David Levine                                                                                                                     Winter 2007

Macroeconomics                                                                                                               MBA-201B

 

                                                     Sample Final Exam Questions

A real final exam has about 160 points worth of questions.  This document is a compilation of questions from past exams, and is much longer than any single exam.

 

Short Answer: True, False, or Uncertain, and Why?  The grade you receive depends solely on the quality of your explanation.  If you are not sure of what the question assumes, simply state your own assumptions clearly, and answer based on these assumptions. 

 

From 2004:

  1. Suppose that a government raises taxes. According to the IS-LM model, the Central Bank should tighten monetary policy if it wants to keep output stable. 
  2. If a country experiences very high inflation rates, it can lower the inflation by fixing its exchange rates.
  3. When US economy enters its next recession, the government’s best response will be to make sure that budget deficits do not lead the ratio of debt:GDP to increase.
  4. Because oil prices are rising and can cause inflation, the Federal Reserve should tighten U.S. monetary policy.
  5. Western European workers are going to be worse off now that 10 new countries have joined the European Union.
  6. Poland will grow faster than Russia in the next 20 years.
  7. The European Central bank should raise interest rates.
  8. If the European Central bank raises interest rates then the United States will be better off

 

1. [10] The US unemployment rate would decline rapidly if unemployment insurance were cut. 

 

2. [10] The rate of growth of M1 and M2 have both been fairly rapid recently (Assume this sentence is true.)  Thus, we can expect that the inflation rate will soon increase rapidly.

 

3. [10]  In the late seventies the US had both high inflation and relatively high unemployment.  Thus, the Phillips' curve theory is wrong, since it predicts that inflation and unemployment are negatively related.

 

4. [10] Recently Canada has informally maintained a fixed exchange rate with the US.  (This sentence is true.)  As long as they target exchange rates, monetary policy will not be effective in Canada.  (You may want to refer to Canadian and US dollars as C$'s and US$'s in your answer.)

 

5. [10] If the Japanese would lower their interest rates to expand their aggregate demand, then Japanese purchases of US goods would increase.  [Hint: Consider the exchange rate.]

 

6. [10] "Why is our money ever less valuable?  Perhaps it is simply that we have inflation because we expect inflation, and we expect inflation because we've had it." (Robert M. Solow, Technology Review, Dec/Jan 1979: 31)

 

7. [10] The current U.S. Federal Government Budget Deficit (BD) is not a problem in the short run (i.e., this year).

 

8. [10] Fiscal policy is less effective in France than in the United States.  [Hint: Consider differences both in the open-economy multiplier and the exchange rate regime.]

 

9. [10] Low-wage countries such Greece and Portugal will gain more from the creation of a common market than will high-wage countries such as Germany and Denmark. {Asked in early 1990s}

 

10. [10] True unemployment is above measured unemployment.

 

11. [10] We should not worry much about inflation.

 

12. [10]  The multiplier is higher when marginal tax rates, marginal savings rates, and marginal propensity to import are all high.

 

13. [10] Budget deficits in a recession are a good thing.

 

14. [10] For each dollar of revenue lost to the government, capital gains tax cuts are less effective at spurring investment than are increases in the investment tax credit.

 

15. [10] The federal government should increase spending on education.

 

16. [10] Unions are responsible for a significant fraction of U.S. unemployment.

 

17. [10] Free trade hurts American workers, but helps workers in low-wage nations.

 

18. [10] It is good for the nation when monetary policy accommodates fiscal policy.

 

19. [10] Frictional unemployment represents people rationally choosing to search for a job.   Thus, no government policy is called for to address it.

 

20. [10] European unemployment rates and unionization rates are both above U.S. levels, proving unions cause unemployment.  {Asked in 1997}

 

21. [10] In class we assumed money demand depended on output and interest rates (L = kY - hi).  In the IS-LM framework, when the demand for money (k) increases at any given level of output, output and interest rates will rise.

 

22. [10] A balanced budget rule (so long as it corrected for cyclical factors) would be a good thing.

 

23. [10] Increasing consumption increases output.  (Hint: Is this a trick question?)

 

24. [10] In an open economy, monetary policy is less effective than in a closed economy.

 

25. [10] No policy can cost-effectively reduce the rate of long-term unemployment.

