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Exam, Introductory Macroeconomics (Econ 2)
Winter 2019
18 March 2019
Version A
DO NOT OPEN THIS TEST UNTIL YOU ARE INSTRUCTED TO DO SO.
This exam has 24 questions (some with multiple parts). There are 6 sheets of paper (including
this cover sheet). The last sheet is scrap paper. You may tear off the scrap paper but must leave
the rest of the exam stapled.
You should write your answers in the space provided for each question. No credit will be given
for answers written anywhere else. On every question you must show your work and circle
your final answer.
Before exam time starts, you must fill in the information below in the space provided:
1) Your name, AS RECORDED WITH THE REGISTRAR (do not write your nickname)
2) your numerical student ID
3) Circle your officially registered section time
Failure to do any of the above will result in a one-point deduction from your exam score
You will NOT be given extra time to do this after exam time is over. Do it now.
Please write:
Name (as given to Registrar): __________________________________________
Numerical ID: __________________________________________
Circle your Section Time:
Naresh Kumar Wed 2:40-3:45 Fri 10:40-11:4
5
Anirban Sanyal Wed 10:40-11:45 Wed 12:00-1:05
Ted Liu Mon 12:00-1:05 Mon 1:20-2:25
Harrison Shieh Mon 8:00-9:05 Mon 9:20-10:25
Guanghong “Michael” Xu Fri 12:00-1:05 Fri 1:20-2:25
YOU MUST USE A PEN
A. Gains from Trade War
The US has 200 million workers (that’s 200,000,000). It can use these workers to produce either
Aluminum (A) or Engines (E). It takes 10 workers to produce 1 ton of aluminum and 40 workers to
produce 1 engine.
1. [2 p] Write down the PPF for the US.
2. [3 p] What is the cost of an engine? What is the opportunity cost? You must show your work and
specify the units of each cost for full credit.
Suppose the US starts trading with several countries at a mutually acceptable trade price of 10 tons of
aluminum for 1 engine.
3. [2 p] Will the US import engines or aluminum? Explain in 1 or 2 sentences.
4. [4 p] Write down the PPF of the US after trade.
5. [2 p] Suppose the price of an engine is $8000.
a. What is the price of aluminum in the U.S. before trade?
b. What is the price after trade?
6. [6 p] Calculate nominal GDP and the nominal wage after trade. (Hint: Is the U.S. specializing in
producing one of the goods after trade?)
The government puts a tariff on aluminum imports, causing the relative trade price of aluminum to rise
to 1/5 engines for 1 ton of aluminum. The (dollar) price of engines remains $8000.
7. [1 p] What is the (dollar) price of aluminum after the tariff?
8. [2 p] What is the nominal wage after the tariff?
9. [7 p] What is the real wage after the tariff? Assume the basket of goods for a typical consumer is
1 engine and 3 ton of aluminum. Take the period after trade as the base for the consumer price
index (meaning you should use the prices that you solved for in Question 5b as the base year
prices).
B. Political Business Cycle
The nation of Dystopia has a long-run aggregate supply curve of �⃑� ? = 2. The velocity of money has
growth rate ? = 0.
Initially the country has a rate of money growth equal to �⃑⃑� = 3.
1. [2 p] Write down the aggregate demand curve.
2. [4 p] Solve for long-run equilibrium.
3. [2 p] Write down the short-run aggregate supply curve.
The president of Dystopia is up for re-election this year. The president’s political consultants believe that
he will win 45 + �⃑� percent of the vote, where �⃑� is the growth rate of GDP. He needs to win at least
50% to be re-elected.
4. [6 p] The president pressures the central bank to permanently raise the rate of money growth to
�⃑⃑� = 10. Assuming the election happens immediately after the change (before expectations
adjust), would the president be re-elected? Justify your answer by solving for the president’s
vote share (you must show all steps for full credit).
5. [6 p] After the election firms adjust their expectations. What is the rate of inflation in the ne
w
long-run equilibrium? What is the new short-run aggregate supply curve?
6. [5 p] Most advanced democracies (e.g. the US, Canada, Britain, the European Union, Japan) have
made their central banks almost completely independent of the political branches of
government. Given your answers to Questions 4 and 5, why might these countries consider
central bank independence a good policy? Explain your answer in 1 or 2 sentences.
C. Solow Below Trend
In the figure above, each dot shows the GDP growth versus initial GDP for a single country. The trend
line shows the average relationship among the black dots.
1. [4 p] According to the Solow Model, what is likely to be true about the countries represented as
black dots? Why might we expect the trend line to be negative? Explain your answer in 2 or 3
sentences. [Hint: think about the parameters of these economies and what that implies about
their GDP in the long run.]
G
D
P
G
ro
w
th
,
1
9
5
0
t
o
2
0
1
8
GDP in 1950
A
Trend Line
2. [4 p] Country A (see figure) does not fit the trend line. How would the Solow Model explain why
Country A falls below the trend? Explain in 1 or 2 sentences.
D. What does it all mean!?
1. [3 p] Each of the 3 letters shown in the diagram above represents a quantity from those named
in the table below. Write the name for the quantity represented by each letter (several will not
be used).
a. ___________________________
b. ___________________________
c. ___________________________
Number of unemployed
Number of non-
institutionalized adults
Number of employed Labor force
Number of underemployed
Minimum
Wage
w
L
a
b
c
Market for Labor
2. [2 p] Write down a formula for the unemployment rate using the letters from the figure above
(for example, a + b – c).
3. [2 p] Explain in 1 or 2 sentences why the demand curve for labor has a negative slope.
E. Gains from Trade Peace
The figure above shows the market for rice in India. India is about to allow trade in the market for rice at
the world price ?? shown above.
P
Q
D
S
80
5
30
200
?? = 50
150 300
Market for Rice in India
1. [4 p] Who loses from opening to trade in the market for rice? How much surplus do they lose?
(Show your work!)
2. [4 p] Suppose the Indian government wants to compensate the losers by transferring surplus
(through a lump sum tax) from the winners to the losers. If the tax extracts just enough surplus
to leave the losers no worse off from trade, how much of the gains from trade would be left to
the winners?
3. Bonus [2 p] Suppose the market for rice is the only market in India that is open to trade,
meaning it has no other imports or exports. Net transfers are zero. If India has a capital account
of ??? = −5000, what must be India’s net factor payments?
F. Half-Baked
1. [3 p] The manager of the local bakery wants to motivate her 15 workers to bake more bread.
She is considering two schemes for paying bonuses. One would pay each baker an extra 50 cents
for each loaf he bakes. The other would pay all 15 bakers an extra 50 cents for every loaf baked
by any one of them. According to the model of individual incentives, which scheme would yield
more bread? Explain your answer in 1 or 2 sentences.
This page is scrap paper [answers written here will be disregarded]
This page is scrap paper [answers written here will be disregarded]
