Collection of Exam Questions

Macroeconomics 1 / Microeconomics 1
Course 2,150,1

Spring Semester 2018

Please read the following notes carefully:

- Each question has only one correct answer.

- For each question, mark only one answer as correct. If you mark several, you will
receive zero points for that question.

- Please note that there are several questions asking, “which of the following is false?”.
Here as well, mark only one answer.

- We do not award negative points for incorrect answers.

- If not stated otherwise, the notation follows the notation used in the textbook and the
course.

- Please round numerical results to the number of decimal places given by the list of
answers.

- The number of points awarded per question serves as an indication of the number of
minutes you should allocate to that question.

- This exam contains 42 questions over 23 pages, for a maximum of 180 points.

Good Luck!

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this exam and its sample solutions may to be reproduced, edited with the use of electronic
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procedure) without written consent by the author.

1
Collection Exam Questions FS 2018 Economics B

Question 1 (total 3 Points)

Consider the following table representing a hypothetical economy producing only good
A and good B:

Good A Good B
year price quantity price quantity
2015 1 100 2 200
2016 3 200 1 100
2017 3 100 2 200
2018 2 200 3 300

Which of the following statements concerning the growth rate of this economy is cor-
rect?
A. The growth rate of nominal gdp between the year 2017 and 2018 was 8.5%.
B. The growth rate of real gdp between the year 2017 and 2018 was 12% using
2015 year prices.
C. The growth rate of real gdp between the year 2015 and 2016 was 14% using
year 2018 as base year.
D. Using the gdp deflator based on first year prices, inflation between the year
2015 and 2017 was 30%.
E. None of the above.

Question 2 (total 5 Points)

For each of the following statements, decide whether the statement is true or false:
(a) (1 Point) Nominal gdp is a flow, but real gdp is a stock.
A. True
B. False
(b) (1 Point) The gdp deflator is defined as real gdp relative to nominal gdp.
A. True
B. False
(c) (1 Point) gdp does not consider environmental damage.
A. True
B. False
(d) (1 Point) The expenditure measure of gdp includes government purchases of goods
and services.
A. True
B. False
(e) (1 Point) Gross national income (gni) is equal to gross domestic income (gdi) plus
net income receipts from the rest of the world.
A. True
B. False

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Collection Exam Questions FS 2018 Economics B

Question 3 (total 3 Points)

Consider the following data on the real Swiss per capita gross domestic product, gdp,
between 1990 and 2016.

120
Level, Index (1990: 100)
115

110
Index

105

100

95
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
16
19
19
19
19
19
19
19
19
19
19
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
4
3 yearly growth rate
2
percentage change

1
0
1
2
3
4
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
16
19
19
19
19
19
19
19
19
19
19
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
Which of the following statements is wrong?
A. Between 1990 and 2016, per capita real gdp increased by about a 1/5.
B. In the years 2000 and 2006, growth was about the same as in the year before.
C. In 2012, per capita real gdp neither increased nor decreased.
D. In 1998, per capita real gdp was at about the same level as in 1990.
E. The financial crisis of 2008-2009 triggered the longest recession since
1990.

Question 4 (total 3 Points)

Assume that, in a perfectly competitive economy, gdp is produced according to a Cobb-
Douglas production function, with share of capital 1/5 and share of labour 4/5. Assume
that the capital growth rate is 4%, labour growth rate −2%, and gdp growth rate 3%.
What is the TFP growth rate?
A. 1.5%
B. 3.8%
C. −2%
D. 0.6%
E. None of the above

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Collection Exam Questions FS 2018 Economics B

Question 5 (total 16 Points)

Assume that, in a perfectly competitive economy, gdp is produced according to the
following Cobb-Douglas production function:

Y = 4K 0.2 L0.8 .

In addition, the depreciation rate is δ = 0.05, the population growth rate is n = 0.02,
and the saving rate is s = 0.10.
(a) (3 Points) In steady state, what is the stock of physical capital per worker?
A. 9
B. 25
C. 32
D. 40
E. None of the above
(b) (3 Points) In steady state, what is the level of gdp per worker?
A. 8
B. 12
C. 20
D. 24
E. None of the above
(c) (3 Points) In steady state, what is the level of consumption per worker?
A. 0.64
B. 5.76
C. 7.20
D. 10.53
E. None of the above
(d) (3 Points) In steady state, what is the marginal product of labour?
A. 10
B. 12
C. 21
D. 25
E. None of the above

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Collection Exam Questions FS 2018 Economics B

(e) (4 Points) Assume that the saving rate increases to s = 0.2.

