International Trade and Commerce (FBE 462)

Macroeconomic Analysis for Business Decisions

(BAUD 350)

Sample Midterm Example

For each question choose the statement that best answers the question posed. Answer all questions. Each question carries one point, for a total of 15 points. You have 20 minutes.

1. Since 1995, which country has experienced inflation rates exceeding 100% a year?

a. The United States

b. The United Kingdom

c. Venezuela

d. Japan

2. While borrowing and lending, to estimate the real interest rate, expected inflation is used because:

a. doing so hedges against inflation risk.

b. inflation is always and everywhere a monetary phenomenon

c. the inflation rate for the period of the loan is unknown at the time the loan is made.

d. doing so will keep inflation a constant.

3. If the total real GDP of an economy grows at 6% a year and the economy’s population grows at 2%, the annual real per capita GDP growth rate is

a. 12%

b. 8%

c. 4%

d. 3%

4. For developing macroeconomic theories, it is a sound simplification to use the notion of a single, economy-wide interest rate since:

a. it is hard to deal with multiple interest rates such as short term vs. long term rates.

b. Interest rates tend to move up or down together in practice..

c. There is only one interest rate that is quoted by publications such as The Economist or The Wall Street Journal.

d. It is the real and not nominal interest rate that matters for borrowing and lending decisions.

5. Refer to the Cobb-Douglas production function. If the total factor productivity level and labor are fixed, and capital increases by 10%, by how much does output increase?

a. <10%

b. >10%

c. =10%

d. It depends on the initial value of capital.

6. Your friend who owns a desktop publishing firm has one person working for her. She tells you that she has been disappointed with this worker because she has been purchasing new office equipment at a rapid rate (two new computers, FAX machine, etc.etc.), but has not seen a corresponding increase in output of documents by the worker. Your answer to her should be

a. The equipment is probably obsolete.

b. There are diminishing returns to labor. Holding the amount of labor fixed and increasing capital leads to smaller and smaller increases in output.

c. There are diminishing returns to capital. Holding the amount of labor fixed and increasing capital leads to smaller and smaller increases in output

d. Fire the worker.

7. The MPL schedule can be interpreted as a competitive firm’s demand for labor because

a. The MPL schedule is downward sloping due to diminishing product.

b. Equilibrium dictates that labor supplied is same as labor demanded.

c. The firm’s profit maximization implies MPL = L (quantity of labor hired).

d. The firm’s profit maximization implies MPL = w/p (real wage rate).

8. Equilibrium in the capital market is equivalent to equilibrium in the good market because

a. They are one and the same market.

b. The goods market clearing condition Y = Cd + Id + G and the definition of savings as Sd = Y - Cd -G, imply Sd = Id.

c. Firms maximize profits and consumers maximize utility.

d. The interest rate is an economy-wide vaiable.

9. We are interested in studying variations in the productivity level A in the production function because:

a. In the long run it determines economic growth and increases the economic standard of living.

b. In the short run it has the potential to account for fluctuations in output (recessions and booms).

c. Neither reason.

d. Both reasons.

10. A decrease in the effective tax rate on capital rental income will stimulate investment because

a. it decreases the effective cost of capital goods and shifts the investment demand curve outward.

b. it increases MPK, shifting the MPK curve outward.

c. it increases MPL, shifting the MPL curve outward.

d. by directly affecting the interest rate, it shifts the saving curve outward.

11. An economy produces three goods: movie, soda and red tape. The quantities produced and prices of these goods are listed in the following table. Suppose a typical urban family consumes movie and soda. The CPI inflation rate from 1995 to 1996 is

a. 50%

b. 36%

c. 133

d. 136.

12. Which of the following statements is TRUE about growth accounting?

a. It explains why some countries grow faster than others.

b. It uses measurements on the growth rates of capital, labor and TFP, to compute the growth rate of per capita output.

c. It uses measurements on the growth rates of per capita income, capita, and labor, to infer the TFP growth as a residual.

d. It shows how the GDP is divided into consumption, investment, and government expenditures.

