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Sampmtguide - exam guide
Intermediate macroeconomics (EC2015)
City University London
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EC2015: INTERMEDIATE MACROECONOMICS I
Answers to the Sample Midterm Test
The exam is out of 50 marks. Answer each part. Parts I and III areworth 20 marks and Part II is worth 10 marks.
PART I: Answer all 8 multiple-choice questions. There is only onebest answer to each question. All questions are worth 2 marks with no penalty for guessing.
- In the national income accounts, the item of expenditure most closely related to the activity of households is
(a) Investment. (b) Government Spending. (c) Consumption. (d) Exports.
- Identify the correct ending for the following sentence: Constant Returns to Scale in an aggregate production function of capital and labour implies that an increase in labour...............
(a) by some multiple leads to an increase in output by that same multiple. (b)and capital by the same multiple leads to an increase in output by that same multiple. (c) and capital by the same multiple leads to a doubling of output. (d) and capital by the same multiple leads to a decrease in output by the same multiple.
- The Base Year method for calculating Real Gross Domestic Product involves multiplying the output of each item produced in the
(a) current year by its price in the current year. (b) base year by its price in the current year. (c) current year by its price in the base year. (d) base year by its price in the base year.
- Which of the following statements isincorrect?
(a) The CPI aims to track changes in the cost of living. (b)The GDP Deflator is calculated by dividing Real GDP by Nom- inal GDP. (c) Many economists believe that the CPI tends to overstate inflation. (d) The GDP Deflator covers a wider range of domestically produced goods than does the CPI.
- Which of the following assumptions is the defining feature of the classical (i. long-run) theory of income determination?
(a) All wages and prices are perfectly flexible and adjust to ensure simultaneous equilibrium in all markets. (b) The supply of labour is fixed. (c) Output is produced via a Cobb-Douglas production function. (d) Capital is a factor of production.
- Identify theincorrectending for the following statement: When output is plot- ted against labour...............
(a) the diagram depicts the production function for a given level of capital. (b) the slope of the diagram represents the marginal productof labour. (c) the concave shape of the diagram is best explained by the presence of diminishing returns to labour. (d)the concave shape of the diagram is best explained by the pres- ence of decreasing returns to scale.
- Which of the following equations is not reflective of the circular flow of income and expenditures in a closed economy:
(a) Y =C+I+G (b)M−X=Kin−Kout (c) P Y =RK+W L (d)S=I+ (G−T)
- According to the classical theory of national income determination, the rea- son that changes in government spending do not affect aggregate output or unemployment is that
(a) government spending is a waste of scarce resources. (b)output and unemployment are entirely determined by supply side factors. (c) government spending leads to substitution between labour and capital in the aggregate production function with no effect on aggregate output. (d) increases in government spending must be matched by increases in taxation so the net effect of the two on aggregate demand is zero.
- Why do firms hire labour up to the point where themarginal productof labour equals itsreal wage? Note: The answer to this part can be based either on the calculus derivation or the graphical one (no need for both). These are on slides number 7 and 8 respectively in the lecture notes on Topic 2. Either way, since this is a short essay question, make sure you add the economic intuition, along the following suggested lines. The intuition behind this result is as follows: The marginalproduct of labour (mpl) measures the extra output that a firm can produce by hiring one more unit of labour, while the real wage is the extra cost (in unitsof GDP) of this extra unit of labour. While the real wage is constant no matterhow many units of labour a firm hires, the mpl is declining in its units of labour. Thus if the firm is operating at a point where the marginal product of labour exceeds the real wage, then the marginal profit from hiring one more unit of labour will be posiitive so adding to its workforce will increase the firm’s overall profits. It will also bring it closer to its optimum point. If the mpl is less than the real wage, then the marginal profit will be negative and reducing the workforce will increase overall profit, helping it move towards its optimum point. It is only when the mpl equals the real wage that the size of the firm’s workforce is profit-maximising.
PART III: Answerone and only oneof the following two numerical questions. Each question is worth 20 marks (sub-questions are awarded marksas shown).
- Consider the following data on the prices, output and consumer purchases of the only two goods produced in an economy: apples and oranges.
APPLES ORANGES
YEAR PRICE OUTPUT BOUGHT PRICE OUTPUT BOUGHT
2016 50 6000 4000 80 6000 8000
2017 55 7000 6000 140 2000 2000
(a) Calculate Nominal GDP for each year. [2 marks] Nominal GDP in 2016: 50x6000 + 80x6000 = 780,000; in 2017: 55x7 000 + 140x2000 = 665,000. (Real GDP in 2016 is the same as Nominal GDP in that year.) (b) Using 2016 as the Base Year, calculate Real GDP in 2017 using the Base Year Method. [4 marks] Real GDP in 2017: 50x7000 + 80x2000 = 510, (c) Using 2016 as the base year, calculate the CPI in 2017 and thus, the CPI inflation rate between the two years. [7 marks]
Consumption Expenditure in 2016 = 50x4000 + 80x8000 = 840,00 0 Consumption Expenditure in 2017 = 55x4000 + 140x8000 = 1,340, CPI 2017 = (1,340,000/840,000)x100 = 159. CPI Inflation = 59% (d) Using 2016 as the base year, calculate the GDP Deflator in 2017 and the GDP inflation rate between the two years. [7 marks] GDP Deflator 2017: (665,000/510,000)*100 = 130 GDP Deflator Infla- tion = 30%
- Consider the following macroeconomic model:
Y = C+I+G; C = 0(Y−T); I = 100− 5 r; G = 200; T = 200; Y = 1000.
(All variables are as defined in lectures).
(a) Calculate the equilibrium value ofr. [4 marks]. Start withY =C+I+Gand replaceCandIby their functional depen- dence on other variables: Y = [0(Y−T)] + [100− 5 r] +G 1000 = 0(1000-200) + 100 - 5r+ 200 1000 = 1020 - 5r 5 r= 20 r= 4% (b) Suppose G increases from 200 to 230 with all other variables as before. Calculate the new value of r. [4 marks]. 1000 = 0(1000-200) + 100 - 5r+ 230 1000 = 1050 - 5r 5 r= 50 r= 10% (c) Suppose T decreases from 200 to 170. Calculate the new value of r and explain how the economy adjusts to the new value of r. [4 marks]. Gis assumed to stay as in the original set-up,i.e. 1000 = 0(1000 - 170) + 100 - 5r + 200 1000 = 747 + 300 - 5r 5 r= 1047 - 1000 r= 47/5 = 9% (d) For each of the policy changes in parts b) and c), illustrate the adjustment from the old equilibrium to the new one on diagrams with financial funds on the horizontal axis and the interest rate on the vertical axis. [8 marks]
Sampmtguide - exam guide
Module: Intermediate macroeconomics (EC2015)
University: City University London