Which of the following statements is correct?
A. Steady state income per worker will increase, but steady state
consumption per worker will decrease.
B. Steady state income per worker will increase, and steady state consump-
tion per worker will increase.
C. Steady state income per worker will decrease, and steady state consump-
tion per worker will decrease.
D. Steady state income per worker will decrease, but steady state consump-
tion per worker will increase.
E. None of the above

Question 6 (total 8 Points)

Consider the equilibrium business cycle model and assume that the inflation rate is zero.
(a) (3 Points) Which of the following statements is false?
A. The real interest rate is equal to the nominal interest rate.
B. The return on bonds is equal to the return on physical capital.
C. The return on physical capital is equal to the inflation rate.
D. The return on physical capital is equal to the real return of capital net of
depreciation.
E. None of the above.
(b) (3 Points) Which of the following statements is correct?
A. Nominal household savings equals

π + wL − P C.

B. Nominal household savings equals

wL
π+ + i(B + P K) − C.
P
C. Nominal household savings equals

∆B + P ∆K.

D. Nominal household savings equals

∆B + K∆P.

E. None of the above

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Collection Exam Questions FS 2018 Economics B

(c) (2 Points) Which of the following statements concerning competitive market equi-
librium is false?
A. The marginal product of labour is equal to the real wage.
B. The marginal product of capital is equal to the real rental price of capital.
C. The demand for physical capital decreases in the real interest rate.
D. The demand curve of labour slopes up when the substitution
effect is large.
E. None of the above

Question 7 (total 6 Points)

Consider a two-period version of the equilibrium business cycle model.
(a) (3 Points) Which of the following statements concerning the decision to save or
consume in this model is false?
A. If the consumer is a net saver, an increase in the interest rate may reduce
his/her saving.
B. If the consumer is a net saver, an increase in the interest rate will increase
his/her saving.
C. At the aggregate level, an increase in the interest rate will have
no effect on saving.
D. An expected increase in future wage income leads to a reduction in current
saving.
(b) (3 Points) Which of the following household budget constraints is true?
A.
( ) ( ) (w)
B0 w L2
C1 + C2 = (1 + i0 ) + K0 + L1 + P 2
P P 1 1 + i1

B.
( ) (w) (w)
B1
C2 B0 L2 + K1
C1 + = (1 + i0 ) + K0 + L1 + − P P 2
1 + i1 P P 1 1 + i1 1 + i1

C.
( ) (w) (w) B2
C2 B0 L2 + K2
C1 + = (1 + i0 ) + K0 + L1 + P 2
− P
1 + i1 P P 1 1 + i1 1 + i1

D.
( ) (w) (w) B2
C2 B0 L2 + K2
C1 + = (1 + i0 ) + K0 + L1 + P 2
− P
1 + i2 P P 1 1 + i2 1 + i2

E. None of the above.

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Collection Exam Questions FS 2018 Economics B

Question 8 (total 5 Points)

For each of the following statements, decide whether the statement is true or false:
(a) (1 Point) An increase in the interest rate raises labour supply.
A. True
B. False
(b) (1 Point) A permanent increase in the real wage always increases labour supply.
A. True
B. False
(c) (1 Point) A one-time windfall gain reduces labour supply.
A. True
B. False
(d) (1 Point) A decrease in the household’s willingness to work will have a positive
effect on the equilibrium rental rate of capital.
A. True
B. False
(e) (1 Point) An increase in the household’s willingness to save leads to a drop in the
interest rate.
A. True
B. False

Question 9 (total 4 Points)

Consider the equilibrium business cycle model.
(a) (2 Points) Which of the following statements concerning the causes of fluctuations
in this framework is false?
A. Economic fluctuations may be due to weather.
B. Technological innovations may induce fluctuations.
C. Aggregate demand drives economic fluctuations.
D. Social unrest may depress gdp.
E. None of the above
(b) (2 Points) Which of the following statements regarding the cyclicality of its core
variables is true?
A. The real wage is predicted to be procyclical.
B. The interest rate is predicted to be counter-cyclical.
C. Labour supply is predicted to be counter-cyclical.
D. Inflation is predicted to be procyclical.
E. None of the above.

