Université d'Orléans - Année universitaire 2012-2013 Faculté de Droit, Économie et Gestion

Licence Economie Gestion (Mention Européenne) – semestre 2 Macroeconomics March 19, 2013

Exam #1

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I. Exercice (5 points)

There are 5 firms in a closed economy. -

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A firm is specialized in iron extraction. The firm has invested 50000€ in machines. The firm employs 5 worker earning 100000€ of wages in total (20000€ each). The firm is selling iron to the steel producer for 150000€. The steel producer has also invested 50000€ in machines. The firms employs 10 workers for 200000€ of wages in total. She has bought iron to the company of extraction (see above). She sells steel to the car producer for 500000€ and to the machines producer for 200000€. The car producer has invested 200000€. He employs 10 workers for 200000€ and buys steel to the steep producer. He sells cars to the car agent for 2000000€. The car agent employs one worker for 20000€. He sells cars to consumers for 2500000€. A last firm is specialized in the production of machines. The firm buys steel to the steel producer. Total wages are 40000€. The firm is selling machines for the iron extraction firm, the steel producer, and the car producer.

1) Calculate the added value of each firm. (2 points) 2) Calculate the GDP using the added-value approach. (1 point) 3) Calculate the GDP using the income approach. (2 points)

II. Exercice (6.5 points) The consumption function in the economy is given by the following equation: C=0.6YD+2 with C the final consumption of households, and YD the disposable income. 1) 2) 3) 4)

What do the values 0.6 and 2 represent? (1 point) Show graphically the consumption function (0.5 points) Give the saving function (1 point) What is the average propensity to consume? How does this propensity to consume move when income rises? (1 points). (To=0) 1

5) The State puts in place a lump-sum tax (To=2). Give the marginal propensity to consume and the average propensity to consume. Show graphically the new consumption function (1.5 points) 6) The State puts in place a flat-rate tax (tY=0.2Y). Give the marginal propensity to consume and the average propensity to consume. Show graphically the new consumption function (1.5 points). III. Exercice (5.5 points) An investment (a new machine-tool) has the following characteristics:

Initial Cost Life expectancy Expected Income (per year) Expected sale value

Project A 305000 2 years 150000 60000

Project B 500000 4 years 150000 60000

The interest rate is 5%. 1. Calculate the net present value of project A. We suppose the firm can sell the machine-tool after the two years. (1 point) 2. Calculate the net present value of project B. We suppose the firm can sell the machine-tool after the four years. (1 point) 3. Which project should be chosen? Why? (1 point) The interest rate increases. It is now 10%. 1. Without making any calculation, comment the effect of such increase on the probability to invest. (0.5 points) 2. Calculate the net present values of both projects. Comment. (2 points)

IV. Exercice (3 points) The economy has the following characteristics: C=200+0.8Yd I=100 G=100 T=100 1. Find the equilibrium GDP Y. (1 point) 2. What is the value of the multiplier? Explain. (1 point) 3. Show what will be the effect on GDP of a public spending increase of 100. (1 point).

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