PART 1 (5 points)

Answering sheet for the multiple choice questions, questions 1 until 10.

Score for n correct answers is 5(n − 1)/9; a negative score is rounded to

zero.

1. Are the following statements true or not true?

I. The neoclassical synthesis is a synthesis of ideas of classical economists and

heterodox economists.
II. The policy implications of macroeconomic models may be ideologically biased,
even if they are based on mathematical models.

1. Statement I is true; statement II is true.

2. Statement I is true; statement II is not true.
3. Statement I is not true; statement II is true.
4. Statement I is not true; statement II is not true.

2. Consider an economy with three firms: a farm (which produces wheat), a mill (which
turns the wheat into flour), and a bakery (which uses the flour to make bread). The
farm employs a farmer, the mill a miller, and the bakery a baker. Assume that the
farmer has shares in the mill, the miller has shares in the bakery, and the baker has
shares in the farm. Are the following statements then true or not true?

I. GDP according to the income approach is not equal to GDP according to the
value-added approach.
II. The farmer’s income is equal to the value added of the farm, the miller’s income
is equal to the value added of the mill, and the baker’s income is equal to the
value added of the bakery.

1. Statement I is true; statement II is true.

2. Statement I is true; statement II is not true.
3. Statement I is not true; statement II is true.
4. Statement I is not true; statement II is not true.

3. Which of the following statements about chain-weighted GDP is correct? Assume

annual data.

1. Both the level and the growth rate of chain-weighted GDP depend on the base
year.
2. The level of chain-weighted GDP depends on the base year, but the growth rate
of chain-weighted GDP does not depend on the base year.
3 The level of chain-weighted GDP does not depend on the base year, but the
growth rate of chain-weighted GDP does depend on the base year.
4. Neither the level nor the growth rate of chain-weighted GDP depends on the
base year.

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4. The graph below gives GDP per capita in the U.S. and Japan, where x1 = 2.5 and
x2 = 5. Are the following statements true or not true?

I. x3 = 7.5 and x4 = 10.

II. The difference in GDP per capita in I$ between the U.S. and Japan since the
beginning of the 1970s can be explained at least partly by the fact that many
goods and services are cheaper in Japan than in the U.S.

1. Statement I is true; statement II is true.

2. Statement I is true; statement II is not true.
3. Statement I is not true; statement II is true.
4. Statement I is not true; statement II is not true.
(in thousand I$ in prices of 2005)

x5 U.S.
Japan
x4
GDP per capita

x3

x2

x1
’50 ’60 ’70 ’80 ’90 2000 ’10

5. Consider a bank with bank capital K, deposits D and debt S. The deposits D and
debt S are the only liabilities of the bank. Are the following statements then true or
not true?

I. If we know K, D and S, we have enough information to compute the bank’s

leverage ratio.
II. Assume that the bank makes x% losses on its assets; the smaller the leverage
ratio, the larger x can be without the bank becoming insolvent.

1. Statement I is true; statement II is true.

2. Statement I is true; statement II is not true.
3. Statement I is not true; statement II is true.
4. Statement I is not true; statement II is not true.

2
6. The graph below gives the GDP deflator and the CPI in Japan. Are the following
statements about this graph true or not true?

I. From the information in the graph follows that the growth rate of real GDP in
Japan between 2000 and 2010 was larger than the growth rate of nominal GDP.
II. Both curves give a weighted average of the prices of goods and services in Japan,
with weights that were determined in the base year that was used to compute
the GDP deflator and the CPI.

1. Statement I is true; statement II is true.

2. Statement I is true; statement II is not true.
3. Statement I is not true; statement II is true.
4. Statement I is not true; statement II is not true.

Price level
120
CPI
GDP deflator

80
index

40

0
’50 ’60 ’70 ’80 ’90 2000 ’10

7. Are the following statements about the circular flow model for a small open economy
true or not true?

I. The assumption of perfect capital mobility implies that the domestic real interest
rate is always equal to the real interest rate abroad.
II. The assumption of perfect capital mobility implies that the real interest rate
abroad can be considered to be an exogenous variable.

1. Statement I is true; statement II is true.

2. Statement I is true; statement II is not true.
3. Statement I is not true; statement II is true.
4. Statement I is not true; statement II is not true.

3
8. Consider a monetary system with fractional-reserve banking, where commercial banks
hold a fraction rr of the balances on their demand deposits as reserves at the Central
Bank. The cash-deposit ratio is equal to cr. Both the reserve-deposit ratio rr and the
cash-deposit ratio cr are between 0 and 1: 0 < rr < 1 en 0 < cr < 1. Assume that
the monetary system is initially in equilibrium. Assume now that the Central Bank
buys government bonds from the commercial banks in an open market operation, and
pays by crediting their reserve accounts. The extra reserves which the Central Bank
creates in this way are equal to △R. The monetary system evolves then to a new
equilibrium. Which of the following statements is then correct?