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Collection Exam Questions FS 2018 Economics B

Question 10 (total 3 Points)

Consider the equilibrium business cycle model. Which of the following statements con-
cerning the effects of an increase in the technological level A is false?
A. It increases the real wage.
B. It increases the marginal product of capital.
C. It increases the real interest rate.
D. It reduces the rental rate of capital.
E. None of the above.

Question 11 (total 5 Points)

Consider the equilibrium business cycle model with capacity utilization.
For each of the following statements, decide whether the statement is true or false:
(a) (1 Point) An increase in technology reduces the demand for capital.
A. True
B. False
(b) (1 Point) A decrease in technology reduces capital utilization.
A. True
B. False
(c) (1 Point) An increase in technology reduces labour demand.
A. True
B. False
(d) (1 Point) An increase in technology decreases the interest rate.
A. True
B. False
(e) (1 Point) In the long run, an increase in technology has no effect on the interest
rate.
A. True
B. False

Question 12 (total 5 Points)

Consider the model of job finding.
(a) (3 Points) Assume that 5% of those employed lose their job in a year, while 95%
of those unemployed find a job in the year. What would be the long-run, natural,
rate of unemployment in such an economy?
A. 0%
B. 5%
C. 6%
D. 10%
E. None of the above

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Collection Exam Questions FS 2018 Economics B

(b) (2 Points) Assume that there is a positive technological shock. Which of the fol-
lowing statements is false?
A. The higher marginal product of labour, mpl, induces more job accept-
ances.
B. Vacancies are procyclical—hence they increase.
C. The job-finding rate increases because market opportunities became bet-
ter.
D. The rate of unemployment increases because it is procyclical
E. None of the above.

Question 13 (total 2 Points)

Which of the following statements is true?
A. The Beveridge curve is an increasing relationship between unemployment and
wage inflation.
B. The Beveridge curve is a decreasing relationship between unemployment and
price inflation.
C. The Beveridge curve is an increasing relationship between unemployment and
job vacancies.
D. The Beveridge curve is a decreasing relationship between unemploy-
ment and job vacancies
E. None of the above.

Question 14 (total 5 Points)

For each of the following statements, decide whether the statement is true or false:
(a) (1 Point) Monetary base is only the currency in circulation.
A. True
B. False
(b) (1 Point) M1 adds checkable deposits to the monetary base.
A. True
B. False
(c) (1 Point) M2 adds to M1 the household holdings of savings deposits, small-time
deposits, and retail money-market mutual funds.
A. True
B. False
(d) (1 Point) High-powered money adds to the total currency in circulation the deposits
held by banks and other depository institutions at the Central Bank.
A. True
B. False
(e) (1 Point) High-powered money is wider than the monetary base.
A. True
B. False

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Collection Exam Questions FS 2018 Economics B

Question 15 (total 4 Points)

For each of the following statements, decide whether the statement is true or false:
(a) (1 Point) If the nominal interest rate drops the demand for money rises.
A. True
B. False
(b) (1 Point) If prices double the real demand for money doubles.
A. True
B. False
(c) (1 Point) If nominal income increases the demand for money decreases.
A. True
B. False
(d) (1 Point) Economies of scale in cash management means that at higher incomes
households hold less money in proportion to their income.
A. True
B. False

Question 16 (total 5 Points)

Consider the general equilibrium model with money.
For each of the following statements, decide whether the statement is true or false.
(a) (1 Point) Ls = Ld determines real wages (w/P )∗ and employment L∗ .
A. True
B. False
(b) (1 Point) (κK)s = (κK)d determines real rentals (R/P )∗ and capital services (κK)∗ .
A. True
B. False
(c) (1 Point) The equilibrium value of the interest rate is determined at i = R/P .
A. True
B. False
(d) (1 Point) The equilibrium value of gdp is determined by Y = AF (L, κK).
A. True
B. False
(e) (1 Point) The nominal quantity of money, M d , is a linear function of the nominal
interest rate i passing through the origin.
A. True
B. False

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Collection Exam Questions FS 2018 Economics B

Question 17 (total 6 Points)

