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Econ 302: Fall 2019 (Eudey)

Third (Final) Exam

Version 4: PINK Exam Booklet

Multiple Choice. Please enter your answer on the ScanTron form.

1. What color is your exam booklet? (What color is this page?)

A. White

B. Yellow

C. Green

D. Pink

Answer if Version 4: D

2. Which of the following statements is currently true about the US business cycle?

A. The US is high and to the left on the Beveridge Curve, consistent with economic expansion

B. The US is high and to the left on the Beveridge Curve, consistent with economic contraction

C. The US is low and to the right on the Beveridge Curve, consistent with economic expansion

D. The US is low and to the right on the Beveridge Curve, consistent with economic contraction

Answer: A

3. The mpc (marginal propensity to consume) measures the sensitivity of current consumption to temporary changes in current-after-tax income. Based on the theory from class, an observation in the data that current consumption is very sensitive to a change in income, mpc > 0, would best be explained by

A. Limited commitment

B. Ricardian equivalence

C. Human capital externalities

D. Consumption smoothing

Answer: A

4. Given the assumptions and notation from the Chapter 9 intertemporal model with current and future-period household incomes y and y’, suppose the firm is having financial difficulties and asks its workers to accept a pay cut this period of amount b in exchange for a pay increase a year from now equal to b(1+r). The worker:

A. Should accept the bonus offer because they will be on a higher indifference curve

B. Should reject the bonus offer because they will be on a lower indifference curve

C. Will be indifferent between accepting and rejecting the offer

We cannot tell, because we don't know if the household is a borrower or a lender
Answer: C

5. Which of the following is true (ceteris paribus)?

A. Current US population growth is below the average observed in the 20^th century; the Solow growth model would therefore predict lower per-capita GDP growth than we had last century.

B. Current US population growth is below the average observed in the 20^th century; the Solow growth model would therefore predict higher per-capita GDP growth than we had last century.

C. Current US population growth is below the average observed in the 20^th century; the Solow growth model would therefore predict lower per-capita GDP than we had last century.

D. Current US population growth is below the average observed in the 20^th century; the Solow growth model would therefore predict higher per-capita GDP than we had last century.

Answer: D

6. There is evidence that income per worker is converging between

A. the richest countries and the poorest countries.

B. the richest countries, but not the poorest countries.

C. the poorest countries, but not the richest countries.

D. neither the richest nor the poorest countries.

Answer: B

7. With asymmetric information in the credit market, if there is a temporary tax cut today then

A. Ricardian equivalence fails for households that were lenders

B. Ricardian equivalence fails for households that were borrowers

C. Ricardian equivalence fails for households that were initially consuming at their endowment point

D. All of the above

Answer: B

8. The opportunity cost of a unit of c (first period consumption) consumed in terms of c' (second period consumption) forgone can be expressed as:

A. s

B. 1+r

C. 1/(1+r)

D. 1/s

Answer: B

9. The Solow residual attempts to measure the amount of output not explained by

A. technological progress.

B. the direct contribution of labor and capital.

C. economic projections.

D. the amount of a nation's human capital.

Answer: B

10. In our chapter 10 model, borrowers must use the value of their homes as collateral for which of the following reasons:

A. Asymmetric information about the quality of borrowers

B. Limited commitment

C. They don’t have enough wealth to borrow at all otherwise

D. Uncertainty about the future value of the housing stock

Answer: B

11. According to the language and theory from class, an increase in lump sum taxes will:

A. Increase consumption

B. Increase labor supply

C. Decrease labor supply

D. Have no effect on the labor supply

Answer: B

12. If we are in the limited commitment model and restrict endowment of housing to a subset of the population, how would aggregate savings compare to the standard limited commitment model from class?

A. Aggregate savings would be lower as a subset of the population is unconstrained

B. Aggregate savings would be higher as a subset of the population is unable to borrow

C. Aggregate savings would be higher as more individuals would be lenders

D. Aggregate savings would be lower as more individuals would be borrowers

Answer: B

13. In the Romer endogenous growth model, decreased time spent working will lead to:

A. A decrease in the growth rate of human capital

B. An increase in the growth rate of consumption

C. A decrease in the growth rate of consumption

D. No change in the growth rate of human capital

Answer: B

14. Consider our chapter 9 model. Suppose an individual is currently borrowing. An increase in taxes in the first period offset by a decrease in taxes in the second period will cause the individual to do which of the following:

A. Increase the amount they are borrowing in the first period

B. Decrease the amount they are borrowing in the first period

C. Increase their consumption in the first period

D. Decrease their consumption in the first period

Answer: A

15. In the Chapter 9 intertemporal model with perfect information, if there is a decrease in the real interest rate r:

A. Lenders have c' increasing, savings decreasing, and ambiguous change in c

B. Lenders have c' decreasing, ambiguous change in savings, and ambiguous change in c

C. Borrowers have c decreasing, savings increasing, and ambiguous change in c'

D. Borrowers have c increasing, c' decreasing, and ambiguous changes in savings.

Answer: B

16. The idea that an improvement in technology causes an increase in population but causes no increase in the average standard of living is attributed to

A. Adam Smith.

B. Thomas Malthus.

C. Robert Solow.

D. Paul Romer.

Answer: B

17. Which of the following are not positively correlated with GDP per capita over the long term?

A. birth rates

B. years in school

C. literacy rates

D. openness to international markets

Answer: A

18. Suppose an individual is in a market with asymmetric information and chooses to neither borrow nor save. Suppose the default premium increases. What happens to the individual’s savings decision?

A. The substitution effect will increase savings and the income effect will decrease savings so the consumer’s decision is ambiguous

B. The substitution effect will decrease savings and the income effect will increase savings so the consumer’s decision is ambiguous

C. The substitution effect will increase savings and the income effect will increase savings so the consumer will increase savings

D. The change in default premium has no impact on the savings decision

Answer: D

19. We assume leisure is a normal good. This implies that

A. an increase in taxes decreases the demand for leisure.

B. households maximize utility.

C. preferences over consumption are well defined.

D. an increase in the wage increases demand for leisure.

Answer: A

20. In the Chapter 9 intertemporal model with perfect information,

A. Consumption is less volatile than in the data

B. Consumption is more volatile than in the data

C. Investment is more volatile than in the data

D. GDP is constant

Answer: A

21. Assume country B experiences asymmetric information in its credit markets. Suppose a group of migrants, who are known to always repay their debts, move from country A to country B. How does this impact the original inhabitants of country B?

A. The default premium will be unchanged and the number of borrowers will increase

B. The default premium will be unchanged and the number of borrowers will be unchanged

C. The default premium will decrease and the number of borrowers will decrease

D. The default premium will decrease and the number of savers will be unchanged

Answer: C

22. A competitive equilibrium

A. is always pareto efficient.

B. is pareto efficient only if there is an externality.

C. is pareto efficient only given some special conditions.

D. does not exist without government taxation.

Answer: C

23. In our chapter 10 model, asymmetric information about the quality of borrowers leads to which of the following:

A. Higher interest rates on lending than borrowing

B. Equal interest rates between lending and borrowing

C. Higher interest rates on borrowing than lending

D. An increase in the value of the housing stock

Answer: C

24. Consider our chapter 10 model with asymmetric information. Suppose there is a decrease in the percent of good quality borrowers. An individual who was already saving:

A. Will increase their consumption in the first period

B. Will decrease their consumption in the first period

C. We cannot say for sure what will happen to their consumption in the first period as a result of the change

D. Will not change their consumption in the first period

Answer: D

25. Consider the Solow exogenous growth model. Saving at the golden rule savings rate will do which of the following:

A. Maximize steady-state consumption per capita

B. Maximize the growth rate of steady-state consumption

C. Maximize the steady-state capital to labor ratio

D. Maximize the growth rate of steady-state GDP per capita

Answer: A

26. Which of the following modifications to the current social security system might help keep it solvent?

A. Decrease the retirement/eligibility age

B. Remove the limit on earnings that can be taxed for social security contributions

C. Increase the level of benefits for poor recipients

D. All of the above changes would increase the solvency of the social security system

Answer: B

27. According to the intertemporal model from class with credit-market imperfections (Chapter 10), an increase in government debt may be welfare-improving if it

A. discourages credit-constrained consumers from borrowing too much.

B. allows credit-constrained consumers to consume more.

C. allows taxpayer to postpone having to pay for government services

D. encourages more private saving.

Answer: B

28. According to the data seen in class, the US has significantly less upward mobility compared to other wealthy countries

A. out of the bottom quintile of the income distribution (poorest group)

B. out of the second quintile of the income distribution (second lowest group)

C. out of the middle quintile of the income distribution

D. All of the above

Answer: A

29. Consider the intertemporal model from class, where the consumer has income y in the first period and no income in the next period. If the interest rate (r) rises:

A. The consumer will be better off

B. The consumer will be worse off

C. The consumer will be no better or worse off

D. We cannot tell if the consumer will be better or worse off

Answer: A

30. Proportional income taxation is distorting because

A. people do all they can to avoid paying taxes.

B. the competitive equilibrium is not Pareto optimal.

C. firms do all they can to avoid paying taxes.

D. the government budget constraint does not hold.

Answer: B

31. In the two-period model, the budget constraint could be kinked for all of these reasons EXCEPT

A. there is limited commitment in the credit market

B. banks face risks when making loans

C. there is asymmetric information in the credit market

D. the real interest rate is greater than zero

Answer: D

32. According to the language theory from class, US “redlining” policies most likely

A. reduced the value of collateral held by African-Americans

B. caused aggregate Consumption spending to be more pro-cyclical

C. reduced welfare for African-Americans

D. all of these things

Answer: D

33. Assume the consumer is currently a lender. As the interest rate rises, which of the following is true:

A. It is possible that the lender may become a borrower

B. It is possible that the lender may lend more

C. It is possible that future consumption may fall

D. All of the above

Answer: B

34. The permanent income hypothesis states that:

A. People tend to react to all changes in current income as though they were permanent

B. People only consider lifetime income, and consume a relatively equal amount in each period

C.  If someone wins the lottery today, they will spend all of that money today because it isn't part of their 'permanent' income

D. People prefer to earn the same income each period rather than earning it all at once in one period

Answer: B

35. From 2009 to 2012

A. The Beveridge curve became flat.

B. The Beveridge curve shifted to the right.

C. The Beveridge curve cannot be discerned in the data.

D. The Beveridge curve shifted to the left.

Answer: B

36. Human capital investments may be lower than is socially optimal as a result of

A. Limited commitment in the market for loans

B. Default (risk) premia in the market for loans

C. Missing intertemporal markets

D. All of the above

Answer: D

37. According to the data seen in class, over the past century after-tax real wages have increased more than 400%

A. with significant increases in male labor force participation at both the extensive margin and intensive margin

B. with significant decreases in male in male labor force participation at both the extensive margin and intensive margin

C. with little change in male labor force participation at the extensive margin and significant declines at the intensive margin

D. with little change in male labor force participation at the extensive margin and significant increases at the intensive margin

Answer: C

38. Consider the case of asymmetric information in the credit market and the effect of an increase in creditworthy borrowers. Which of the following statements is true?

A. The intertemporal budget constraint gets steeper in the range of borrowers.

B. Welfare falls as both current consumption and future consumption are normal goods.

C. The amount of borrowing decreases.

D. The spread between a borrowing rate and a lending rate (i.e. the default premium) decreases.

Answer: D

39. Consider the pay-as-you-go Social Security model from Chapters 9 and 10. The pay-as-you-go program will increase lifetime wealth if

A. the population growth rate (n) is lower than the interest rate (r)

B. the population growth rate (n) is higher than the interest rate (r)

C. the population growth rate (n) is lower than the individual benefit (b)

D. the population growth rate (n) is higher than the individual benefit (b)

Answer: B

40. If the government replaces a lump sum tax with a proportional labor income tax, then

A. employment and output increase.

B. employment increases and output decreases.

C. employment decreases and output increases.

D. employment and output decrease.

Answer: D

41. The fact that indifference curves are downward sloping

A. is not true.

B. follows from the fact that more is preferred to less.

C. follows from the property that the consumer likes diversity in his or her consumption bundle.

D. follows from the property that consumption and leisure are normal goods.

Answer: B

42. In the intertemporal models from class, an increase in interest rates

A. Decreases welfare for both borrowers and lenders

B. Decreases welfare for borrowers but has an uncertain impact on lenders

C. Decreases welfare for borrowers and increases it for lenders

D. Has no impact on the welfare of either borrowers or lenders because of Ricardian Equivalence

Answer: C

43. Consider the limited commitment model from class. Under what circumstances will the model prediction always be the same as the efficient outcome?

A. When house prices are high

B. When the default premium is zero

C. When the future after-tax endowment is zero

D. When the current after-tax endowment is zero

Answer: C

44. Proportional taxes may be less efficient than lump sum taxes because they produce:

A. A larger negative income effect on consumption and leisure than lump sum taxes

B. A negative substitution effect on leisure

C. A positive substitution effect on leisure

D. A positive substitution effect on consumptionbe

Answer: C

45. Consider the model from class describing the market for education with imperfect information and a fraction a < 1 of good borrowers who will repay their debts. In this model education is more expensive for poor households than for rich ones because

A. The cost of borrowing by poor households is higher than the return from lending that could be earned by rich households

B. The cost of borrowing by poor households is higher than the cost of borrowing for rich households

C. Rich households have better information about the returns from education than do poor households.

D. Poor households have more incentive to go to school than do rich households, who don’t need to be educated to earn good incomes.

Answer: A