief position paper explaining
the advantages and disadvantages of switching
12. The money supply is growing at the biological interest rate
13. The country is in steady state equilibrium
14. There is no national debt.
15. Government purchases consume a fraction n of GDP.
16. Government expenditures are financed by taxes on wage income and money creation.
Two countries decide to introduce a social security program. Each country will pay its senior citizens (those over retirement age) a pension of $500 per year, starting in year one. Thereafter the pension will grow in proportion to the biological interest rate:
· TAX pays for the program on a pay as you go basis by a tax on wage income.
· PRINT decides to fund the program by increasing the rate of growth of the money supply. In addition to the normal printing, enough to let the money supply grow at the biological interest rate, enough additional money will be printed each year to pay the social security program.
· A third country, MISER, does nothing but conveniently provides a base case.
·
Show the effect of this policy on the Y and M curves
for year one. Note: no credit on
this question without a well-labeled and well-explained graph. In fact this is a good place to draw your
well-labeled graph. The explanation can
come later. Draw one graph so you can
more easily compare the three countries.
|
|
· Changes in the Y and M curves. Reading from this graph, fill in the following table:
|
In
which country is the Y curve further to the right? Tax/Print/Miser |
In
which country is the M curve further to the right? Tax/Print/Miser |
|
In
which country is the Y curve further to the left? Tax/Print/Miser |
In
which country is the M curve further to the left? Tax/Print/Miser |
· Why these shifts in the Y and M curves? What factors are at work leading to these shifts? (This is a good place for your explanation).
· For each of the following variables, rank the counties. For example, if you think TAX will have the highest saving rate and MISER the lowest, write I>P>U. If you think (say) that PRINT and MISER will tie, write I>P=U.
|
Variable |
Rank |
|
Saving rate in year one |
|
|
Real interest rate in year one |
|
|
Price level in year one |
|
|
Real wage rate in year one |
|
|
Real output in year one |
|
|
Capital stock in year one |
|
· Explain your answers. Your grade will depend on both your answers and your explanation. NB in the case of the interest rate and the price level, it is enough to say see above”. It is not enough for the other variables
Variable |
Rank |
|
Saving rate in year one |
|
|
Real interest rate in year one |
See above |
|
Price level in year one |
See above |
|
Real wage rate in year one |
|
|
Real output in year one |
|
|
Capital stock in year one |
|
Life goes on, and eventually the three counties reach steady
state equilibrium. Your task is to
predict the effect of the monument on steady state equilibrium
· Explain why you must determine the change in the equilibrium saving rate to answer most of the questions to follow:
· What does happen to the saving rate? Which country has the highest saving rate? Which country has the lowest saving rate? Why? What are the consequences of t his change in the saving rate on output, wage rates and capital rental rates? (Yes, a graph would be helpful here).
· Now fill in the following table:
For each of the following variables, rank the counties. For example, if you think TAX will have the highest saving rate and MISER the lowest, write I>P>U. If you think (say) that PRINT and MISER will tie, write I>P=U.
|
Variable |
Rank |
|
Saving rate in steady state equilibrium |
|
|
Real interest rate in steady state equilibrium |
|
|
Price level in steady state equilibrium |
|
|
Real wage rate in steady state equilibrium |
|
|
Real output in steady state equilibrium |
|
|
Capital stock in steady state equilibrium |
|
|
Rate of growth of GDP in steady state equilibrium |
|
|
Inflation rate in steady state equilibrium |
|
·
Now explain the basis for these answers.