Consider the equilibrium business cycle model with money. Assume that money Mt
grows steadily at the rate µ.
(a) (3 Points) Which of the following statements is false?
A. The price level, Pt , will also grow steadily at the rate µ.
B. The inflation rate affects the real interest rate r.
C. The nominal interest rate, i, equals r + µ.
D. The real quantity of money demanded does not vary over time.
E. None of the above.
(b) (3 Points) Let us now assume that the money growth rate suddenly drops to a rate
µ′ < µ.
Which of the following statements is true?
A. The price level, Pt , will keep growing steadily at the rate µ.
B. The decrease in the money growth rate causes an increase in inflation and
nominal interest rates.
C. The nominal interest rate, i, increases.
D. The price level jumps during the transition to a lower level.
E. None of the above.

Question 18 (total 3 Points)

Assuming that money Mt grows steadily at the rate µ, and that, due to long-term growth
of real gdp, the real quantity of money demanded grows steadily at the constant rate
γ > 0.
Which of the following statements is true?
A. The real money balances Mt /Pt , will grow steadily at the rate µ − γ.
B. The price level, Pt will grow steadily at the rate µ − γ.
C. The nominal interest rate, i, is unaffected by the growth rate of real money
demand.
D. The real interest rate, r, is affected by the growth rate of real money demand.
E. None of the above.

Question 19 (total 2 Points)

Which of the following statements is false?
A. Government transfers are part of aggregate demand.
B. Government purchases in goods are part of aggregate demand.
C. Government purchases in services are part of aggregate demand.
D. Pensions, unemployment subsidies, etc. imply a redistribution of income from
some people to other people.
E. None of the above.

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Collection Exam Questions FS 2018 Economics B

Question 20 (total 2 Points)

Which of the following statements about lump-sum taxes is false?
A. Lump-sum taxes are paid independently from the individual income, assets,
consumption or corporate profits.
B. They are unrealistic, because taxes paid do vary with income, etc.
C. Lump-sum taxes do not have income effects.
D. More realistic taxes have other effects as well: they may discourage labour
supply, savings, investment, etc.
E. None of the above.

Question 21 (total 5 Points)

Let us assume that the government budget is balanced, that is,

Gt + Vt = Tt ,

and taxes are lump-sum.

For each of the following statements, decide whether the statement is true or false:
(a) (1 Point) A permanent increase in government expenditure, Gt , has no effect on
gdp.
A. True
B. False
(b) (1 Point) A permanent increase in government expenditure, Gt , has no effect on
consumption, Ct .
A. True
B. False
(c) (1 Point) A permanent increase in government expenditure, Gt , has a negative
effect on real gdp, Yt .
A. True
B. False
(d) (1 Point) A permanent increase in government expenditure, Gt , has no effect on
the real interest rate, rt .
A. True
B. False
(e) (1 Point) A permanent increase in goverment expenditure, Gt , has a positive effect
on the inflation rate, πt .
A. True
B. False

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Collection Exam Questions FS 2018 Economics B

Question 22 (total 5 Points)

Let us assume that the government budget is balanced, that is,

Gt + Vt = Tt ,

and taxes are lump-sum.

For each of the following statements, decide whether the statement is true or false:
(a) (1 Point) A temporary decrease in government expenditure, Gt , increases consump-
tion, Ct , roughly one to one.
A. True
B. False
(b) (1 Point) A temporary decrease in government expenditure, Gt , has no effect on
current real gdp, Yt .
A. True
B. False
(c) (1 Point) A temporary decrease in government expenditure, Gt , has a negative
effect on real investment, It .
A. True
B. False
(d) (1 Point) A temporary decrease in government expenditure, Gt , has no effect on
the current real interest rate, rt .
A. True
B. False
(e) (1 Point) A temporary decrease in goverment expenditure, Gt , has a negative effect
on the future real interest rate, rt .
A. True
B. False

Question 23 (total 2 Points)

Let us assume that the government budget is balanced, that is,

Gt + Vt = Tt ,

Taxes are proportional to labour income, with rate τw . Government expenditures, Gt ,

remain constant.
Which of the following statements is false?
A. An increase in labour tax rate, τw , only has substitution effects.
B. A decrease in labour tax rate, τw , increases labour supply.
C. An increase in labour tax rate, τw , increases real gdp.
D. An increase in labour tax rate, τw , reduces the real interest rate.
E. None of the above.