1. The extra reserves in the new equilibrium compared with the initial equilibrium
(before the open market operation) are less than △R.
2. The extra reserves in the new equilibrium compared with the initial equilibrium
(before the open market operation) are equal to △R.
3. The extra reserves in the new equilibrium compared with the initial equilibrium
(before the open market operation) are larger than △R.
4. There is not sufficient information to determine whether the extra reserves in
the new equilibrium compared to the initial equilibrium (before the open market
operation) are less than, equal to, or larger than △R.

9. The data in the table below are for The Netherlands. The real exchange rate is defined
in such a way that an increase in the real exchange rate implies a real appreciation,
while a decrease implies a real depreciation. Are the following statements then true
or not true?

I. The data for the government surplus and the real interest rate are consistent
with the circular-flow model for a closed economy.
II. The data for the government surplus, the trade balance and the real exchange
rate are consistent with the circular-flow model for a small open economy.

1975 1980

Government surplus (in % of GDP) -2.9 -4.0

Trade balance (in % of GDP) 2.5 -1.1
Real interest rate (in %) -1.0 4.2
Real exchange rate 97.0 104.4

1. Statement I is true; statement II is true.

2. Statement I is true; statement II is not true.
3. Statement I is not true; statement II is true.
4. Statement I is not true; statement II is not true.

4
 10. The table below shows the composition of GDP in The Netherlands in 2007 according
to the expenditure approach. Are the following statements about this table true or
not true? For your answer, use the definitions and concepts as in the circular flow
model for a small open economy.
I. In 2007, The Netherlands had excess demand in the goods market.
II. As export was larger than import, The Netherlands experienced excess supply
of foreign exchange in the exchange market in 2007.

The composition of GDP (in percent, 2007)

The Netherlands
Expenditure approach
• private consumption 46.1
• investment 20.5
∗ planned investment 20.0
∗ inventory investment 0.5
• government consumption 25.1
• net export 8.2
∗ export 74.1
∗ import 65.9

1. Statement I is true; statement II is true.

2. Statement I is true; statement II is not true.
3. Statement I is not true; statement II is true.
4. Statement I is not true; statement II is not true.

PART 2 (1.5 points)

Answering sheet for the multiple choice questions, questions 11 until 29.
9 n−19/3
Score for n correct answers is 4 19
; a negative score is rounded
to zero.

Below is described how the economy reacts to a decrease in taxes according to the
circular flow model of a closed economy.

A number of terms or phrases in the description are left out. Fill in the most appro-
priate term or phrase in the list which the term between curled brackets refers to. The list
with possible answers is not in this exam copy, but is handed out seperately. Make on your
answering sheet the bullets black that correspond with the correct answers. The answer
for the first phrase that is left out corresponds on your answering sheet with the answer for
question 11, the answer for the second phrase that is left out corresponds on your answering
sheet with the answer for question 12, etc. The answer for the last phrase that is left out
corresponds on your answering sheet with the answer for question 29.

Assume the economy is in equilibrium when it is hit by the shock.

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Description
i. The shock causes {11. disequilibrium} on the goods market, {12. disequilibrium}
on the market for loanable funds, and a shift {13. shift} {14. curve} to the {15.
direction}.

ii. As a result, {16. variable} {17. change} such that {18. variable} {19. change},
which is described by a shift {20. shift} {21. curve} to the {22. direction}. This goes
on until the market for loanable funds, and therefore also the goods market, is again
in equilibrium.

iii. Compared with the initial equilibrium, in the new equilibrium

• aggregate production {23. change}

• aggregate consumption {24. change}
• aggregate investment {25. change}
• the real interest rate {26. change}
• private saving {27. change}
• public saving {28. change}
• total saving {29. change}

PART 3 (1.5 points)

Answering sheet for the multiple choice questions, questions 30 until 50.
9 n−21/3
Score for n correct answers is 4 21
; a negative score is rounded
to zero.

Below is described how the economy reacts to a decrease in autonomous investment

according to the circular flow model of a small open economy.

A number of terms or phrases in the description are left out. Fill in the most appro-
priate term or phrase in the list which the term between curled brackets refers to. The list
with possible answers is not in this exam copy, but is handed out seperately. Make on your
answering sheet the bullets black that correspond with the correct answers. The answer
for the first phrase that is left out corresponds on your answering sheet with the answer for
question 30, the answer for the second phrase that is left out corresponds on your answering
sheet with the answer for question 31, etc. The answer for the last phrase that is left out
corresponds on your answering sheet with the answer for question 50.

