Page 1 of 12 THE UNIVERSITY OF HONG KONG Faculty of Business & Economics 2019-2020 1st Semester Examination Economics: ECON1220 Introductory Macroeconomics Sub-class A: Dr. C.W. YUEN Sub-class B,C: Dr. C. KWOK December 23, 2019 2:30-4:30 p.m. This examination consists of two parts. Part A. 20 Multiple Choice Questions (1 point each, 20 points in total) Part B. 12 Short-Answer Questions (80 points in total) For the first 8 questions, each question carries 5 points. For the last 4 questions, each question carries 10 points. Total Points: 100 Total number of pages in this Exam Script (including this cover page): 12 In your Answer File, remember to type in your UID: • on the first page of your answer file, AND • in the MCQ answer table on page 2 of your answer file. Time yourself carefully: do NOT spend too much time on one single question. Page 2 of 12 Part A. 20 Multiple Choice Questions (1 point each, 20 points in total) Choose the best possible answer in each question and type your choice in the MCQ answer table in answer file Q. 1 The table below presents the GDP of an economy. Given the information above, what can we say has happened in the economy from 2011 to 2012? A) The price level has fallen. B) The price level has remained constant. C) The price level has risen. D) The quantity of each of the final goods and services produced in the economy must have decreased. E) The growth rate of the nominal GDP from 2011 to 2012 is positive. For Q.2 and Q.3 Refer to Table 2 below Table 2 A very simple economy produces three goods: movies, burgers, and bikes. The quantities produced and their corresponding prices in 2006 and 2011 are shown in the table above. Q. 2 What is nominal GDP in 2011? A) $3,320 B) $3,690 C) $6,360 D) $7,035 E) $8,505 Q. 3 What is real GDP in 2011, using 2006 as the base year? A) $3,320 B) $3,690 C) $6,360 D) $7,035 E) $8,505 2011 2012 Nominal GDP $10,000 $9,800 Real GDP 9,500 9,600 2006 2011 Product Quantity Price Quantity Price Movies 20 $6.00 30 $7.00 Burgers 100 $2.00 90 $2.50 Bikes 3 $1,000.00 6 $1,100.00 Page 3 of 12 Q. 4 Suppose that in 2008, Giordano produced 1000 T-shirts in its factory in Hong Kong. However, instead of selling them immediately, Giordano kept them as inventory. In 2009, Giordano sold 800 of the T-shirts out of its inventory and the rest 200 T-shirts remained as inventory in 2009. Each of the T-shirts has a market price of $10 in 2008 and 2009. The above activities of Giordano __(i)__ the nominal GDP of Hong Kong in 2008 and __(ii)__ the nominal GDP of Hong Kong in 2009. A) (i) add $10,000 to; (ii) add $8,000 to B) (i) add $8,000 to; (ii) add $2,000 to C) (i) add $10,000 to; (ii) do not affect D) (i) do not affect; (ii) add $8,000 to E) (i) do not affect; (ii) add $10,000 to Q. 5 Suppose that in an economy, the number of employed persons is 180,000 and the unemployment rate is 10%. The number of persons who are unemployed in the economy is: A) 380,000 B) 20,000 C) 18,000 D) 200,000 E) 1,620,000 Q. 6 Suppose that an economy is producing below the potential GDP and the Central Bank decides to implement the correct change in monetary policy to bring the economy to its potential GDP. However, by the time the Central Bank implements the policy, the economy has deteriorated further down in the recession (with higher unemployment rate and lower GDP) and the Central Bank fails to revise its monetary policy to incorporate the latest development of the economy. As a result, A) the Central Bank’s contractionary policy will result in too small of a decrease in GDP. B) the Central Bank’s expansionary policy will result in too large of an increase in GDP. C) the Central Bank’s expansionary policy will result in too small of an increase in GDP. D) the Central Bank’s contractionary policy will result in too large of a decrease in GDP. E) the Central Bank’s contractionary policy will correctly bring the economy to the potential GDP. Q. 7 Most of the governments do not count the “discouraged worker” in the labor force. If these governments revise their definition of the “unemployed persons” to include the “discouraged workers,” then in general the labor force will __(i)__ and the unemployment rate will __(ii)__. A) (i) decrease; (ii) decrease B) (i) decrease; (ii) increase C) (i) increase; (ii) decrease D) (i) increase; (ii) increase E) (i) remain unchanged; (ii) decrease Page 4 of 12 Q. 8 If consumers purchase fewer of those products that increase most in price and more of those products that decrease in price as compared to the CPI basket, then changes in the CPI will: A) accurately reflect the true rate of increase of the cost of living. B) understate the true rate of increase of the cost of living. C) overstate the true rate of increase of the cost of living. D) accurately reflect the true rate of increase in the production cost of the producers. E) understate the true rate of increase in the production cost of the producers. Q.9 The CPI in 1990 was 131, and the CPI in 2010 was 218. If you earned a nominal salary of $40,000 in 1990, what would be your nominal