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Collection Exam Questions FS 2018 Economics B

Question 24 (total 3 Points)

Let us assume that the government can finance its expenditures with taxes and by
borrowing, but not by printing money.
Which of the following statements is true?
A. The government budget constraint is

Btg − Bt−1
g
Gt + Vt = Tt + .
P

B. The government budget constraint is

g
rt−1 Bt−1
Gt + Vt + = Tt .
P

C. The government budget constraint is

g
rt−1 Bt−1 Mt − Mt−1
Gt + Vt + = Tt +
P P

D. The government budget constraint is

g
rt−1 Bt−1 B g − Bt−1
g
Mt − Mt−1
Gt + Vt + = Tt + t + .
P P P

E. None of the above.

Question 25 (total 2 Points)

Consider the equilibrium business cycle model with a role for the government.
Which of the following statements is false?
A. If households are Ricardian, when the government cuts lump-sum taxes and
runs a budget deficit gdp will not change.
B. If households are short-lived, when the government cuts lump-sum and runs a
budget deficit consumption may increase.
C. If credit markets are imperfect, when the government cuts labour
taxes and runs a budget deficit, household consumption will not
change.
D. If households are Ricardian, when the government cuts labour taxes and runs
a budget deficit labour supply will increase.
E. None of the above

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Collection Exam Questions FS 2018 Economics B

Question 26 (total 2 Points)

Consider the equilibrium business cycle model with government and Ricardian house-
holds.
Which of the following statements is true?
A. If the government cuts asset income taxes and runs a budget deficit consump-
tion will not change.
B. If the government cuts asset income taxes and runs a budget deficit
future taxes will be expected to increase.
C. If the government raises labour income taxes and runs a budget surplus labour
supply will increase.
D. If the government cuts asset income taxes current investment will drop.
E. None of the above

Question 27 (total 7 Points)

Consider the price misperceptions model.
(a) (2 Points) Which of the following statements is true?
A. Workers know the exact prices of each basket of goods
B. If workers see an increase in their nominal wage they may think
that their real wage has increased as well.
C. If workers see a decrease in their nominal wage they may think that prices
have dropped by more.
D. The workers will work less if wages and prices increase.
E. None of the above

For each of the following statements, decide whether the statement is true or false.
(b) (1 Point) The Lucas hypothesis on monetary shocks is that the real effect of a
given size monetary shock is larger, the more unstable the underlying monetary
environment.
A. True
B. False
(c) (1 Point) The nominal stock of money, Mt , is predicted to be countercyclical.
A. True
B. False
(d) (1 Point) The real wage, wt /Pt , is predicted to be procyclical.
A. True
B. False
(e) (1 Point) The average product of labour, Yt /Lt , is predicted to be countercyclical.
A. True
B. False

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Collection Exam Questions FS 2018 Economics B

(f) (1 Point) The price level, Pt , is predicted to be procyclical.

A. True
B. False

Question 28 (total 9 Points)

Consider the sticky prices model.
(a) (2 Points) Which of the following statements is true?
A. Firms are assumed to be perfectly competitive.
B. The nominal quantity of money, M , doubles, the real quantity of money
does not change.
C. A profit-maximizing firm would meet an increase in demand by
raising its production, Y (j).
D. A monetary expansion increases the rental rate of capital.
E. None of the above
(b) (2 Points) Which of the following statements is false?
A. An increase in money supply raises the real wage, w/P .
B. An increase in money supply raises the real rental rate of capital, R/P .
C. A decrease in money supply reduces the average product of
labour, Y /L.
D. A decrease in money supply reduces gdp.
E. None of the above

For each of the following statements, decide whether the statement is true or false.
(c) (1 Point) Labour hoarding improves the model’s predictions about labour produc-
tivity.
A. True
B. False
(d) (1 Point) In the longer run prices do not move.
A. True
B. False
(e) (1 Point) The price level, Pt , is predicted to be procyclical.
A. True
B. False
(f) (1 Point) The average product of labour, Yt /Lt , is predicted to be countercyclical.
A. True
B. False
(g) (1 Point) The sticky prices model predicts involuntary unemployment.
A. True
B. False

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Collection Exam Questions FS 2018 Economics B