 

26. [10] Because the stock market falls when output and employment rise, the market is not a good predictor of future output growth.

 

27. Japan will grow faster than Russia next year.  {Asked in 1996}

 

28. Japan will grow faster than Russia over the next 15 years. {Asked in 1996}

 

29. Russian inflation will decline next year.  {Asked in 1995}

 

30. The creation of the EMU will reduce Italian long-term interest rates. {Asked in early 1990s}

 

31. The process of qualifying for the EMU has reduced French economic growth. {Asked in 1992}

 

1. [15] No mix of fiscal and monetary policies in a closed economy permits constant output and lower interest rates.

 

2. [15] GDP is a pretty good measure of quality of life.

 

3. [15] Nations often have high inflation and high unemployment.  Thus, the Phillips curve is a fiction.

 

4. [15] The nations of the Euro-zone should agree that regions with falling unemployment should pay a tax and that regions with rising unemployment should receive a transfer.

 

5. [15] A balanced budget amendment for the U.S. would be good.

 

6. [15] Government meddling in the short-run macroeconomy will just makes things worse than an unfettered free market.

 

7. [15] The recent cut in interest rates in the Euro-zone is good for the U.S.  {Asked in Fall 1998.}

 

8. [15] Brazil should devalue. {Asked in Fall 1998 when the Brazilian fixed currency was being attacked.}

 

 

1.      [10] Given the higher employment rates of men than women, poor nations should invest more in boys’ education than in girls’ education.

2.      [10] Central banks should be required to have rules such as targeting inflation, instead of having discretion.

3.      [10 – from 2000] Because higher oil prices are inflationary, central banks in Europe and the U.S. should tighten monetary policy.

4.      [10] Structural deficits are bad. 

5.      [10 -- from 2000] Ireland should implement a tight money policy.  (HINT: This is a trick question!)

6.      [10—from 2000] If George Bush is chosen as the next U.S. president, interest rates will decline.

 

 

 

Longer answers

 

From 2004:  The Chinese economy has been growing at 9% on average for a number of years.  Its currency is pegged to the U.S. dollar while its trade surplus with the rest of the world is large.  If the yuan were to float freely would it be more likely to strengthen or weaken versus the dollar?  What are three effects you predict of a floating yuan?


Reminder:  When in doubt, state your assumptions (long- vs. short-run, etc.).

 

Fall 2000 final: Answer one of the following, avoiding any nation in which you have lived.

 

7A. [30] Argentine should devalue its currency. 

7B. [30] Turkey should devalue its currency more rapidly than is planned by the crawling peg. 

7C. [30] Japan should rapidly depreciate its currency.

HINTS for the above:  Think about dollar-denominated debts held in that nation.  Think about credible policies to fight inflation.  Think about the costs and benefits of inflation or deflation.

META-HINT: Not all hints may apply to each nation.

 

 

From 1990

 

2. [26] In 1990 the strange and wonderful nation of Bezerkly could best be modelled with the following one-sector model of a closed economy:

 

Y = C + I + G

C =C0 + c * (Y - T) = 50 + .8 * (Y - T)

I = I0 + fY = 50 + .1 Y

G = G0 = T = T0= 100

 

This model differs from the standard textbook model because when sales increase by $1, Bezerk investors see that they need new factories, and investment increases by $f, where the parameter f is between zero and one.

 

a) [8] Derive the government spending multiplier in this model either symbolically or numerically.  Compare it to multiplier when f = 0.  (Recall that if f= 0, then the multiplier in this model dY/dG = 1/(1-c) = 1/(1-.8) = 5.  To help you with your arithmetic, Y = 1200 in the example above.)

 

b) [8]  Explain in words the intuition behind the comparison of the two multipliers.

 

c) [10] What happens to output if G0 falls to 90?  What happens to national savings?  Show national savings (Sp + government savings) = I after the shock. 

 

3. [30] As time passed the Telegraph was invented and brought news from the outside world about the wonderful concept of money.  Soon thereafter money is introduced into the Bezerker economy, undoubtedly by some non-politically correct dean or economist. 