salary in 2010 such that the purchasing power of your nominal salary will be the same in 1990 and 2010? A) $45,977 B) $66,565 C) $87,200 D) $143,486 E) $40,000 For Q. 10 and Q. 11, refer to the table below Year Nominal Average Hourly Earnings CPI (1982-1984 =100) 2009 $10 100 2010 10 105 2011 12 110 Q. 10 Looking at the table above, what is the approximate rate of growth of the real average hourly earnings from 2009 to 2010? A) 15% B) 4.4% C) -1.5% D) -4.8% E) 0% Q. 11 Looking at the table above, what is the rate of growth of the general price level from 2010 to 2011? A) 1% B) 2% C) 3.5% D) 4.76% E) 5.25% Page 5 of 12 Q. 12 Which of the following would you expect to result in faster economic growth in the long run? A) a decrease in research and development spending B) the invention of new computers that increase labor productivity C) a decrease in the average level of education in the economy D) a decrease in the stock of capital per worker E) a decrease in the money supply Q. 13 During an economic recession, the real GDP is mostly likely to be __(i)__ the potential GDP, and the unemployment that exists in the economy is most likely to include __(ii)__ unemployment. A) (i) above; (ii) only frictional and structural B) (i) above; (ii) frictional, structural and cyclical C) (i) below; (ii) only frictional and structural D) (i) below; (ii) frictional, structural and cyclical E) (i) below; (ii) only structural Q.14 Frictional Unemployment refers to the unemployment due to: A) out-dated skills of the labor which are no longer needed in the country. B) the time it takes for the job seekers to search for the best plausible jobs available. C) cyclical downturn of an economy. D) cyclical upturn of an economy. E) the influx of immigrants. Q. 15 An economy is at full employment when the unemployment rate is __(i)__ and there is/are __(ii)__. A) (i) equal to the natural rate of unemployment; (ii) cyclical unemployment only. B) (i) equal to zero; (ii) no unemployment at all. C) (i) equal to the natural rate of unemployment; (ii) cyclical unemployment and structural unemployment only D) (i) equal to the unemployment rate associated with cyclical unemployment only; (ii) cyclical unemployment only. E) (i) equal to the natural rate of unemployment; (ii) frictional unemployment and structural unemployment only Page 6 of 12 Q. 16 Demand deposits (or equivalently checking account deposits) are __(i)__ and saving account deposits are __(ii)__. A) (i) included in M1 but not in M2; (ii) included in M2 but not in M1 B) (i) included in M1 and M2; (ii) included in M2 but not in M1 C) (i) included in M2 but not in M1; (ii) included in M1 but not in M2 D) (i) not included in M1 nor M2; (ii) included in M1 but not in M2 E) (i) included in M1 and M2; (ii) included in M1 and M2 Q.17 Which of the following constitutes a contractionary fiscal policy (i) an increase in income tax (ii) a decrease in money supply (iii) an increase in government purchase of goods and services (iv) the Central Bank conducts an open market sale A) (i), (ii) and (iv) only B) (ii) and (iv) only C) (i) and (ii) only D) (i) only E) All of (i), (ii), (iii) and (iv) Q.18 The table below represents the output (Y) associated with different level of capital goods (K). K Y 0 0 1 2 2 5 3 9 The marginal product of capital good given in the table is: A) increasing in K. B) decreasing in K. C) constant in K. D) increasing in the labor input. E) decreasing in the labor input. Q.19 The short run aggregate supply curve is upward sloping because A) households and firms cannot correctly predict future incomes. B) nominal wages are sticky. C) there are different potential output levels in the short run. D) the marginal product of capital goods increases as the output increases. E) the marginal product of labor increases as the output increases. Page 7 of 12 Q.20 If the real GDP of an economy grows at an annual rate of 3.5% every year, then by the “rule of 70,” how long will it take the economy to double its real GDP (Choose the closest approximation)? A) 200 years B) 20 years C) 20 months D) 2 years E) 70 years - End of part A - - Part B starts on the next page - Page 8 of 12 Part B. 12 Short-Answer Questions (80 points in total) For the first 8 questions, each question carries 5 points. For the last 4 questions, each question carries 10 points. Type your answer of each question in the corresponding box provided in the answer file. Q.1 (5 points) The following table presents the data of countries A, B and C. Country Real GDP per capita in 1960 (in 2005 dollars) Average annual growth rate in real GDP per capita, 1960-2010 A $ 2,483 2.45% B $ 7,015 0.52% C $ 4,105 0.85% Is the data above consistent with the “catch-up prediction”? Explain. Q.2 (5 points) The following table presents the data of countries X and Y. Country Real GDP per capita in 1960 (in 2005 dollars) average annual growth rate of the real GDP per capita after 1960 X $1000 8% Y $ 800 12% Starting from 1960, how many years will it take for the two countries to have the same real GDP per capita? What