Question 29 (total 2 Points)

Consider the sticky wages model. Which of the following statements is false?
A. An increase in money supply raises the real wage, w/P .
B. This model is thought to represent Keynes’ ideas.
C. This model is able to predict involuntary unemplyoment.
D. A decrease in government expenditure may increase unemployment.
E. None of the above

Question 30 (total 5 Points)

Consider the open economy model. For each of the following statements, decide whether
the statement is true or false:
(a) (1 Point) The trade balance is equal to the real gdp minus real domestic expendit-
ures.
A. True
B. False
(b) (1 Point) The current-account balance is equal to gross national product, gnp,
minus domestic expenditure.
A. True
B. False
(c) (1 Point) Real gdp is equal to real domestic expenditure.
A. True
B. False
(d) (1 Point) Net foreign investment is equal to the trade balance.
A. True
B. False
(e) (1 Point) The current-account balance is equal to the trade balance plus net asset
income from abroad.
A. True
B. False

Question 31 (total 2 Points)

Consider the open economy model. Assume a permanent increase in the technological
level At . Which of the following statements is true?
A. Consumption, Ct , will increase by much less than gdp, Yt .
B. Due to an increase in consumption, Ct , investment, It , will drop.
C. The current account will move towards surplus.
D. Trade balance will move towards deficit.
E. None of the above

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Collection Exam Questions FS 2018 Economics B

Question 32 (total 2 Points)

Consider the open economy model. Assume that before opening the real interest rate,
rt , was lower than that of the rest of the world, rf .
Which of the following statements is false?
A. Capital will flow abroad.
B. The capital incomes will increase.
C. The current account will move towards surplus.
D. Real wages will increase.
E. None of the above

Question 33 (total 6 Points)

Consider the open economy model. For each of the following statements, decide whether
the statement is true or false:
(a) (1 Point) If households are not Ricardian, a budget deficit cannot create a current-
account deficit.
A. True
B. False
(b) (1 Point) A harvest failure will move the current account towards deficit.
A. True
B. False
(c) (1 Point) A temporary increase in government expenditure will move the current
account towards deficit.
A. True
B. False
(d) (1 Point) A developing country opening to capital inflow will have a current account
deficit.
A. True
B. False
(e) (1 Point) Current-account deficits are always a symptom of bad economic times.
A. True
B. False
(f) (1 Point) Changes in the terms of trade, P /P f , have similar effects as changes in
the technology level, A.
A. True
B. False

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Collection Exam Questions FS 2018 Economics B

Question 34 (total 3 Points)

Let ε denote the nominal exchange rate, giving the number of foreign currency units
per unit of domestic currency. Let π (respectively π f ) denote the domestic (respectively
foreign) country inflation rate.
Which of the following statements is false?
A. Purchasing power parity (PPP) implies that the real exchange rate is equal
to 1.
B. The real exchange rate is equal to εP /P f .
C. The Relative PPP Condition is ∆ε/ε = (π − π f ).
D. PPP implies Relative PPP.
E. None of the above

Question 35 (total 3 Points)

Let i (respectively if ) denote the domestic (respectively foreign) country interest rate.
Which of the following statements is true?
A. Interest rate parity implies: 1 + i = εt+1 · (1 + if )/εt .
B. Interest rate parity implies: 1 + if = (1 + i) · (1 + ∆εt /εt ).
C. Interest rate parity implies: i − if = ∆ε/ε = π f − π.
D. Interest rate parity implies: (∆εt /εt )e > π e − (π f )e .
E. None of the above.

Question 36 (total 2 Points)

Which of the following statements is false?
A. In a fixed-exchange-rate setup, the real exchange rate is not a fixed numer.
B. A fixed-exchange rate system precludes an independent monetary policy.
C. One advantage of a flexible nominal exchange rate is that changes in may
replace the too slow changes in P .
D. A fixed-exchange rate system does not work well if prices are fully
flexible.
E. None of the above.

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Question 37 (total 6 Points)

Consider the following Taylor rule,

i = π̄ + r + a · (π − π̄) + b · (y − ȳ),

where π̄ denotes the inflation target and ȳ trend output.

