Université d'Orléans - Année universitaire 2015-2016 Faculté de Droit, Économie et Gestion

Licence Economie Gestion (Mention Européenne) – semestre 2 Macroeconomics March 1st, 2016

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 100000€ in machines. The firm employs 5 worker earning 200000€ of wages in total (40000€ each). The firm is selling iron to the steel producer for 300000€. The steel producer has also invested 100000€ in machines. The firms employs 5 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 100000€ and to the machines producer for 400000€. The car producer has invested 400000€. He employs 10 workers for 400000€ and buys steel to the steep producer. He sells cars to the car agent for 800000€. The car agent employs one worker for 40000€. He sells cars to consumers for 900000€. A last firm is specialized in the production of machines. The firm buys steel to the steel producer. Total wages are 80000€. 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 and the GDP using the added-value approach. (2 points)

AV1 = 300000 AV2= (100000+400000)-300000=200000 AV3=800000-100000=700000 AV4=900000-800000=100000 AV5=(100000+100000+400000)-400000=200000 GDP= sum (AV)=1500000

2) Calculate the GDP using the production approach. (1 point)

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Final goods = cars + machines 900000+(100000+100000+400000)=1500000

(investment

goods)

NB: there was a mistake in the exam. The question you had to answer was “2) GDP using the added-value approach”. The answer was simply: GDP= sum (AV)=1500000

=

Calculate the

3) Calculate the GDP using the income approach. (2 points) Wages = 200000+200000+400000+40000+80000=920000 Profit= AV-wages Profit1 =300000-200000=100000 Profit 2=200000-200000=0 Profit 3=700000-400000=300000 Profit 4=100000-40000=60000 Profit 5=200000-80000=120000 Total profit= 580000 GDP=580000+920000=1500000

II. Exercice (3 points) The economy can be summarized by the following table. Year Computers Milk Cars

2014 Quantity 10 1000000 10

2014 Price 1000 1 5000

2015 Quantity 12 1000000 8

2015 Price 800 1.1 6000

1. What is the nominal GDP in 2014 and 2015? What is the growth rate? (1.5 points)

GDP 2014 = (10 * 1000) + (1000000*1)+(10*5000)=1060000 GDP 2015= (12 * 800)+(1000000*1.1)+(8*6000)=9600+1100000+48000=1157600 Growth rate= 9.2%

2. Using 2014 as the reference year, what is the real GDP in 2014 and 2015? What is the real growth rate? (1.5 points) GDP 2014 = 1060000 GDP 2015= (12*1000)+(1000000*1)+(8*5000)=1052000 Growth rate= -0.75%

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III. Exercice (7.5 points) The consumption function in the economy is given by the following equation: C=0.8YD+10 with C the final consumption of households, and YD the disposable income. 1) What do the values 0.8 and 10 represent? (1 point) 0.8 = MPC 10= fixed consumption

2) Show graphically the consumption function (0.5 points) 3) Give the saving function (1 point)

S= YD -C S= YD - 0.8YD-10 S=0.2 YD -10 4) What is the average propensity to consume? How does this propensity to consume move when income rises? (1 points). (To=0) APC = (0.8Y+10)/Y= 0.8+10/Y Propensity is falling when income is rising. 5) The State puts in place a lump-sum tax (To=4). Give the marginal propensity to consume and the average propensity to consume. Comment. Show graphically the new consumption function (2 points) C = 0.8Y – 3.2 +10 C=0.8Y +6.8 APC=0.8 +6.8/Y MPC=0.8 A lump-sum tax affects the APC but not the MPC. 6) The State puts in place a flat-rate tax (tY=0.3Y). Give the marginal propensity to consume and the average propensity to consume. Comment. Show graphically the new consumption function (2 points). C=0.5Y+10 APC=0.5+10/Y MPC=0.5

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A flat rate tax affects both MPC and APC.

IV. Question (1.5 points) Explain the differences between the Keynesian consumption function and the Permanent income hypothesis. -

Permanent income versus current income APC is decreasing in the Keynesian framework (fundamental psychological law) APC=MPC in the Permenant Income Hypothesis

III. Exercice (3 points) You want to buy an apartment. The cost is 200000€. According to the real estate agent, you can sell it for 300000€ in five years. The interest rate of the economy is 10 %. You plan to live in this apartment so you do not expect additional income during the 5 years (except the value of the apartment when you will sell it in five years). 1) You have to borrow 200000€. Is the investment profitable? Justify. (2 point) Present value= 300000/1.1^5 = 186276,3969 NPV = 186276,3969 – 200000= -13723,60308 Opportunity cost: more profitable to save/lend this capital 2) Suppose now that you have enough savings to buy this apartment without borrowing. Is the investment profitable? Justify and explain what the differences with the previous question are. (1 point).

If the interest rate is similar when we borrow and when we lend, same result. Investment is profitable. If I borrow 200000, I’ll have to reimburse 322102 (>300000)

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