13. In the Solow model with a constant saving rate s, and per worker production function Af(k), the consumption per worker when the capital is k is

a. sAf(k).

b. (1-s)Af(k)

c. Af(k)

d. s+Af(k)

14. In the Solow model, in the stead state:

a. per capita capital is growing, while per capita consumption and output are not growing.

b. per capita consumption is growing, while per capita capital and output are not growing.

c. per capital output is growing, while per capita consumption and capital are not growing.

d. per capita capital, consumption, and output are all not growing.

15. The Prime Minister of Tyrannia, a less developed country, asks your opinion about her plan to forcibly increase the saving rte of her country’s citizens in order to both improve the level of per capita income in the country and to put the country on a sustainable per capita income growth path. Your answer to the Honorable Prime Minister should be

a. The saving rate has no connection to the long run level of income or growth rate.

b. The increased saving rate will increase both the level of income and the growth rate of income in the long run.

c. The increased saving rate will increase the level of income in the long run, but no the growth rate of income in the long run.

d. The increased saving rate will increase the growth rate of income in the long run, but not the level of income in the long run.

16. The change in the capital stock is equal to:

a. investment + total depreciation.

b. investment - total depreciation.

c. investment x total depreciation.

d. investment / depreciation.

17. In the Solow model, in the stead state:

a. per capita capital is growing, while per capita consumption and output are not growing.

b. per capita consumption is growing, while per capita capital and output are not growing.

c. per capital output is growing, while per capita consumption and capital are not growing.

d. per capita capital, consumption, and output are all not growing.

18. Suppose an economy only consists two firms: AppleInc and JuiceInc. The following is a table of the transaction of this economy.

AppleIncJuiceInc

wage$15,000$10,000

taxes$ 5,000$ 2,000

revenue$35,000$50,000

to domestic consumer$10,000$30,000

to JuiceInc$25,000---

to Foreign0$20,000

cost of intermediate good0$30,000

from AppleInc$25,000

from Foreign$ 5,000

The GDP of this economy is

a. $60,000

b. $55,000

c. $40,000

d. $20,000

19. When the U.S. official capital account balance (OKA) is positive,

a. the central banks are selling dollars in net.

b. the central banks are buying dollars in net.

c. the central banks are neither buying nor selling dollars in net.

d. the central banks are buying foreign currencies in net.

20. During the 1994-1995 Mexican Peso crisis, investors lost confidence and sold peso for dollars which caused the private capital account balance (PKA) in Mexico to be substantially negative. Which one of the following was true in the end of 1993 before the crisis?

a. Foreigners invested in Mexico mostly in the form of foreign direct investment.

b. The portfolio equity inflow into Mexico was the largest component of foreign investment compared with bond inflow and foreign direct investment.

c. The portfolio equity inflow into Mexico was the smallest component of foreign investment compared with bond inflow and foreign direct investment.

d. The Mexican current account balance was very positive.

NOTE: Midterm examination will consist 30 multiple questions.

PART II. Answer all questions. Answer in the space provided. Points will be deducted for irrelevant material. Use equations and graphs, whenever applicable (these will save a lot of words and time, and by making your answer more precise are likely to fetch you more points). Each question carries 15 points. There are 3 questions.

1. Consider the capital market equilibrium for a closed economy depicted below:

A. Explain briefly why the interest rate of r cannot be part of an equilibrium. (i.e., what sort of economic adjustment would take place if the interest rate were r, that would cause an equilibrium interest rate of r* to be attained?)

B. In the given saving (S) curve, which effect to a change in the interest rate dominates, the income effect or the substitution effect?

C. How do you expect a war of short duration to affect the interest rate in this economy? (Briefly explain which curve would shift and why, and draw a graph to show the effect on the interest rate).

2. It has been observed that large government budget deficits and trade deficits occurred in the United States during the Reagan administration. What could be the possible reasons for the phenomenon? What assumptions you have to make in order to answer this question? Draw a diagram and provide a logical explanation for each of your reasons.

3. It has been observed that the income gap between rich and poor nations in the world have not converged during the past several decades. Some poor nations have even seen their income gap with rich nations widened for a very long period of time.

A. Under what circumstances the income of the rich and poor nations will converge? Draw a diagram to show this.

B. What could be the reasons that the income gap between rich and poor nations have not converged?

C. What could be the main reason that the income gap between some poor nations and rich nations widened during a very long period of time?