Instructions

. The exam set must not be taken apart.

. Please use indelible ink only (i.e. pens or ballpoint pens, no pencils), otherwise the
exam cannot be graded.
. Pocket calculators are permitted.
. One dictionary - either monolingual or bilingual - is permitted.
. Part 1 comprises 15 multiple choice questions. All questions are supposed to be
answered. Each question contains only one correct answer out of five. A correct answer
gives 2 points, an incorrect answer 0 points. Unmarked or plurally marked questions give
0 points.
. Part 2 comprises 15 questions. All questions are supposed to be answered. The
answers can be either "True" or "False". A correct answer gives 1 point, an incorrect
answer 0 points. Unmarked or plurally marked questions give 0 points.
. Mark the correct answer with a cross.
. You can correct an unintended answer by filling the marked answer field completely. The
filled circle counts as an unmarked answer. If you realize afterwards that the filled
answer field should be the valid answer, please put a cross left of the filled answer field.
. Unless noted differently the notation known from the lecture is used.
. We use US notation for the numbers, e.g. $ 1,600.45 for 1600 US-Dollars and 45 cents
(and not $ 1.600,45).
. The exam time is 90 minutes, total points are 45.

Good luck!

1
Remarks:
• In the following, assume that in the short run, the equilibrium is given by the intersection of the AS and
AD curve. Prices are somewhat flexible. However, price expectations only adjust in the medium run.
• Investment is a function of both income Y and the interest rate i, I = I(Y, i), if not stated otherwise.

Part 1

. Mark the correct answer. Only one out of five possibilities is correct. A correct answer gives 2 points, an
incorrect answer 0 points. Unmarked or plurally marked questions give 0 points.

1. During a given year, the following activities occur:

I. A silver mining company pays its workers $150,000 to mine 75 pounds of silver. The silver is then
sold to a jewellery manufacturer for $200,000.
II. The jewellery manufacturer pays $ 200,000 for the silver, and also pays its workers $100,000 to
make silver necklaces, which it sells directly to consumers for $1,200,000.

Using the "value added" approach what is GDP?

m a) $ 50,000 for the silver mining company, $ 900,000 for the jewellery manufacturer. Total $ 950,000.
m b) $ 200,000 for the silver mining company, $ 1,000,000 for the jewellery manufacturer. Total $
1,200,000.
m c) $ 250,000 wages, $ 950,000 profits. Total $ 1,200,000.
m d) $1,200,000, the value of the necklaces.
m e) There is insufficient data to determine GDP using the "value added" approach.

2. The following information is given:

2011 2012
Quantity Price Quantity Price
Bread 15 $ 100 17 $ 120
Mobile phones 3 $ 800 5 $ 900

What is the inflation rate (based on the GDP deflator) when we take prices of 2012 as the set of
common prices? Please round off the values to integral numbers.

m a) 13%
m b) 14%
m c) 15%
m d) 16%
m e) none of the above

3. Consider the given set of equations:

C = c0 + c1 YD
T = tY
I = i0 + i1 Y
G = T

2
 The last equation means the government budget is balanced and government consumption G is
endogenous. The parameters are: c0 = 500, c1 = 0.5, t = 0.3, i0 = 500 and i1 = 0.1. How will output
change when autonomous consumption increases to 650?

m a) Y increases by 400
m b) Y increases by 600
m c) Y decreases by 200
m d) Y decreases by 400
m e) Y decreases by 600

4. The following IS-LM model is given:

C = 250 + 0.2YD
I = 100 + 0.3Y − 500i
Ḡ = 250
T = 250
 d
M
= 2Y − 8, 000i
P
 
M
= 1, 600
P

The LM relation can be written as: i = 1

4,000 Y − 0.2. What is equilibrium output?

m a) 900
m b) 960
m c) 1000
m d) 1040
m e) 1060

5. What could cause a drop in the overall supply of money?

m a) a lower demand for currency (relative to deposits)

m b) a higher reserve ratio
m c) an increase of the monetary base
m d) a decrease of income
m e) a lower preference for liquidity

6. The central bank wants to decrease the interest rate. Then it should:

m a) Sell bonds, because this will decrease the money supply.

m b) Sell bonds, because this will increase the money supply.
m c) Buy bonds, because this will decrease the money supply.
m d) Buy bonds, because this will increase the money supply.
m e) none of the above

7. The following two events happen at the same time:

I. A reduction in government expenses.

II. An increase in consumer confidence.

These two events have the following effects:

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 m a) Output will increase, the interest rate will decrease.
m b) Output will increase, the interest rate will increase.
m c) Output will decrease, the interest rate will decrease.
m d) Output will decrease, the interest rate will increase.
m e) It is not possible to say what will happen given this information.

