Name: __________________________ Date: _____________ Exam 1 Econ 3080 Fall 2011 There are 15 multiple choice questions worth

h 60 points total, and 3 short answers worth 40 points total. Be sure to be clear, concise, and show your work on the short answer questions and put a box around your final answer. You may keep your exam and compare your answers to the answer key. Multiple Choice 4 points each 1. When a pizza maker lists the price of a pizza as $10, this is an example of using money as a: A) store of value. B) unit of account. C) medium of exchange.

D) flow of value.

2. The investment component of GDP includes all of the following except: A) purchases of corporate stock. B) spending on new plants and equipment. C) purchases of new housing by households.

D) changes in business inventories. 3. In a Cobb-Douglas production function the marginal product of labor will increase if: A) the quantity of labor increases. B) the quantity of capital increases. C) capital's share of output increases.

D) average labor productivity decreases.

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4. Two economies are identical except that the level of capital per worker is higher in Highland than in Lowland. The production functions in both economies exhibit diminishing marginal product of capital. An extra unit of capital per worker increases output per worker: A) more in Highland. B) more in Lowland. C) by the same amount in Highland and Lowland.

D) in Highland, but not in Lowland. 5. The consumption function in the Solow model assumes that society saves a: A) constant proportion of income. B) smaller proportion of income as it becomes richer. C) larger proportion of income as it becomes richer.

D) larger proportion of income when the interest rate is higher.

6. Public policies in the United States designed to stimulate technological progress do not include: A) tax breaks to encourage homeownership. B) the temporary monopoly granted by the patent system. C) tax breaks for research and development.

D) subsidies given by the National Science Foundation.

7. If income velocity is assumed to be constant, but no other assumptions are made, the level of ______ is determined by M. A) prices B) income C) transactions

D) nominal GDP

8. To determine whether an economy is operating at its Golden Rule level of capital stock, a policymaker must determine the steady-state saving rate that produces the: A) largest MPK. B) smallest depreciation rate. C) largest consumption per worker.

D) largest output per worker.

9. If the real interest rate declines by 1 percent and the inflation rate increases by 2 percent, the nominal interest rate must: A) increase by 2 percent. B) increase by 1 percent. C) remain constant.

D) decrease by 1 percent. 10. Assume that a rancher sells McDonald's a quarter-pound of meat for $1 and that McDonald's sells you a hamburger made from that meat for $2. In this case, the value included in GDP should be: A) $0.50. B) $1. C) $2.

D) $3. 11. If the marginal product of capital net of depreciation equals 10 percent and the rate of population growth equals 2 percent, then this economy will be at the Golden Rule steady state if the rate of technological progress equals _____ percent. A) 0 B) 2 C) 8

D) 10

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12. Assume that equilibrium GDP (Y) is 5,000. Consumption is given by the equation C = 500 + 0.6 (Y T). Taxes (T) are equal to 600. Government spending is equal to 1,000. Investment is given by the equation I = 2,160 100r, where r is the real interest rate in percent. In this case, the equilibrium real interest rate is: A) 5 percent. B) 8 percent. C) 10 percent.

D) 13 percent. Use the following to answer question 13: (Exhibit: CapitalLabor Ratio and the Steady State)

13. (Exhibit: CapitalLabor Ratio and the Steady State) In this graph, starting from capital labor ratio k1, the capitallabor ratio will: A) decrease. B) remain constant. C) increase.

D) first decrease and then remain constant. 14. Empirical evidence supports the theory that free trade: A) increases economic growth. B) decreases economic growth. C) increases imports, but decreases exports because of greater global competition.

D) increases both imports and exports, but does not contribute to overall economic growth.

15. In the Solow growth model with population growth and technological change, the break-even level of investment must cover: A) depreciating capital. B) depreciating capital and capital for new workers. C) depreciating capital and capital for new effective workers.

D) depreciating capital, capital for new workers, and capital for new effective workers.

Short Answer Write on your own paper. Be clear and concise, and BE SURE TO BOX YOUR FINAL ANSWERS 16. Assume that a country's production function is Y = K1/2L1/2. a. What is the per-worker production function y = f(k)? b. Assume that the country possesses 40,000 units of capital and 10,000 units of labor. What is Y? What is output per worker? c. Assume that 10 percent of capital depreciates each year. What gross saving rate is necessary to make the given capital per worker the steadystate capital per worker? (Hint: In this case we are assuming the capital level is the steady state level and solving for the savings rate that makes this true) d. If the saving rate equals the steady-state level, what is consumption per worker? 17. Consider a competitive economy in which factor prices adjust to keep the factors of production fully employed and the interest rate adjusts to keep the supply and demand for goods and services in equilibrium. The economy can be described by the following set of equations: L = L,K= K,G = G,T = T , Y = AKa L(1a) Y=C+I+G C = C (Y T) I = I (r) Suggest two policies that a government could use to increase the equilibrium quantity of investment in the economy, and carefully explain how these policies produce this result. 18. Income per person exceeds $25,000 in many countries, but is below $1,000 per person in many other countries. Based on the Solow growth model, suggest four possible explanations for this gap in living standards. Extra Credit What was the podcast I suggested to you about?

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Answer Key
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. B A B B A A D C B C C D C A D

16. a. y = k1/2. b. Y = 20,000; Y/L (y) = 2 c. s = 0.2. d. Consumption per worker will be 1.6. 17. The government could cut spending (G), which would increase national saving (Y-C-G), lower the equilibrium interest rate, and produce an increase in the equilibrium quantity of investment. The government could increase taxes (T), which would increase national saving (Y-C-G) by reducing consumption. 18. Possible explanations include: richer countries have higher saving rates, lower population growth rates, lower capital-depreciation rates, higher rates of technological progress, or institutions that better facilitate economic growth.
Extra Credit Answer: Hyperinflation in Germany