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Midterm 2020 Answers

The document outlines key answers for a Macroeconomics midterm exam, covering topics such as the impact of minimum wage laws on unemployment, the limitations of unemployment rate measurements, and preferences regarding GDP levels. It includes calculations for nominal and real GDP, inflation rates, and the relationship between saving, investment, and interest rates. Additionally, it discusses production functions and growth rates in productivity, emphasizing the importance of maintaining balanced growth rates for inputs to sustain productivity.

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anischelly95
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12 views4 pages

Midterm 2020 Answers

The document outlines key answers for a Macroeconomics midterm exam, covering topics such as the impact of minimum wage laws on unemployment, the limitations of unemployment rate measurements, and preferences regarding GDP levels. It includes calculations for nominal and real GDP, inflation rates, and the relationship between saving, investment, and interest rates. Additionally, it discusses production functions and growth rates in productivity, emphasizing the importance of maintaining balanced growth rates for inputs to sustain productivity.

Uploaded by

anischelly95
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Macroeconomics midterm exam: key answer (Fall 2020)

Understanding questions:
1- The minimum wage law might hurt workers when the government (through unions)
sets the minimum legal wage above the equilibrium wage. Indeed, it creates an
unbalance between quantity supplied for labor (it gets up) and quantity demanded for
labor (it gets down). Therefore, firms would fire workers and the quantity of vacant
jobs would be lower than required.
 unemployment rate will increase.
 inexperienced workers and unskilled workers would suffer from long unemployment
period. (3points)
The government may intervene by creating agencies for training, agencies for
employment to match between jobseekers and firm’s needs, and unemployment
insurance… (3 points)
2- The unemployment rate can underestimate the amount of joblessness when it:
- ignores discouraged workers (who stop looking for job, but they still unemployed),
- misreports the work status in surveys, and when
- it includes part time jobs ignoring that this type of job reflects the absence of full-
time jobs. (2 points)
3- I would prefer to live in a country with high level of GDP even with low GDP growth
rate because I will benefit from a higher Real GDP per capita which reflects the high
standard of living in the country. Moreover, the growth rate of GDP does impact me
neither directly nor in the short run as a household. (2 points)

Problem 1 (national income and cost of living) (30%)


1- Nominal GDP 2017: (20*80) + (40*20) = $2400 (2.5 pts)

Nominal GDP 2018: (25*90) + (30*30) =$3150 (2.5 pts)

2- Real GDP 2017: (20*80) +( 40*20) = $2400 (2.5 pts)

Real GDP 2018: (25* 80) + (30*20) = $2600 (2.5 pts)

3- GDP Deflator 2018: (3150/2600) * 100 = 121.153 (5 pts)

4- CPI 2018: (Cost of basket 2018/ Cost of basket 2017) *100

= (20*90) + (40*30) / (20*80) +( 40*20) (2.5 pts)


= ($3000/$2400) *100
=125 ((2.5 pts)

5- Inflation rate (GDP DEFLATOR) = ((121.153-100)/100) *100


= 21.153% (2.5 pts)
Inflation rate (CPI) = 125-100)/100) *100 = 25% (2.5 pts)

6- CPI includes imported goods while GDP deflator excludes them. (2 pts)
CPI excludes capital goods while GDP deflator includes them. (2pts)
CPI uses fixed basket while GDP deflator uses current basket. (1 pt)

Problem 2 (Saving investment and financial system) (30%)

1- r = 0.03 = 3%
Q = 3 billions (2 pts) for the graph (6 points)

2- because every time r increases, saving increases


r decreases, saving decreases. (2 pts)

3- r = 4% > 3%; it will create a surplus in the market for loanable funds. (4 pts)

4- I = 6 – (100 * 0.04) = 2
(2 pts)
S= 100*0.04 = 4
the quantity exchanged is 2 billions. (2 pts)

5- S = 100r+1 (2 pts)
I = 6-100r

r = 2.5% (1 pt); Q= 3.5 billions (1pt)


6- 1st policy (setting a new interest rate by the central bank) exchanged quantity for
loanable funds is lower than equilibrium and it equals to 2 billions, the impact on
national investment would be negative since the interest rate is very high than the
equilibrium. (2 pts)
2nd policy (encouraging saving behavior) exchanged quantity for loanable funds is
3.5 billions which is higher than equilibrium, the impact on national investment
would be positive because r would be lower than equilibrium (2,5%) So, loanable
funds would be less expensive for investors. (2 pts)

Therefore, fixing the interest rate by the central bank creates a surplus in the market
for loanable funds then it decreases the quantity exchanged to 2 billions and increases
the interest rate which will discouraged investors. by contrast, when government
encourage saving ( by tax cuts) it generates a decrease in the interest rate to 2.5%, an
increase in the quantity for loanable funds and it will encourage investors in the long
run to make more investment.

7- Public saving <0 National saving decreases (2 pts)


8- National saving decreases => interest rate increases =>fewer quantity available to
finance national investment (which is by now too expensive) so national investment
decreases as well as the standard of living. (2 pts)

Problem 3: Production and growth (30 points)


∂Y
1- = 18 (L/K)0.1 >0 (2 pts); every time K increases, the production Y increases (2
∂K
pts)

∂Y K
= 2 * ( ) 0.9 ≥ 0 (2 pts) every time L increases; the production Y increases. (2 pts)
∂L L

∂ 2Y
2- = -1.8 K-1.1 L0.1 ≤ 0 (2 pts); an increase in input k will result in smaller
∂2K
increases in output (Y). (2 pts)

∂ 2Y
= -1.8L -1.9 K 0.9 ≤ 0 (2 pts); an increase in input L will result in smaller
∂2 L
increases in output (Y). (2 pts)

3- Productivity function is the quantity of output produced by one unit of input (3 pts)

Y K 0.9
L
= 20 * ( L
) (3 pts)

4- growth rate in productivity = 0.9(growth rate in k – growth rate in L) (3 pts)

as the growth rate of the productivity is zero so the growth rate in K must be equal to

-1%. (2 pts)

To maintain productivity constant, K and L must grow at the same rate whether it is
positive growth rate or negative. (2 pts)

5- In order to get a positive growth rate in productivity while the growth rate of L is
negative, so the growth rate of K must be greater than -1%.

Δ Productivity = α (Δ K + Δ L) to obtain Δ Productivity>0; α (Δ K + Δ L) > 0


So, α Δ K > - α Δ L => Δ K > - Δ L

so to get Δ Productivity >0; Δ K must be > - Δ L. (1 pt).

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