will be the value of the real GDP per capita of the country at the time? Show your calculation. Q.3 (5 points) The aggregate production function of an economy is given by = 0.50.5 . We also have the following data about the labor market of the economy: the working age population is 100 persons, the labor force participation rate is 80%, the natural rate of unemployment is 5%. Compute the potential GDP of the economy when A = 10 and K = 5. Page 9 of 12 Q.4 (5 points) A country had a trade surplus with the rest of the world in 2017. From 2017 to 2018, • the national saving of the country increased; • its “investment” also increased (“investment” refers to the “investment” in the expenditure approach of computing the GDP of the country). Based on the information above, can you unambiguously infer what must have happened to the trade surplus of the country with the rest of the world from 2017 to 2018 (increase or decrease)? Is it possible for the trade surplus to turn into a trade deficit? Explain using the expenditure approach of the GDP computation. Q. 5 (5 points) The aggregate production function of a country is given by = 0.50.5 where N denotes the labor employment, K denotes the capital stock and A denotes the technology parameter in the production function. Also, in the labor market, W denotes the nominal wage, w denotes the real wage. Consider the five variables A, K, N, W, w P B SRAS A Y (a) Which of the variables above would remain constant as we move from point A to point B along a given SRAS curve? (b) Which of the variables above would change and in what direction as we move from point A to point B along a given SRAS curve? Q.6 (5 points) The following diagram presents the AD curve of an economy. P A B AD Y Consider the real balance of money held by the public at point A and point B along a given AD curve. Is the real balance of money held by the public at point A higher than or lower than that at point B? Or that you cannot compare the two unambiguously? Explain. Page 10 of 12 Q. 7 (5 points) Briefly explain why the output associated with the LRAS is the full-employment output. Q. 8 (5 points) Consider the LRAS and SRAS curves in the diagram with P on the vertical axis and Y on the horizontal axis. The two curves intersected at point A initially. Over time, the intersection point has moved to point B which lies to the right of the initial LRAS and above the initial SRAS curve. Which curve (s) must have shifted to get the intersection of the two curves to move from A to B? If any of the curves has shifted, state the direction of the shift, propose a factor that leads to the shift of the curve and state clearly whether the factor has increased or decreased. Reminder: For the next four questions, each carries 10 points. Q. 9 (10 points) The following diagram presents the production function of an economy on a per capita basis, = � � where is the output per labor employed, is the capital per labor employed, and A is the technology parameter. Y/N G B F E K/N (a) Propose factor(s) that can bring the economy from point E to point G. For each of the factor proposed, state clearly whether the factor increases or decreases. (b) How would you compare the marginal product of the capital good at point E and point G: which one will have a higher marginal product of the capital good, or that you cannot have an unambiguous comparison? Explain. Page 11 of 12 Important Note for the next three questions The next three questions are based on the LRAS-SRAS-AD analysis where the SRAS is upward sloping, LRAS is vertical and AD curve is downward sloping. Furthermore, we assume that the LRAS is held constant (i.e., it does not shift throughout our analysis). Q.10 (10 points) A country is initially at the long-run and short-run equilibrium. However, in the short-run, we observe that the country experiences an increase in the real GDP but the general price level remains the same. (a) Which curve(s) in the LRAS-SRAS-AD diagram must have shifted to generate the observation above? If any of the curves has shifted, state the direction of the shift, propose a factor that leads to the shift of the curve and state clearly whether the factor has increased or decreased. (b) Without any intervention from the government or the Central Bank, we know that the country will adjust to the new long-run equilibrium through labor contract renewal. During the adjustment process, (i) which curve(s) in the LRAS-SRAS-AD diagram will shift and in what direction? (ii) how will the real GDP, unemployment rate and the general price level change during the adjustment process? Q.11 (10 points) A country is initially at the long-run and short-run equilibrium. However, in the short-run, the country experiences a drop in the general price level and the real GDP at the same time due to a temporary shock and we know there is one shock only. (a) Which curve(s) in the LRAS-SRAS-AD diagram must have shifted to generate the observation above? If any of the curves has shifted, state the direction of the shift, propose a factor that leads to the