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.
. The exam comprises 20 multiple choice questions. All questions are supposed to be
answered. Each question contains only one correct answer out of five.
. Mark your answers on the ANSWER SHEET on the last page.
. Put a circle around the letter corresponding to the correct answer. Only one out of five
possibilities is correct.
. You can correct an unintended answer by putting a cross through the unintended answer
and putting a circle around the correct answer. If you later realize that the crossed out
letter should be the valid answer, please put the correct letter in the left margin (and put
a cross through the incorrectly marked answers).
. 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).
. We use the standard rules for rounding numbers. For example, if the answer without any
rounding is 95.06, then 95 or 95.1 would both be correct answers, but 95.00 is wrong.
Additional instructions for rounding intermediate answers might be given.
. The exam time is 90 minutes.

Good luck!

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EXAM WINTER TERM 2018 - 2019

1. In the following figure you see an estimation of Okun’s law for the United States, where output is in real
terms.

Figure 1: Okun’s Law

The corresponding equation is

ut − ut−1 = −0.4(gt − 0.03),

where ut is the unemployment rate and gt the growth rate of real output in period t. Which of the
following statements is true?

m a) When g = 0.03, unemployment rate declines.

m b) When g = 0.04, unemployment rate rises.
m c) An increase of output growth by one percentage point causes a drop of unemployment rate by 0.4
percentage points.
m d) An increase of output growth by one percentage point causes a drop of unemployment rate by 1
percentage points.
m e) An increase of output growth by one percentage point causes a rise of unemployment rate by 1
percentage points.

2. An economy produces two goods, bread and mobile phones. Quantities and prices per unit sold for years
2017 and 2018 are as follows:

2017 2018
Quantity Price Quantity Price
Bread 15 $ 100 17 $ 120
Mobile phones 3 $ 800 5 $ 900

Which statement is correct? Please round off the values to integer numbers. Use the prices of 2017 as set
of common prices.

m a) In 2018, nominal GDP is 5700.

m b) Real GDP in 2017 is 4500.
m c) Real GDP grows with 46%.
m d) Nominal GDP growths by 52%.
m e) Inflation rate based on GDP deflator is 12%.

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3. Consider the following economy:

C = c0 + c1 YD
T = t0 + t1 Y
YD = Y − T
I = I¯
G = Ḡ

with the standard conditions c0 > 0, Ḡ > 0, I¯ > 0, 0 < c1 < 0, t0 > 0 and 0 < t1 < 1.
Assume now that G increases with 1 unit, and review the following two statements:
I. If t1 is positive then the change in Y will be larger than when t1 = 0
II. If c1 increases then the change in Y will be larger

m a) Both statements are true

m b) Both statement are false
m c) Statement I is true, Statement II is false
m d) Statement I false, Statement II is true
m e) The statements can not be reviewed separately, because they depend on the interaction between
t1 and c1

4. Consider the following economy:

C = c0 + c1 YD
T = T̄
I = I¯
G = Ḡ

with c1 = 0.4. In the initial situation equilibrium output is 1000. Government spending then increases
with 50, the change in output is then:
m a) Change in output is 20
m b) Change in output is 30
m c) Change in output is 50
m d) Change in output is 83.33
m e) Change in output is 125

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5. Consider the figure:

The shift of the graph from I to II shows us :

m a) An increase in income, bond prices will increase;
m b) An increase in income, bond prices will decrease;
m c) An decrease in income, bond prices will increase;
m d) An decrease in income, bond prices will decrease;
m e) None of the above.

6. Assume the following:

• The public holds no currency.
• The ratio of reserves to deposits θ = 0.1.
• The demand for money is given by M d = $Y (0.8 − 4 ∗ i)
• Nominal income is $5,000 billion.
The equilibrium nominal interest rate is 10%. What is the demand for central bank money H d in
equilibrium?
m a) 200 billion
m b) 400 billion
m c) 500 billion
m d) 1000 billion
m e) 5000 billion

7. Consider the two following statements separately:

I. If the government and central bank want to increase output but hold the interest rate constant,
then fiscal policy needs to be expansionary and the real money supply has to increase
II. When the money supply is fixed an increase in government spending may increase or decrease
investment

m a) Both statements are true.

m b) Both statements are false.
m c) Statement I is true, Statement II is false.
m d) Statement I is false, Statement II is true.
m e) Statement I is uncertain (it depends on whether the LM curve is flat or upward sloping),
Statement II is false.

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 8. Consider the initial situation of the IS-LM model. :

C = 200 + 0.25YD
I = 150 + 0.25Y − 1000i
G = 250
T = 200

The central bank targets the interest rate i and fixes it at 5%. Now suppose that government spending
increases to G = 400. What are the effect of the increase in government spending on Consumption and
Investment?
m a) Both Consumption and Investment decrease
m b) Both Consumption and Investment increase
m c) Consumption decreases, Investment increases
m d) Consumption increases, Investment decreases
m e) Consumption increases, Investment can increase, decrease or stay constant

9. Consider the two following statements separately:

I. Banks have assets that are less liquid than their liabilities.
II. When the risk premium increases the LM curve shifts up in the extended IS-LM model

m a) Both statements are true.

m b) Both statements are false.
m c) Statement I is true, Statement II is false.
m d) Statement I is false, Statement II is true.
m e) Statement I is only true in times of crisis, Statement II is false.