(a) (2 Points) What is the economic intuition behind a?
A. It describes the elasticity of inflation with respect to the interest rate
chosen by the central bank.
B. It represents the reactivity of firms’ price setting in presence of economic
growth.
C. It captures the response function of households adjusting their balances
during inflationary spells.
D. It models the strength of the response in interest rates when
inflation deviates from its target.
E. None of the above
(b) (2 Points) For simplicity, assume that the inflation target is set to zero. Based on
the resulting Taylor rule, which of the following is true?
A. In equilibrium, the real interest rate is equal to the nominal
interest rate.
B. b captures the size of the response of economic growth to interest rates.
C. Absent any economic shocks, inflation is equal to the nominal interest
rate.
D. If actual inflation is zero, the nominal interest rate determines the cyclical
component of output.
E. None of the above
(c) (1 Point) Assume that the economy is in equilibrium. What happens if the central
bank decides to raise π̄?
A. The central bank sets a lower interest rate.
B. The central bank sets a higher interest rate.
C. The central bank keeps the interest rate constant.
(d) (1 Point) Assume that the economy is in equilibrium. What happens if ȳ decreases?
A. The central bank sets a lower interest rate.
B. The central bank sets a higher interest rate.
C. The central bank keeps the interest rate constant.

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Question 38 (total 3 Points)

If the home inflation rate is −0.5% and the foreign inflation rate is 4.5%, then by relative
purchasing power parity the home country would expect its exchange rate…
A. …rise in value by 5%.
B. …fall in value by 5%.
C. …rise value by 4%.
D. …fall in value by 4%.
E. None of the above

Question 39 (total 3 Points)

According to interest rate parity, if the home interest rate is 0.5% and the foreign interest
rate is 2%, then the expected growth of the nominal exchange rate is:
A. 1.5%
B. −1.5%
C. 2.5%
D. −2.5%
E. None of the above

Question 40 (total 6 Points)

Consider the price misperceptions model.
(a) (2 Points) If the nominal wage is $9 per hour, the expected price level is $3 and
the actual price level is 2$, then:
A. The expected real wage rate is greater than the actual real wage rate.
B. The expected real wage rate is greater than the actual nominal wage rate.
C. The actual real wage rate is greater than the actual nominal wage rate.
D. The expected real wage rate is less than the actual real wage
rate.
E. None of the above
(b) (4 Points) The nominal wage rises from $5 per hour in period one to $10 per hour
in period 2 as the expected price level rises from 2 to 5 while the actual price level
rises from 3 to 4.
Which of the following statements regarding what happens from period 1 to period
2 is false?
A. The nominal wage is rising.
B. The actual real wage is rising.
C. The expected real wage is falling.
D. The expected initial real wage was lower than the actual initial real wage.
E. None of the above.

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Collection Exam Questions FS 2018 Economics B

Question 41 (total 1 Point)

If the nominal interest rate is 2% and the expected inflation rate is -1%, then the expected
real rate of interest is:
A. −3%
B. −1%
C. 1%
D. 3%
E. None of the above

Question 42 (total 6 Point)

Consider a bank with assets of 2,500 Million and debt of 2,440 Million.
Decide for each of the following statements whether it is true or false.
(a) (1 Point) Assume that the bank has given out 1,000 of its assets as loans. Now,
5% of these loans default.
After this loss, the bank is insolvent.
A. True
B. False
(b) (1 Point) Assume that the bank holds 60% of its liabilities in foreign currencies but
all liabilities in domestic currency.
An appreciation of 4% of the domestic currency does not lead to the bank’s in-
solvency.
A. True
B. False
The bank may now take on an additional 150 Million at an interest rate of 4% in deposits
from the public.
There are two investment possibilities for these additional funds:
Option 1 The bank can lend at a rate of 9%. There is a 4% percent chance that the
bank does not receive any interest payments, and only the loan itself is paid pack.
In all other cases, both the principal and interest are paid back.
Option 2 The bank can fund a risky investment project. With a probability of 65%,
this investment yields a return of 40%, and otherwise the investment cannot be
recovered.

(c) (2 Points) Which option is preferred by the bank’s depositors?

A. The are indifferent.
B. Option 1
C. Option 2
D. None of the above

Please turn the page.

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(d) (2 Points) Which option is preferred by the bank’s shareholders that have limited
liability?
A. The are indifferent.
B. Option 1
C. Option 2
D. None of the above

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