Econ 100b

Created 4/30/1996
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Practice Midterm Two

Economics 100b; Spring 1996

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

[not yet written]

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

1. What is a steady-state long-run growth path?

2. What is the difference between net exports and the capital account deficit?

3. What is the "current account"?

4. What is a "gold standard"?

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

A. Suppose that national product is $7,000 billion a year, with federal revenues and federal spending both at $1,400 billion a year, and that the initial trade balance--net exports--is zero:

1. Suppose the president proposes and congress enacts a flat tax, which collects 20% less each year in revenue than the previous progressive income tax. Assume that government spending, private savings, and private investment remain unchanged. What is the new equilibrium value of the trade balance?

2. Suppose imports (in dollars) are constant at $700 billion no matter what the real exchange rate is (when the exchange rate rises, Americans buy fewer goods from abroad--but they pay higher dollar prices for them, and the effects cancel out). Furthermore, suppose that annual exports are (in billions of dollars):

X = 700 + 700*(1-e)

where e is the value of the real exchange rate. What was the value of the exchange rate before the flat tax was enacted? What is the equilibrium value of the exchange rate after the flat tax? By how much--and in which direction--has the exchange rate fallen?

3. Suppose that longtime presidential friend and aide Ira Magaziner assembles a 500 person task force to deal with the crisis in America's exports. He and Secretary of Commerce Clyde Prestowitz conclude that the fall-off in exports reflects foreign countries' adoption of subtle anti-competitive non-tariff barriers to American exports. They propose, and congress enacts, a steep punitive tariff that has no effect on aggregate U.S. revenue but that reduces imports to $420 billion a year. What happens to annual U.S. exports? What happens to the exchange rate? Why?

4. The Secretary of the Treasury Paul Craig Roberts announces that the high value of the dollar is proof of the success of the Administration's economic policies. Comment briefly.

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

Suppose that your country has the production function:

Y = F(K, EL) = K0.3(EL)0.7

that the rate of population growth n=2% per year; the rate of depreciation d=4% per year; the rate of labor efficiency growth g=2% per year; and the savings rate s=32% of national income. Suppose, further, that the economy is on its steady-state growth path.

Your boss's boss, the prime minister, wants to give a speech announcing that the economy is doing too little savings and proposing a substantial shift of taxation away from the taxation of capital income toward the taxation of wage income in order to boost the country's savings rate. Your boss, the minister of labor, wants to know if this is a good idea.

Write a short memo explaining why an increase in national savings would or would not benefit the consumers of your country.


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