Assume the economy is in equilibrium when it is hit by the shock.

An ”increasing exchange rate” means that the domestic currency appreciates; a ”decreasing
exchange rate” means that the domestic currency depreciates.

Excess demand on the foreign exchange market means that there is more demand for
foreign currency than supply of foreign currency; excess supply on the foreign exchange

6
market means that there is more supply of foreign currency than demand for foreign cur-
rency.

Unless mentioned otherwise, all variables refer to their domestic values.

Description
i. The shock causes {30. disequilibrium} on the goods market, {31. disequilibrium}
on the foreign exchange market, and a shift {32. shift} {33. curve} to the {34.
direction}.

ii. As a result, {35. variable} {36. change} such that {37. variable} {38. change},
which is described by a shift {39. shift} {40. curve} to the {41. direction}. This goes
on until the foreign exchange market, and therefore also the goods market, is again
in equilibrium.

iii. Compared with the initial equilibrium, in the new equilibrium

• aggregate production {42. change}

• aggregate consumption {43. change}
• aggregate investment {44. change}
• net export {45. change}
• the real interest rate {46. change}
• the real exchange rate {47. change}
• private saving {48. change}
• public saving {49. change}
• total saving {50. change}

PART 4 (1 point)
Answering sheet for the numerical questions, questions 1 until 14.

Give only your solutions (not your derivations)!

Score for n correct answers is n/14.

Consider an economy described by the circular flow model for a small open economy:

Y = C + I + G + NX
C = C(Y − T )
I = I(r)
NX = N X(ε)
r = r∗

Y is aggregate production, C is aggregate consumption, I is aggregate investment, G is

government purchases, T is taxes, and N X is net export. r is the domestic real interest

7
rate, r∗ is the real interest rate abroad and ε is the real exchange rate. Y , G, T and r∗ are
determined exogenously.
Assume the following functional forms and parameter values:
Y = 1000, G = 220, T = 200, r∗ = 5
C(Y − T ) = 20 + 45 (Y − T )
I(r) = 300 − 20r
N X(ε) = 400 − 20ε
Compute now the equilibrium values of the following variables:
1. private saving.
2. public saving.
3. national saving.
4. the real interest rate r.
5. aggregate investment I.
6. the real exchange rate ε.
7. net export N X.

Assume now that the foreign interest rate r∗ declines from 5 to 3. Compute then again the
equilibrium values of the following variables:
8. private saving.
9. public saving.
10. national saving.
11. the real interest rate r.
12. aggregate investment I.
13. the real exchange rate ε.
14. net export N X.

PART 5 (1 point)
Answering sheet for the numerical questions, questions 15 until 20.

Give only your solutions (not your derivations)!

Score for n correct answers is n/6.

Assume that the economic agents (the households, firms and the government) hold two
financial assets: cash and demand deposits at commercial banks. The reserve-deposit ratio
of commercial banks is 25%. The monetary base is 1200. The total amount of reserves of
commercial banks is 200. Compute then the following variables:

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 15. currency-in-circulation C.

16. the total balance of demand deposits D.

17. M 1.

Assume now that the cash-deposit ratio becomes 0.5, but that the reserve-deposit ratio
does not change. Assume also that the Central Bank does not carry out open market
operations, and keeps the monetary base constant. As the cash-deposit ratio changes,
the economy evolves to a new equilibrium. Compute the following variables in this new
equilibrium:

18. currency-in-circulation C.

19. the total amount of reserves R.

20. the total balance of demand deposits D.

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Lists for Part 2

curve

1. the saving curve

2. the investment curve

disequilibrium

1. excess demand
2. excess supply

direction

1. right
2. left

variable

1. aggregate production
2. consumption demand
3. investment demand
4. the real interest rate

change

1. increases/increase/has increased
2. does not change/do not change/has not changed
3. decreases/decrease/has decreased

shift

1. of
2. along
Lists for Part 3

curve

1. the excess saving curve

2. the net export curve

disequilibrium

1. excess demand
2. excess supply

direction

1. right
2. left

variable

1. aggregate production / the real interest rate

2. consumption demand / the real exchange rate
3. investment demand
4. net export

change

1. increases/increase/has increased
2. does not change/do not change/has not changed
3. decreases/decrease/has decreased