10. The risk premium is 2%, the nominal borrowing rate is 6%, and the real borrowing rate is 3%. Then (by
approximation) the:
m a) Nominal policy rate is 3%, expected inflation is 2%
m b) Nominal policy rate is 3%, expected inflation is 3%
m c) Nominal policy rate is 3%, expected inflation is 4%
m d) Nominal policy rate is 4%, expected inflation is 3%
m e) None of the above

11. Consider the two following statements separately:

I. The participation rate is the ratio of the labor force to the total non-institutional civilian
population.
II. When some unemployed become discouraged workers the unemployment rate goes down.

m a) Both statements are true.

m b) Both statements are false.
m c) Statement I is true, Statement II is false.
m d) Statement I is false, Statement II is true.
m e) Statement I is false, Statement II is uncertain.

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12. Consider the labor market model described by the following equations:
Y =N
P = (1 + m)W
W = P e (1 − αu + z)
The government becomes more friendly to businesses such that the level of competition goes down. Then:
m a) The real wage goes down, the natural level of unemployment goes down
m b) The real wage goes down, the natural level of unemployment goes up
m c) The real wage goes up, the natural level of unemployment goes down
m d) The real wage goes up, the natural level of unemployment goes up
m e) The real wage doesn’t change, the natural level of unemployment goes down

13. Consider the two following statements separately:

I. The Phillips Curve describes the downward sloping relationship between output and inflation.
II. If the Phillips curve is πt = πte + (m + z) − αut , and we have m = 5%, z = 5% and α = 2. The
natural level of unemployment is then 5%
m a) Both statements are true.
m b) Both statements are false.
m c) Statement I is true, Statement II is false.
m d) Statement I is false, Statement II is true.
m e) Statement I is false, Statement II is uncertain.

14. There is a decrease in consumer confidence and as a consequence the IS curve shifts to the left. Consider
the two statement regarding this:
I. The natural level of output decreases.
II. The natural level of the real interest rate decreases
m a) Both statements are true.
m b) Both statements are false.
m c) Statement I is false, because the natural level of output decreases; Statement II is true.
m d) Statement I is false, because the natural level of output decreases; Statement II is false.
m e) Statement I is false, because the natural level of output is unaffected; Statement II is true.

15. Consider we start from the Medium Run equilibrium. After that output is above potential output
(Y > Yn ) for several periods. Which of the following statements is true?
m a) If output returns to potential output, inflation continues to rise.
m b) If π e = πt−1 , then it is not possible to bring inflation back to its initial level without a recession.
m c) If π e = πt−1 , then the central bank does not need to change the nominal interest rate i to keep
real interest rate r constant (in the periods with Y > Yn ).
m d) If π e = π̄, then the nominal policy rate i must increase every period to keep the real interest rate r
constant (in the periods with Y > Yn ).
m e) If π e = π̄, then inflation increases every period as long as Y > Yn .

16. The government signs a new law that makes it more difficult to fire people, such that the natural level of
unemployment increases (through variable z in our labor market model). The central bank acts directly
such that the inflation rate does not change (and also expected inflation does not change). Which of the
following statements is correct?
m a) After the new law the natural real interest rate rn is higher.
m b) After the new law the natural level of output Yn is higher.
m c) After the new law the IS curve shifts to the left.
m d) After the new law the LM curve does not shift.
m e) After the new law the Phillips Curve remains unchanged.

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17. Consider the following statements:
I. The price of food is higher in poor countries than it is in rich countries.
II. In OECD countries output per person is converging to the level of output per person in the United
States.

m a) Both statements are true.

m b) Both statements are false.
m c) Statement I is true, Statement II is false.
m d) Statement I is false, Statement II is true.
m e) Statement I is false, Statement II is only try for low income countries.

18. The production function is Y = K α N 1−α , with α < 1. Consider the following changes separately:
I. We double both capital and labor
II. We double capital per worker
Which statement is true?

m a) In (I) output doubles, in (II) output per worker doubles

m b) In (I) output doubles, in (II) output per worker less than doubles
m c) In (I) output less than doubles, in (II) output per worker doubles
m d) In (I) output less than doubles, in (II) output per worker less than doubles
m e) None of the above

19. Consider the Solow model where the production function is Y = K α N 1−α with α = 31 . Assume the
model is in the long run equilibrium. Which statement is true?

Y s 1/2


m a) N = δ
Y δ 1/2


m b) N = s
K s 1/3


m c) N = δ
K δ 1/3


m d) N = s
K δ 4/3


m e) N = s

20. Consider the Solow model where the production function is Y = K α N 1−α . Assume savings are
proportional to income, the participation rate is constant, there is no population growth, and no
technological progress. When the savings rate increases then:
m a) The level of consumption increases in the long run.
m b) The level of output decreases in short run, but is higher in the long run
m c) The growth rate is lower in the short run, but higher in the long run
m d) The growth rate increases and stays higher forever.
m e) The growth rate is positive for some time, but the long run growth rate is unaffected

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 Answer sheet

1 A B C D E
2 A B C D E
3 A B C D E
4 A B C D E
5 A B C D E
6 A B C D E
7 A B C D E
8 A B C D E
9 A B C D E
10 A B C D E
11 A B C D E
12 A B C D E
13 A B C D E
14 A B C D E
15 A B C D E
16 A B C D E
17 A B C D E
18 A B C D E
19 A B C D E
20 A B C D E

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