Question 1 (5 points) National accounts - multiple choice In equilibrium, where Y=GDP, C=consumption, G=government spending, E=exports and M=imports, Y-C-G-(E-M) must equal
a) Private savings
b) The sum of private and public savings
c) The sum of private and foreign savings into the country
d) The sum of public, private and foreign savings into the country

Question 2 (15 points) Economic Growth - short questions You cannot use more than 200 words to answer each part
a) (5 points) According to the Solow growth model, there are two reasons why an increase in total factor productivity leads to an increase in output. What are those two reasons?

b) (5 points) Does the fact that the income distribution between different countries in the world has not narrowed since the second world war contradict the predictions of the Solow growth model?

c) (5 points) Name five factors that are likely to increase the steady state level of income in a given country

Question 3 (15 points) Inflation and the money supply.
You cannot use more than 200 words to answer each part
a) (5 points) Suppose that the central bank has an inflation target and that it can achieve the
desired level of the money supply. Assume also that the velocity of money is constant.
Does this mean that inflation will be always on target?
b) (5 points) Assume that the output gap is positive but inflation is low. According to the
Taylor rule should the central bank increase or decrease the interest rate?
c) (5 points) Name two mechanisms which can lead to a decrease in the velocity of money
circulation.

Question 4 (15 points) - Exchange Rate
Be brief and precise

Consider a monetary expansion in a small open economy.
a) (5 points) what happens to the nominal exchange rate?b) (10 points) Consider the case in which China faces an increase in the percentage change of the real exchange rate with respect to the US. Facing this, China does not adjust thenominal exchange rate. Explain what the effects on the Chinese economy are in this case.