Université d'Orléans - Année universitaire 2008-2009 Faculté de Droit, Économie et Gestion

Licence Economie Gestion (Mention Européenne) – semestre 2 Macroeconomics 5 mars 2012

Exam #1

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I. Exercice (3 points)

There are five firms in a closed economy: a steel producer, a rubber producer, a producer of machines-tool, a tire producer, a bike producer. The bike producer sells €8000 bikes directly to the consumers. In order to produce bikes, the firm buys €1000 tires, €2500 steels, and €1800 machine-tools. The tire producer buys €600 rubber. And the machines-tool producer buys €1000 steels. 1) Calculate the added-value of each firm. 2) Calculate the GDP of the economy.

II. Exercice (7 points) The consumption function in the economy is given by the following equation: C=0.8YD+4 with C the final consumption of households, and YD the disposable income. 1) 2) 3) 4)

What do the values 0.8 and 4 represent? (1 point) Give the saving function (1 point) Determine the marginal propensity to save (1 point). What is the average propensity to consume? How does this propensity to consume move when income rises? (2 points). 5) Explain the main differences between Keynes and the classics concerning their respective vision of saving (2 points). III. Exercice (7 points) The following table gives the internal rate of return for various projects of investments. Project Initial Cost Internal rate of return

A 37.5 12%

B 75 6%

C 25 22%

D 50 1%

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E 12.5 5%

F 87.5 15%

1) Rank these projects from the most profitable to the lowest one. Explain. (1 point) 2) What will be the level of investments if the interest rate is 22%? Same question for an interest rate of 12%, 6%, 1% (2 point) 3) Show graphically the relation between I, the level of investments, and i, the interest rate. Explain. (2 points) 4) We now suppose that the State wants to subsidy investments by taking in charge a share of the interest rate. Interest rates paid by firms would be then i-α with α the interest rate subsidy offered by the State. Using the same graph than in the previous question, show what will be the effect of this subsidy on investment levels. (2 points)

IV. Exercice (3 points) An investment (a new machine-tool) has the following characteristics: Initial Cost Life expectancy Expected Income (1st year) Expected Income (2nd year) Expected sale value Interest rate of the economy

200000 2 years 100000 80000 50000 10%

1. Calculate the net present value of the current project. We suppose that the firm can sell the machine-tool after the two years (and get the expected sale value). 2. Should the firm invest? Why?

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