shift of the curve and state clearly whether the factor has increased or decreased. (b) Without any intervention from the government or the Central Bank, we know that the country will adjust to the new long-run equilibrium through labor contract renewal. During the adjustment process, (i) which curve(s) in the LRAS-SRAS-AD diagram will shift and in what direction? (ii) how will the real GDP, unemployment rate and the general price level change during the adjustment process? Q. 12 starts on the next page Page 12 of 12 Q.12 (10 points) A country is initially at the long-run and short-run equilibrium. In the short run, we observe that the country experiences an increase in the price level and the unemployment rate at the same time due to a temporary shock (and we know there is one shock only). (a) Which curve(s) in the LRAS-SRAS-AD diagram must have shifted to generate the observation above? If any of the curves has shifted, state the direction of the shift, propose a factor that leads to the shift of the curve and state clearly whether the factor has increased or decreased. (b) Given that the country experiences an increase in the price level and the unemployment rate in the short run, is it possible for the Central bank to adopt monetary policies to bring the economy to full- employment without increasing the price level further? If yes, state whether the monetary policy should be expansionary or contractionary, which curve (s) in the LRAS-SRAS-AD diagram will shift and in what direction? If no, explain why not. - end of exam paper - 1ECON 1220 Semester A, 2019-2020 Final Exam (online): Suggested Answer Part A Multiple Choice Questions Question Answer Question Answer 1 A 11 D 2 D 12 B 3 C 13 D 4 C 14 B 5 B 15 E 6 C 16 B 7 D 17 D 8 C 18 A 9 B 19 B 10 D 20 B Part B Short Answer Questions Q.1 An implication of the “catch-up prediction” is that the higher the real per capita GDP, the lower the subsequent average growth rate of the real per capita GDP. The data given in the table is consistent with the “catch-up prediction” because: the ranking of the real per capita GDP, from highest to lowest, is B, C and A, and the ranking of the subsequent average growth rate of the real per capita GDP, from lowest to highest, is B, C, A. Q.2 Let t denote the number of years that the two countries will have the same real per capita GDP: $1000ሺ1 8%ሻ ൌ $800 ሺ1 12%ሻ ⇒ $1000$800 ൌ ሺ112%ሻ ሺ18%ሻ ⇒ ൌ ln ሺ 1000 800 ሻ ln 1.121.08 ≅ 6.14 years. The value of the real GDP 6.14 years afterwards will be: $1000ሺ1 8%ሻ6.14 ≅ $1604.06. Or equivalently, $800 ሺ1 12%ሻ6.14 ≅ $1604.31. (Note: the slight difference between the two numbers above is due to the rounding up errors) 2Q.3 Labor Force = 100 x 80% = 80 The number of persons employed when the unemployment rate is equal to the Natural Rate of Unemployment: 80 x 5% = 4 Therefore, the number of employed person at full employment is: 80 - 4 = 76 Potential real GDP = 10 50.5 760.5 = 194.94 Q.4 Y = C + I + G + NX ⇒ Y – C – G – I = NX (1) where (Y – C – G) represents the national saving. Therefore, as (Y – C – G) and I increase at the same time, we cannot unambiguously predict how the LHS (left hand side) of equation (1) will change, and hence, we cannot unambiguously predict how NX, the trade position of the country will change. It is possible for the trade surplus to turn into a trade deficit. Consider the following. Initially in 2017, (Y – C – G) is larger than I, thus, the LHS of equation (1) is positive which implies NX is positive (i.e., trade surplus). When both (Y – C – G) and I increase, if the increase in I is much larger than the increase in (Y – C –G) in such a way that I becomes larger than (Y – C –G), then the LHS of equation (1) becomes negative implying that NX becomes negative (i.e., a trade deficit). Q.5 (a) Along a given SRAS curve, the productivity parameter (A), the amount of capital goods (K) and the nominal wage (W) are fixed. (b) As we move from A to B, the number of employed persons (N) increases. The real wage w, which is , decreases. It is because from A to B, the nominal wage (W) is fixed butthe price level (P) increases. Q.6 The Aggregate Demand Curve is derived from the equilibrium of the market of money for a given nominal supply of money (). In the equilibrium in the market of money, the real balance of money held by the public is equal to the amount of money supplied in real terms ( ). From A to B, the price level (P) drops which implies that the real supply of money is increases.Equilibrium in the market of money would imply that the real balance of money held by the public is equal to the amount of money supplied in real terms. Thus, the real balance of money held by the public would increase. 