8. The government wants to cool down the economy (reduce output) but hold the interest rate equal, then
it should:

m a) Increase taxes, increase the money supply.

m b) Increase taxes, reduce the money supply.
m c) Reduce taxes, increase the money supply.
m d) Reduce taxes, reduce the money supply.
m e) none of the above

9. Consider Figure 1 and Figure 2 in the appendix. What are the possible causes of the shifts in these two
graphs?

m a) Figure 1: Increase in unemployment benefits; Figure 2: Less strict market regulations (less
stringent antitrust regulations)
m b) Figure 1: Increase in unemployment benefits; Figure 2: more strict market regulations (less
stringent antitrust regulations)
m c) Figure 1: Decrease in unemployment benefits; Figure 2: Less strict market regulations (less
stringent antitrust regulations)
m d) Figure 1: Decrease in unemployment benefits; Figure 2: more strict market regulations (less
stringent antitrust regulations)
m e) Figure 1: Decrease in unemployment benefits; Figure 2: Lower oil prices

10. What are the effects of a fiscal expansion in the medium run?

m a) the AS-curve and the AD-curve shift both right

m b) the AS-curve and the AD-curve shift both left
m c) real money supply increases
m d) the investments increase
m e) none of the above

11. The following two statements are given:

I. An increase in the price of oil will reduce the natural level of output in the U.S.
II. A monetary contraction results in an increase in the interest rate in the short run.

m a) Both statements are true.

m b) Both statements are false.
m c) Statement I is true while statement II is false.
m d) Statement I is false while statement II is true.
m e) none of the above

12. The following production function is given: Y = K α N 1−α . The saving rate is 24%, the depreciation rate
is 6%, and α = 31 . What is the steady state level of capital per worker, so K
N?
√
m a) 2
m b) 2
m c) 4

4
 m d) 8
m e) 16

13. Suppose there are two countries that are identical in every way with the following exception: Country A
has a lower depreciation rate (δ) than country B. Given this information, we know with certainty that in
the long run

m a) the growth rate of K

N will be the same in the two countries.
m b) the growth rate of Y
N will be higher in A than in B.
m c) K
N will be higher in B.
m d) Y
N will be higher in B.
m e) none of the above

14. Consider Figure 3 in the appendix. In this figure you see:

m a) An increase in the savings rate, and higher growth rate in the long run.
m b) An increase in the savings rate, and lower growth rate in the long run.
m c) An decrease in the savings rate, and higher growth rate in the long run.
m d) An decrease in the savings rate, and lower growth rate in the long run.
m e) none of the above

15. The following two statements are given:

I. If the population growth rate increases, the investment rate (the ratio of investment to output)
must increase in order to keep capital per effective worker constant in the long run.
II. If the rate of technological progress increases, the investment rate (the ratio of investment to
output) must increase in order to keep capital per effective worker constant in the long run.

m a) Both statements are true.

m b) Both statements are false.
m c) Statement I is true while statement II is false.
m d) Statement I is false while statement II is true.
m e) none of the above

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Part 2

. Mark the correct answer. A correct answer gives 1 point, an incorrect 0 points. Unmarked or plurally
marked questions give 0 points.

True False
In a recession the unemployment rate could go down as a result of a fall in
16. m m
the participation rate.
An increase in the propensity to consume leads to a decrease in output in the
17. m m
short run.
When taxes depend on income (Y ), then output will respond less strong to
18. m m
changes in G.
If the price for a one year bond that pays EUR 100.00 one year from now and
19. m m
the interest rate is 6.00%, then current price should be EUR 94.00.
If nominal income goes up, the interest rate will go down for a given money
20. m m
supply.
When investments react strongly to the interest rate, then we know that the
21. m m
IS-curve is relatively flat.
If there is a fiscal contraction and a monetary expansion at the same time,
22. m m
then we know for sure that the interest rate goes up.
Assume the probability to leave unemployment is equal to 0.35 per month.
23. Hence, the probability that an unemployed worker is still unemployed after m m
four months is about 17.9%.
The efficiency wage is the wage at which someone is indifferent between
24. m m
working and being unemployed.
Neutrality of money means that monetary policy has no influence on output
25. m m
or prices in the medium run.
Fiscal policy cannot affect investment in the medium run, because output
26. m m
always returns to its natural level in the medium run.
When unemployment is equal to its natural level, then the price expectations
27. m m
are equal to the current price level.
Comparing the income per capita of India and the U.S., the income difference
28. between India and the U.S. is smaller when it is based on Purchasing Power m m
Parity, than when it is based on exchange rates.
For OECD countries there is a clear negative correlation between the growth
29. m m
rate and the initial level of output per person since 1950.
If the capital stock per capita of the current period is larger than the one of
30. the last period, we know that investments per capita exceed depreciations per m m
capita.

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Appendix

Figure 1: Reference to exercise 9

Figure 2: Reference to exercise 9

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Figure 3: Reference to exercise 14