ECON 301: Intermediate Macro Spring 2019 Problem Set #1 Due: Monday, April 22, 10:30 AM Directions: Put the names of up to 3 group members at the top of this page. Please clearly mark each of your answers to the multiple choice questions in capital letters in the spaces provided below. Please mark your solutions (preferably typed) to each of the short answer questions on separate sheets of paper (with clean edges if using notebook paper) and staple or paper clip your solutions to the multiple choice answer sheet. Hand it in (one per group) on or before the due date during class time. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. SECTION 1: MULTIPLE CHOICE QUESTIONS 1. Based on your understanding of the aggregate expenditure model, we know with certainty that an equal and simultaneous increase in G and T will cause: (a) an increase in output (b) no change in output (c) a reduction in output (d) an increase in investment (e) a decrease in investment For the following two questions, suppose an economy produces only milk and butter. As- sume that all production is consumed in each year, and that price and quantity data are given in the tables below. Year 1 Good Quantity Price Milk 500 $2 Butter 2000 $1 Year 2 Good Quantity Price Milk 900 $3 Butter 3000 $2 2. (Refer to the above tables) Between Year 1 and Year 2, real GDP (based on Year 1 as a base year) grew by (a) 58.18% (b) 158.18% (c) 160% (d) 60% (e) 260% 3. (Refer to the above tables) Between Year 1 and Year 2, the GDP deflator (based on Year 1 as a base year) rose (a) 81.25% (b) 90% (c) 190% (d) 83.33 (e) 183.33% ECON 301: Intermediate Macro Problem Set #1 1 4. Which of the following generally occurs when a central bank pursues expansionary monetary policy? (a) the central bank purchases bonds and the interest rate increases (b) the central bank purchases bonds and the interest rate decreases (c) the central bank sells bonds and the interest rate increases (d) the central bank sells bonds and the interest rate decreases (e) an increase in the reserve requirement ratio 5. The marginal propensity to consume represents (a) the level of consumption that occurs if disposable income is zero. (b) the ratio of total consumption to disposable income. (c) total income minus total taxes. (d) the change in output caused by a one-unit change in autonomous demand. (e) the change in consumption caused by a one-unit change in disposable income. 6. Suppose a one-year discount bond offers to pay $1000 in one year and currently has a 15% interest rate. Given this information, we know that the bond’s price must be approximately: (a) $870 (b) $1150 (c) $850 (d) $950 (e) $985 7. Equilibrium in the goods market requires that (a) production equals income. (b) production equals demand. (c) consumption equals saving. (d) consumption equals income. (e) government spending equals taxes minus transfers. 8. The LM curve shifts down when which of the following occurs.

1. ECON 301: Intermediate Macro
Spring 2019 Problem Set #1
Due: Monday, April 22, 10:30 AM
Directions: Put the names of up to 3 group members at the top
of this page.
Please clearly mark each of your answers to the multiple choice
questions
in capital letters in the spaces provided below. Please mark your
solutions
(preferably typed) to each of the short answer questions on
separate sheets
of paper (with clean edges if using notebook paper) and staple
or paper
clip your solutions to the multiple choice answer sheet. Hand it
in (one per
group) on or before the due date during class time.
1.
2.
3.
4.
5.
6.
7.

2. 8.
9.
10.
SECTION 1: MULTIPLE CHOICE QUESTIONS
1. Based on your understanding of the aggregate expenditure
model, we know with certainty
that an equal and simultaneous increase in G and T will cause:
(a) an increase in output
(b) no change in output
(c) a reduction in output
(d) an increase in investment
(e) a decrease in investment
For the following two questions, suppose an economy produces
only milk and butter. As-
sume that all production is consumed in each year, and that
price and quantity data are given
in the tables below.
Year 1
Good Quantity Price

3. Milk 500 $2
Butter 2000 $1
Year 2
Good Quantity Price
Milk 900 $3
Butter 3000 $2
2. (Refer to the above tables) Between Year 1 and Year 2, real
GDP (based on Year 1 as a base
year) grew by
(a) 58.18%
(b) 158.18%
(c) 160%
(d) 60%
(e) 260%
3. (Refer to the above tables) Between Year 1 and Year 2, the
GDP deflator (based on Year 1
as a base year) rose
(a) 81.25%
(b) 90%
(c) 190%
(d) 83.33

4. (e) 183.33%
ECON 301: Intermediate Macro Problem Set #1 1
4. Which of the following generally occurs when a central bank
pursues expansionary monetary
policy?
(a) the central bank purchases bonds and the interest rate
increases
(b) the central bank purchases bonds and the interest rate
decreases
(c) the central bank sells bonds and the interest rate increases
(d) the central bank sells bonds and the interest rate decreases
(e) an increase in the reserve requirement ratio
5. The marginal propensity to consume represents
(a) the level of consumption that occurs if disposable income is
zero.
(b) the ratio of total consumption to disposable income.
(c) total income minus total taxes.
(d) the change in output caused by a one-unit change in
autonomous demand.
(e) the change in consumption caused by a one-unit change in