shift

1. of
2. along
Solutions
Part 1 - Answering sheet for the multiple choice questions
1. 3. See lecture notes.
2. 4. Statement I: The income approach and the value-added approach are two ways to compute
GDP (and should therefore yield the same number for GDP). Statement II: Part of the value
added of the farm is labor income for the farmer (the remainder is capital income for the
baker); capital income of the farmer is part of the value added of the mill; so total income
of the farmer (his labor income plus his capital income) is not necessarily equal to the value
added of the farm; the same holds for the income of the miller and the income of the baker.
3. 2. See lecture notes.
4. 4. Statement I: The vertical axis has a logarithmic scale, so x3 = 10 and x4 = 20. Statement
II: As GDP in I$ is computed for all countries with the same set of fictitious prices in the World
Penn Table, the difference in GDP in I$ between the U.S. and Japan cannot be explained by
the fact that a lot of goods and services would be cheaper in Japan than in the U.S.
5. 1. Statement I: The total value of the bank’s assets is equal to its liabilities plus its bank
capital, and is therefore equal to D + S + K. As the leverage ratio is equal to the total value
of assets divided by the bank’s bank capital, the leverage ratio is equal to (D + S + K)/K.
Statement II: The smaller the leverage ratio, the smaller the total value of the bank’s assets
divided by its bank capital, the smaller the total loss which the bank suffers divided by its bank
capital, so the more the bank can lose per euro on its asset side before the bank becomes
insolvent.
6. 2. Statement I: De BBP-deflator is gelijk aan het nominaal BBP gedeeld door het reëel BBP.
Aangezien de BBP-deflator tussen 2000 en 2010 gedaald is, is het nominaal BBP tussen 2000
en 2010 minder sterk gestegen dan het reëel BBP, en was de groeivoet van het reëel BBP dus
groter dan de groeivoet van het nominaal BBP. Statement II: The weights of prices of goods
and services to compute the GDP deflator are not determined in the base year, but change
over time and depend on the produced quantities.
7. 2. See lecture notes. (The fact that the real interest rate is assumed to be exogenous in the
model follows from the assumption that the economy is small, and therefore has a negligibly
small effect on the foreign real interest rate.)
8. 1. Commercial banks will take up part of △R as cash, and lend it out. As cr > 0, part of this
currency will not be deposited in bank deposits (and perhaps disappear in the Central Bank
as commercial banks keep part of the extra balances on deposits as reserves), but remain in
circulation, such that the total amount of reserves becomes smaller.
9. 1. Statement I: The data show a decline in public saving, which according to the circular flow
model for a closed economy leads to a higher real interest rate - which is consistent with the
data in the table. Statement II: The data show a decline in public saving, which according to
the circular flow model for a small open economy leads to a real appreciation of the exchange
rate, and lower net export - which is consistent with the data in the table.
10. 4. Statement I: Inventory investment was positive in 2007. Consequently, aggregate produc-
tion was larger than planned aggregate expenditure, such that there was excess supply in the
goods market. Statement II: There is excess supply of foreign exchange if N X > S − I, which
implies that Y < C + I + G + N X such that there should be excess demand in the goods
market. But according to the table, there was excess supply in the goods market. Further-
more, the difference between export and import is not sufficient to find out whether there is
excess demand or excess supply in the foreign exchange market: to know whether there is
excess demand or excess supply in the foreign exchange market, we also need to know S − I.
Part 2 - Answering sheet for the multiple choice questions
11. 1 , 12. 1 , 13. 1 , 14. 1 , 15. 2
16. 4 , 17. 1 , 18. 3 , 19. 3 , 20. 2 , 21. 2 , 22. 2
23. 2 , 24. 1 , 25. 3 , 26. 1 , 27. 1 , 28. 3 , 29. 3

Part 3 - Answering sheet for the multiple choice questions

30. 2 , 31. 1 , 32. 1 , 33. 1 , 34. 1
35. 2 , 36. 3 , 37. 4 , 38. 1 , 39. 2 , 40. 2 , 41. 1
42. 2 , 43. 2 , 44. 3 , 45. 1 , 46. 2 , 47. 3 , 48. 2 , 49. 2 , 50. 2

Part 4 - Answering sheet for the numerical questions

1. S pr = 140, 2. S pub = −20, 3. S = 120, 4. r = 5, 5. I = 200, 6. ε = 24, 7. N X = −80
8. S pr = 140, 9. S pub = −20, 10. S = 120, 11. r = 3, 12. I = 240, 13. ε = 26, 14. N X = −120

Part 5 - Answering sheet for the numerical questions

15. C = 1000, 16. D = 800, 17. M 1 = 1800
18. C = 800, 19. R = 400, 20. D = 1600