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Econ 100b

Created 4/30/1996
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Midterm Two Answers

Economics 100b; Spring 1996


Part I. Multiple Choice (12 1/2 minutes; 25 points)

1. Assuming no population growth and no increase in the efficiency of labor, the steady-state level of capital per worker is calculated by:

a. dividing the depreciation rate by the savings rate.
b. looking for the intersection of the y=f(k) line with the "dk" depreciation line.
c. dividing the savings rate by the depreciation rate.
d. using the multiplier to determine the level of investment consistent with full employment.


2. The Golden Rule level of capital accumulation is the steady state with:

a. the highest growth rate of output
b. the highest level of output per worker
c. the highest level of depreciation per worker
d. the highest level of consumption per worker


3. The Solow growth model predicts that countries with higher population growth rates will have

a. lower growth rates of output
b. higher growth rates of output per worker
c. the same growth rate of total output, but a lower level of output
d. none of the above


4. In the Solow growth model, persistent increases in standards of living are due to:

a. technological progress
b. faster labor force growth
c. higher levels of net exports
d. a larger initial stock of capital per worker


5. Today, America's capital stock is below the Golden Rule level. We know this because:

a. The return on investment is greater than the sum of the deprecation rates and the growth rates of population and labor efficiency.
b. The U.S. runs a persistent trade deficit.
c. The U.S. has not yet converged to its steady-state growth path.
d. We don't know this; the capital stock is above the Golden Rule level.


6. In the 1950s, the Federal Reserve bought and sold gold on demand at a price of $35 an ounce; the Bank of England bought and sold gold on demand at a price of 14 pounds, 11 shillings, 8 pence an ounce. The dollar-pound sterling exchange rate was thus:

a. impossible to determine from the information given.
b. $5 to the pound sterling.
c. About $2.40 to the pound sterling.
d. About $0.45 to the pound sterling.


7. If national output is $7,000 billion a year, and domestic spending on all goods and services is $7,200 billion a year, then net exports must equal:

a. zero
b. -$200 billion a year
c. +$200 billion a year
d. it depends on the real interest rate.


8. In a small open economy with a floating exchange rate, fiscal policy

a. has powerful effects on employment, but not on output or the exchange rate
b. has powerful effects on the exchange rate, but not on employment or output
c. has powerful effects on output, but not on employment or the exchange rate
d. has powerful effects on all three macroeconomic variables.


9. Monetary policy has the largest effects on output in a:

a. small open economy with a fixed exchange rate
b. small open economy with a floating exchange rate
c. large open economy with a fixed exchange rate
d. closed economy


10. Imposing high tariffs (and making no other changes in government tax and spending policy) in a floating exchange rate system will:

a. boost net exports because the additional tariff collections will reduce the government deficit and increase total national saving
b. have no effect on net exports, but lower the exchange rate
c. lead to a recession
d. require a tighter monetary policy.




Part II. Short Answer (3 sentences per question; 12 1/2 minutes; 25 points)

1. What is the Mundell-Fleming model?


2. What does it mean to analyze a situation as if the economy were "small and open"? When is this assumption a good one? When is this assumption a bad one?


3. What is the "capital account"?


4. In advanced post-industrial economies, is more economic growth generated by better technology and labor efficiency, or by increased investment in physical capital?




Part III. International Economics (12 1/2 minutes; 25 points)

Suppose that the United States can be best modeled as a small open economy. Suppose that annual national product is $7,000 billion a year, with both government spending and taxes at $1,400 billion a year, with private investment equal to (in billions):

1400 - 140*(r-2%)

where the real interest rate is measured in percent per year. Suppose, further, that the government spending and investment multipliers are equal to 2; that the initial equilibrium exchange rate is $1 equals 100 yen; and that net exports (in billions) are given by:

NX = 7*(100 - e)

where e is the real exchange rate in yen.

Suppose that real interest rates in the rest of the world--which had been averaging 2% per year--suddenly jump up to 5% per year as a result of contractionary monetary policies adopted by the Bank of Japan and the Bundesbank. The Under Secretary of the Treasury for International Affairs declares that the continued world leadership of the United States depends on keeping the dollar exchange rate at or above 100 yen. The Chair of the CEA declares that the right policy is to let the dollar fall so that any reduction in investment is offset by an expansion of net exports, and that monetary retriction abroad is not allowed to trigger a recession at home.

Your boss--the Secretary of Commerce, say--wants you to write a brief memo telling her what is at stake. What shifts in economic policy are required to carry out the Under Secretary of the Treasury's and the CEA Chair's preferred policies? What effects do these policies (and the increase in world interest rates) have on other macroeconomic variables?

Is there a policy to both maintain the value of the dollar and avoid a domestic recession? What is it?



Part IV. Long Run Growth (12 1/2 minutes; 25 points)

In Taiwan today, gross capital income is about 40% of GDP, the savings rate is 30%, the average rate of growth of output is about 5 percent per year, the average rate of population growth is about 1 percent per year, and the depreciation rate is about 4 percent per year.

Suppose that Taiwan is able to maintain these investment, population growth, depreciation, and labor efficiency growth rates far into the future.

1. What is the steady-state capital-output ratio?


2. What will the marginal product of capital (rate-of-return on investment) be in this steady state?


3. When Taiwan reaches its steady-state growth path, will its capital stock be above or below the "Golden Rule" value?


4. What will the long-run rate of growth of total GDP be in the steady state? What will the long-run rate of growth of GDP per worker be in steady state?




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Econ 100b

Created 4/30/1996
Go to
Brad De Long's Home Page


Professor of Economics J. Bradford DeLong, 601 Evans
University of California at Berkeley
Berkeley, CA 94720-3880
(510) 643-4027 phone (510) 642-6615 fax
delong@econ.berkeley.edu
http://www.j-bradford-delong.net/