Econ 154 : Intermediate Macroeconomics Midterm Exam

Make sure to use a different exam book for each part (i.e. There are 3 parts, so you will need 3 books). I. True, False, Uncertain Short Answers. Explanation determines the grade. Only a few well chosen sentences are necessary, but you can use models and/or graphs to support your explanations. (25 minutes, i.e. approximately 4 minutes per question). a. In the Robinson Crusoe world, a proportional increase in technology implies that both substitution and wealth effects have occurred. After considering both effects, we conclude that consumption increases and work effort falls. b. In 1979, Paul Volker reduced the money supply. At the same time output fell. Thus, it is obvious that contractionary monetary policy caused the recession. c. The marginal propensity to consume out of temporary income is always less than one, no matter how old you are. d. Consumption depends on the real interest rate because r is the opportunity cost of holding consumption goods. e. Walras' law states that the bond market always clears. We can therefore afford to look only at the real goods and money markets only. f. In the Keynesian model, when the price level is stuck above equilibrium, then the real interest rate is also stuck above equilibrium. a. How and why does investment depend on the real interest rate, the depreciation rate, the marginal product of capital, and the pre-existing capital stock? b. Why does investment depend on the real interest rate rather than the nominal interest rate? c. Suppose we start from the condition that there exists an investment tax, which taxes a certain percentage of all investment undertaken by a firm. Now suppose that the government decides to REDUCE this investment tax. What is the effect on investment demand? Could this be