3Q.7 The intersection of the SRAS curve and the AD curve in the P-Y space represents the short-run equilibrium of an economy. However, as long as the employment level in the short-run equilibrium deviates from the full-employment level, the nominal wage in the labor market will adjust and the employment level will have a tendency to evolve to the full-employment level. Once the short-run equilibrium occurs at the full employment output level, there will not be any force in the economy for the equilibrium and the employment level to adjust, i.e., the SRAS and the AD curve will not shift and the employment level will stay at the full-employment level. Hence, the full-employment output represents the equilibrium output in the long-run. Furthermore, the above argument holds for any given price level. Thus, the vertical line in the P-Y space where the output is the full-employment output represents the LRAS. Q.8 In order for point B to be to the right of point A, the LRAS must have shifted to the right. In order for point B to be above the initial SRAS, the SRAS must have shifted upwards. Examples of factors that shift the LRAS curve to the right: increase in the working age population, “permanent” positive productivity shock, increase in capital stock, etc. Note however, these factors will also shift the SRAS to the right (or downwards) at the same time. Therefore, in order for the SRAS to shift to upwards, there must have been “temporary” factors that shifts the SRAS upwards and the effect is large enough to offset the rightward shift of the SRAS mentioned in above. Examples that shift the SRAS to the left: temporary negative productivity shock (e.g., bad weather). Note: In this question, we simply ask you to propose a factor that could have led to the shift of the SRAS and the LRAS. We did not ask you to explain how the change in the factor you propose will lead to the shift of the curve you have stated. If we do ask you to present the explanations, then you have to use the “reasons” we have presented in Table 1 in Handouts 9 (for the shift of the LRAS) and Table 1 in Handout 10 (for the shift of the SRAS). Similar comments apply to Q. 10, 11 and 12. In particular, if there are shifts of the AD curve, and if we do ask you to explain how the AD curve shifts as a result of the change in the factor that you have proposed, then you need to present the “reasons” stated in the Table on p.5 of Handout 12. 4Q.9 (a) From E to G: (i) the capital per labor employed, K/N has increased, and (ii) the production function has shifted upwards. Item (i) could be due to an increase in the amount of capital. Item (ii) could be due to an improvement in technology that leads to an increase in the overall productivity of the whole economy. (b) We cannot make an unambiguous comparison: the Marginal Product of Capital at point B is higher than that at point E because the technology parameter A at point B must be higher than one at point E, and yet the Marginal Product of Capital at point G must be lower than that at point B due to diminishing marginal product of capital. Q.10 (a) AD and SRAS must have both shifted to the right such that the equilibrium output increases while the equilibrium price level remain the same. A factor that might have shifted the AD curve to the right: firms expects the capital good to be more productive in the future A factor that might have shifted the SRAS to the right: a temporary positive productivity shock. (b) In the short-run equilibrium, the economy is producing beyond the full-employment output. Thus, the unemployment rate must be lower than the NRU. As a result, the bargaining power of labor increases and drives up the nominal wage. As the labor cost goes up, the firms will produce less and hence the SRAS will shift to the left. As the SRAS shifts to the left, the real GDP decreases, the general price level increases and the unemployment rate increases. Q.11 (a) There must have been be a negative AD shock: the AD curve shifts downwards. A factor that could have led to the downward shift of the AD curve is that the firms expects the capital goods to be less productive in the future. (b) In the short-run equilibrium, the economy is producing below the full-employment output. Thus, the unemployment rate must be higher than the NRU. As a result, the bargaining power of labor decreases and drives down the nominal wage. As the labor cost goes down, the firms will produce more and hence the SRAS will shift to the right. As the SRAS shifts to the right, the real GDP increases, the general price level decreases and the unemployment rate decreases. 5Q. 12 (a) There must have been a negative AS shock shifting the SRAS curve to the left. A factor that could have led to the SRAS curve to shift to the left: a temporary negative productivity shock. (b) No. Monetary policies will shift the AD curve only. To bring the economy back to the full employment output, the central bank has to adopt expansionary monetary policy which will shift the AD curve upwards. However, as the AD curve shifts upwards, the real GDP will increase but the price level will increase as the same time. On the other hand, if the Central Bank adopts contractionary monetary policies, the AD curve will shift downwards, and the price level will decrease but then the real GDP will drop further below the full- employment output.
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