 

In addition, repetitive drumming in by microeconomics, finance, accounting and macroeconomics professors convinces managers to pay attention to interest rates when choosing how much to invest.  Now the nation is best modelled with the following IS-LM model of a closed economy:

 

C = C0 + c (Y - T) = 50 + .8 * (Y - T)

I =  I0 + fY - bi = 50 + .1 Y - i

 

G = G0 = T = T0= 100

L = kY - hi = Y - 10i                Money demand

M/P = 1000                             Money supply

 

A. [10] Derive the formulae for the IS curve and the LM curves.  (Don't use numbers for this question.)

 

B. [10] What are the equilibrium levels of income, interest rate and the velocity of money?  (Do use numbers for this question.)

 

C) [10] What happens to output, the interest rate and the velocity of money if M/P falls to 800?

 

4. [30] While in class we focussed on fixed vs. flexible exchange rates, many nations have intermediate cases.  For example, some nations have band, where rates are fixed plus or minus some percent.  For example, a nation may fix its rates at 10 pesos per dollar plus or minus 4 percent, thus fixing between 9.6 and 10.4 pesos per dollar.  In other cases the fixed rate has a crawl built into it: We fix at 10 pesos to the dollar, depreciating 1 percent per month.  Other nations combine the two: a band each month, with built-in depreciation over time.  What are the advantages and disadvantages of these hybrid systems compared to pure fixed rates?

 

5. [20] In 1993 the strange and wonderful nation of Bezerkly could best be modelled with the following one-sector model of a closed economy:

 

Y = C + I + G

C = a + c * (Y - T) = 50 + .8 (Y-T)

I = I0 = 50

G = G0 + gY = 100 + .1 Y

T = T0 + tY = -100 + .5 Y

 

This model differs from the standard textbook model because when sales decrease by $1, the Bezerk government fears a higher budget deficit and reduces its spending by g$, where the parameter g is between zero and one.

 

a) [10] Derive the government spending multiplier in this model.  Is it larger, smaller, the same as the multiplier when g = 0?  (If your answer is "It depends," explain on what it depends.)

 

Hint: Recall that when g= 0 the multiplier in this model is:

dY/dG = 1/(1-c(1-t)) = 1/(1-.8(1-.5)) = 1.67

 

b) [10]  Explain in words the intuition behind the comparison of the two multipliers.

 

36. [30] The neighboring closed economy of Telegrafia is blessed with no government and no tax system.  However, unlike Bezerkely, Telegrafittis (as the residents of this artsy but somewhat over-written nation are known) do use money.  In addition, repetitive drumming in by microeconomics, finance, accounting and macroeconomics professors convinces managers to pay attention to interest rates when choosing how much to invest.  Thus, this nation is best modelled with the following IS-LM model of a closed economy:

 

C = a + cY = 50 + .8 Y

I =  I0 - bi = 50 - i

L = kY - hi = Y - 5i      Money demand

M/P = 400                               Money supply

 

A. [10] Derive the formulae for the IS curve and the LM curves.  (Don't use numbers for this question.)

 

B.  [8] What are the equilibrium levels of income and interest rate?  (Do use numbers for this question.)

 

C.  [12] Show graphically the effect of a 1-unit increase in I0.  Is this effect larger, smaller, or the same as the simple one-sector investment mutliplier (1/1-c)?  (If your answer is "It depends," explain on what it depends.)  Why? 

 

37. [40] The Expectations Augmented Phillips Curve for an economy is given by the equation

p = p-1 - .33 ( U - NAIRU) + e

 

Assume the NAIRU for this economy is 9%.

In year 0, this economy has inflation and inflationary expectations = 3%.

In year 1, the economy suffers an adverse supply shock due to a spike in the price of oil that raises inflation by 3 percentage points (e = 3%).

 

A) [4] What is inflation in year 1?

 

For each of the following three potential macroeconomic policy responses to this shock outline the effects on inflation, inflationary expectations, unemployment and growth (making reference to Okun’s Law: %DY = 3% - 2 * DU) in years 2-5:

 

B) [12] do nothing.

 

C) [12] return inflation to 3% in one year (by year 2).

 

D) [12] return inflation to 3% as fast as possible while holding unemployment to no more than 12%.

 

 

Longer Answer (but please keep to 1-2 single-spaced or 2-4 double-spaced pages)

 

1.    [20] Consider a current event that (1) is not already mentioned in this exam; (2) is not within the U.S.; and (3) is not within a nation in which you have lived.  Use a model or theory from this class to describe the causes and/or effects of that current event.