5. disposable income.
6. Suppose a one-year discount bond offers to pay $1000 in one
year and currently has a 15%
interest rate. Given this information, we know that the bond’s
price must be approximately:
(a) $870
(b) $1150
(c) $850
(d) $950
(e) $985
7. Equilibrium in the goods market requires that
(a) production equals income.
(b) production equals demand.
(c) consumption equals saving.
(d) consumption equals income.
(e) government spending equals taxes minus transfers.
8. The LM curve shifts down when which of the following
occurs?
(a) an increase in taxes
(b) an increase in output

6. (c) an open market purchase of bonds by the central bank
(d) a decrease in the nominal money stock
(e) an increase in the price level
ECON 301: Intermediate Macro Problem Set #1 2
9. Suppose there is an increase in consumer confidence. Which
of the following represents the
complete list of variables that must increase in the short run in
response to this increase in
consumer confidence?
(a) consumption
(b) consumption and investment
(c) consumption, investment and output
(d) consumption and output
(e) consumption, output and the interest rate
10. In a given year, suppose a company spends $100 million on
intermediate goods and $200
million on wages, with no other expenses. Also assume that its
total sales are $800 million.
The value added by this company equals:
(a) $200 million
(b) $300 million

7. (c) $500 million
(d) $700 million
(e) $800 million
ECON 301: Intermediate Macro Problem Set #1 3
SECTION 2: FREE RESPONSE QUESTIONS
1. Consider an economy with a corn producer, some consumers,
and a government. In a given
year, the corn producer grows 30 million bushels of corn and
the market price for corn is $5
per bushel. Of the 30 million bushels produced, 20 million
bushels are sold to consumers,
5 million are stored in inventory, and 5 million are sold to the
government to feed the army.
The corn producer pays $60 million in wages to consumers and
$10 million in taxes to
the government. Consumers pay $5 million in taxes to the
government, and receive $5
million in Social Security payments from the government. The
profits of the corn producer
are distributed to consumers. Calculate private disposable
income, private sector saving,
government saving, (national) saving, and the government
deficit.
2. Assume an economy with a coal producer, a steel producer,
and some consumers (there is
no government). In a given year, the coal producer produces 15
million tons of coal and
sells it for $5 per ton. The coal producer pays $50 million in

8. wages to consumers. The
steel producer uses 25 million tons of coal as an input into steel
production, all purchased
at $5 per ton. Of this, 15 million tons of coal comes from the
domestic coal producer and
10 million tons is imported. The steel producer produces 10
million tons of steel and sells
it for $20 per ton. Domestic consumers buy 8 million tons of
steel, and 2 million tons are
exported. The steel producer pays consumers $40 million in
wages. All profits made by
domestic producers are distributed to domestic consumers.
Show the details of the calculations that determine GDP using
the
(a) product (value-added) approach,
(b) expenditure (value of final goods) approach,
(c) and income approach.
3. Consider the following economy.
Y = Z
Z = C + I + G
C = c0 + c1YD
YD = Y − T
T = t0 + t1Y
I = b0
G = g0

9. where Y is output, Z is aggregate demand, C is consumption, I
is investment, G is gov-
ernment spending, YD is disposable income, T is a tax function,
t0 is a lump-sum tax, t1
is a proportional tax on income, and I is investment. The
parameter values are c0 = 1000,
c1 = 0.75, t0 = −600, t1 = 0.2, b0 = 800, and g0 = 1200.
(a) Solve for an expression for equilibrium Y (i.e., keeping all
algebraic symbols), then
calculate equilibrium Y using the expression and the parameter
values.
ECON 301: Intermediate Macro Problem Set #1 4
(b) Graph the aggregate expenditure/goods market model. Be
sure to indicate the numeri-
cal values of the intercept and slope of the demand curve as
well as the value where the
demand curve crosses the 45 degree line. Why is the slope
different than the marginal
propensity to consume out of income?
(c) What is the expression for the government spending
multiplier? What is the expres-
sion for the lump-sum tax multiplier? What are the values of
these multipliers? Why
does a reduction in lump-sum taxes have a different size
multiplier than an increase in
government spending?
(d) Suppose G = g1 = 1500 in the following year, but everything
else remains the same.

10. What is next year’s equilibrium Y ? Call this equilibrium Y1,
and the old equilibrium
Y0. What is the percent change in equilibrium output year-over-
year? Draw the new
demand curve on the same figure as item (b) and indicate the
relevant values. Indicate
with an arrow the direction the demand curve shifts.
4. Suppose that money demand is given by
Md = $Y (.25 − i)
where $Y is $100. Also suppose that the supply of money is
$20.
(a) What is the equilibrium interest rate?
(b) If the Federal Reserve wants to increase i by 10 percentage
points (e.g., from 2% to
12%), at what level should it set the supply of money?
5. Show the changes on short run equilibrium real GDP and the
equilibrium nominal interest
rate in the IS-LM model from each of the following
policies/economic situations. Briefly
explain any economic reactions (i.e. what is occurring in the
goods and/or money markets.
One graph is necessary for each part. Clearly label your graph
for full credit.
(a) A decrease in taxes
(b) An increase in the money supply
(c) A decrease in consumer confidence

11. ECON 301: Intermediate Macro Problem Set #1 5