Mälardalen University, economics

Exam in Macroeconomic principles (NAA135)

Course credits: 7.5 ECTS credits
Date and time: 2021-11-04, 8.30-12.30
Teacher: Johan Lindén
Aids: calculator

Grades, minimum grade points required

A maximum of 30 grade points may be awarded for all exam questions together.
Grades: E: 15p, D: 18p, C: 21p, B: 24p, A: 28p

Time for grading

Test results are normally posted within 15 working days.

Instructions
The exam consists of two parts, A and B. To the questions in part A, only answers are
required. Fill in the answers in the answer form found at the end of the exam.
To the questions in part B, both correct answers in the answer form and complete,
motivated solutions are required. The solutions should be presented on separate paper,
and brief answers copied to the answer form.
Hand in the answer form along with the solutions.
• In the solutions, graphical and mathematical exposition must be accompanied
by explanatory text.
• Explain the notation, especially if it isn’t standard notation used in the course.
• Label all curves and axes in diagrams.
• Start each question on a new sheet of paper. Number the sheets and sort them
in order, first question first.
Part A
Only answers are required to the questions in this part. Fill in the answers in the
answer form.

1. (5p)
The table below shows some figures from the Swedish national accounts for the year
2010. Use these data to calculate the following values for the same year.
(a) gross national product (GNP)
(b) net domestic product (NDP)
(c) net factor income from abroad
(d) gross investments
(e) national savings

From the Swedish national accounts 2010

current prices billion SEK
Gross production 6777
gross domestic product (GDP) 3331
net national product (NNP) 2953
private consumption 1611
public consumption (government purchases) 891
capital depreciation 445
exports 1656
imports 1447

2. (5p)
Use the long run model for a closed economy to determine the expected effect on the
equilibrium from an increase in taxes (T ).
For each of the following variables, state whether it is expected to increase (+), decrease
(–), remain unchanged (0), or whether the effect is indeterminate (?).
All variables are in real terms.
(a) production (Y )
(b) the real interest rate (r)
(c) private savings (Sp )
(d) public savings (SG )
(e) investments (I)
3. (5p)
Suppose a country has a money demand function ( M P
)d = kY where k = 1/4 is a
constant, and M is the quantity of money, P is the price level, and Y is real production.
Use the quantity theory of money to answer the following questions.
(a) What is the income velocity of money (V )?
(b) What is the average inflation rate (π), if the money supply (M ) grows by 12%
per year and real production (Y ) grows by 4% per year?
(c) Suppose instead that real production grows by 5% per year, while the money
growth rate is as in part (b). Then what is the average inflation rate (π)?
(d) Suppose instead that the money supply grows by 9% per year, while real pro-
duction growth is as in part (b). Then what is the average inflation rate (π)?
(e) Now suppose that money and real output grow as in part (b), but the velocity of
money is growing steadily at a rate of 2% per year because of financial innovation.
Then what is the average inflation rate (π)?
Part B
To the questions in this part, complete solutions as well as correct answers are required.
Write the solutions on separate paper. Fill in the answers in the answer form.

4. (5p)
A small open economy is described by the following equations:
• The accounting identity: Y = C + I + G + NX
• Production: Y = 3500
• Government purchases: G = 1500
• Taxes: T = 1500
• Household consumption C is given by the consumption function:
C = 200 + 0.8(Y − T )
• Investments I depend on the real interest rate r as: I = 600 − 10000r
• Net exports NX depend on the real exchange rate ε as: NX = 400 − 400ε
• The domestic real interest rate r is given by the world real interest rate r∗ :
r = r∗ = 4% = 0.04
Use the classical theory for the long run equilibrium of a small open economy to answer
the following questions.
(a) What are national savings (S)?
(b) What are investments (I)?
(c) What are net exports (NX )?
(d) What is the real exchange rate (ε)?
(e) Suppose that government purchases rises to G = 1600. What is the new equilib-
rium real exchange rate?
5. (5p)
A country’s labor market is characterized by labor demand and labor supply given by
the following equations:
LD = 200 − 2W
LS = 100
where LD and LS are the quantity of labor demanded and supplied respectively, and
W is the wage.
(a) Suppose the labor market adjusts to competitive equilibrium. What is total
employment (L)?
(b) What is the competitive wage (W )?
(c) Suppose instead that there is a minimum wage of Wm = 60. What then is total
employment (LD )?
(d) What is the number of unemployed workers (U )?
(e) What is the unemployment rate (u)?

6. (5p)
A country’s technology is described by the production function

Y = F (K, L) = K 1/2 L1/2

where Y is its level of output (GDP), K is its capital stock, and L is its labor force.
The country saves 20% of its output (s = 0.20). The capital depreciation rate is 4%
per year (δ = 0.04). There is no population growth or technological progress. The
country is a closed economy.
Use the Solow growth model to compute the steady state values of the following vari-
ables.
(a) capital per worker (k = K/L)
(b) output per worker (y = Y /L)
(c) consumption per worker (c)
(d) investments per worker (i)
(e) capital output ratio (K/Y )
Answer form
to exam in Macroeconomic principles (NAA135).
Give only brief answers here. Present complete solutions to part B on separate paper.

Question Requested value: Answer:

Part A
1.
(a) gross national product (GNP):
(b) net domestic product (NDP):
(c) net factor income from abroad:
(d) gross investments:
(e) national savings:
2.
(a) change in Y (+, –, 0, or ?):
(b) change in r (+, –, 0, or ?):
(c) change in Sp (+, –, 0, or ?):
(d) change in SG (+, –, 0, or ?):
(e) change in I (+, –, 0, or ?):
3.
(a) velocity of money (V ):
(b) inflation (π):
(c) inflation (π):
(d) inflation (π):
(e) inflation (π):
Part B
4.
(a) national savings (S):
(b) investments (I):
(c) net exports (NX ):
(d) real exchange rate (ε):
(e) new real exchange rate:
5.
(a) employment (L):
(b) wage (W ):
(c) employment (LD ):
(d) number of unemployed workers (U ):
(e) unemployment rate (u):
6.
(a) capital per worker (k):
(b) output per worker (y):
(c) consumption per worker (c):
(d) investments per worker (i):
(e) capital output ratio (K/Y ):