Econ 3 Practice Final Exam

Transcription

1 Econ 3 Winter 2010 Econ 3 Practice Final Exam No books or notes of any kind are allowed. On problems requiring calculations, you will only get credit if you show your work. Part I: Longer Answers. Please answer these questions on this exam. 1. Consider the expanded Keynesian Expenditure Model with Interest Rates: PAE = C + I P + NX + G C = C + mpc(y-t) a r Y = PAE I P = I - b r G = G NX = N X T = T Where C = consumption, I P = planned investment, NX = net exports, G = government spending, Y = output, PAE = planned aggregate expenditure, T = net taxes, r = real interest rate. C, mpc, a, and b are positive parameters. A. ( 4 points) Solve algebraically for the short-run equilibrium output as a function of autonomous spending components and the real interest rate. 1

2 For B and C, use, or no change to indicate the impact of each of the following changes. B. ( 2 points) The Fed conducts an open-market sale of bonds. Y I C. (2 points) Consumers lower their marginal propensity to consume Y (mpc). I D. (2 points) Firms raise their autonomous investment ( I ). Y C E. (4 points) Suppose that instead of being exogenously given, net exports are now assumed to depend negatively on income: NX = NX mpi Y, where mpi is the marginal propensity to import and is a positive constant. Solve the modified model and indicate how this change affects the multiplier on government spending. 2

3 2. ( 6 points) How did consumers respond to the tax rebate given last spring? Was their response more consistent with the assumptions of the Keynesian Consumption Function or the Permanent Income Life Cycle model? Explain. 3

4 3. (10 points) Refer to the following table to answers the questions A- D below. Year Nominal GDP (in billions) Price Level (=1 in 2000) A. What was real GDP (measured in 2000 $) in 1929? B. By what percent did real GDP fall from 1929 to 1933? C. By what percent did nominal GDP fall from 1929 to 1933? D. How could nominal GDP fall more than real GDP? Explain briefly. E. What was the average annual (compound) inflation rate from 1929 to 1939? 4

5 4. (10 Points) Assume the economy starts out in long-run equilibrium at Y* with an inflation rate of π 1 = expected inflation. Suppose that an increase in stock prices and housing prices makes consumers feel wealthier, so they increase their autonomous consumption. Show the effect of this change on the economy in the short-run and the transition to the long-run on the graph below. Explain briefly in words what is happening. (Assume that the Fed s policy rule makes real interest rates depend only on inflation, not the output gap.) LRAS Inflation rate AS π 1 = expected π AD Y* Y 5

6 Part II. Multiple Choice (2 points each) Please use the Scantron to mark your answers. Be sure to fill out and bubble in your PID numbers on the Scantron. Bubble in your version under Test Form. Use the following graph to answer questions 1 and 2. PAE Y* 6000 PAE = Y Y 1. Based on the Keynesian cross diagram above, short-run equilibrium output equals: A B C D E Based on the Keynesian cross diagram above, at short-run equilibrium output autonomous expenditure equals and expenditure induced by income equals. A. 500, 4500 B. 500, 5000 C. 500, 5900 D. 5450, 5500 E. 5900,

7 3. The current recession began: A. In January 2009 B. October 2008 when the stock market crashed. C. A little more than a year ago D. Three years ago E. We aren t currently in a recession The Shire is a small closed economy with households, firms, and a stable government. Suppose the following equations describe the economy of The Shire in millions of dollars. Net taxes (T) are taxes minus transfer payments. C = (Y - T) I P = 52 G = 55 NX = 0 Taxes = 25 Transfer Payments = 10 Y* = Potential Output = $ 500 million 4. Equilibrium short-run output in the Shire is: A. $ 700 million B. $ 750 million C. $ 680 million D. $ 800 million 5. Suppose the government raises taxes from $25 million to $100 million. Which of the following is equal to the Shire s short-run equilibrium output after taxes are raised to $100 million? A. $ 400 million B. $ 370 million C. $ 500 million D. $ 450 million 7

8 6. Because the Fed determines the money supply, in the graph with nominal interest rates on the vertical axis and money balances on the horizontal axis, A. the money demand curve is downward sloping B. the money demand curve is upward sloping C. the money supply curve is vertical D. the money supply curve is downward sloping E. the money supply curve is upward sloping 7. When actual investment is less than planned investment: A. firms sold less output than expected B. firms sold more output than expected C. the quantity of output sold is the amount the firm expected to sell D. autonomous expenditure is less than induced expenditure E. capital depreciated faster than normal 8. The marginal propensity to consume is the: A. amount by which disposable income increases when consumption increases by $1 B. amount by which consumption increases when disposable income increases by $1 C. percentage by which consumption increases when disposable income increases by $ 1 D. percentage by which disposable income increases when consumption increases by $1 E. ratio of consumption to disposable income 9. Data on after-tax income and consumption spending for the Adam Smith family are given below: After-tax income Consumption Spending $ 9,000 $16,750 $14,000 $20,500 $19,000 $24,250 $24,000 $28,000 Based on these data, the Adam Smith family has a marginal propensity to consume of: A. 0.9 B. 0.8 C D. 0.6 E

9 10. In Econland, autonomous consumption equals 200, the marginal propensity to consume equals 0.9, net taxes are fixed at 100, planned investment is fixed at 200, government purchases are fixed at 300, and net exports are fixed at 50. Short-run equilibrium output in this economy equals: A. 850 B C D E In the short-run Keynesian model where the marginal propensity to consume is 0.5, to offset a recessionary gap resulting from a $1 billion decrease in autonomous consumption, government purchases must be: A. increased by $1 billion B. decreased by $1 billion C. increased by $2 billion D. decreased by $2 billion E. increased by $0.5 billion 12. A country in which national saving is less than investment must also have: A. a trade deficit B. a budget surplus C. a budget deficit D. negative capital inflows E. lazy firms 13. A three-year bond with a principal amount of $5,000, a 3% coupon rate paid annually, one year from maturity will sell for what price (rounded to the nearest dollar) in the bond market if market interest rates are 5%? A. $4,762 B. $4,905 C. $5,000 D. $5,150 E. $5,408 9

10 14. When a U.S. company purchases a lumber mill in Bosnia, from the perspective of the United States this is a(n): A. import B. export C. trade balance D. capital inflow E. capital outflow Use this graph to answer questions 15 and The country of Kemper is on its production function at point W in the figure above. The government of Kemper passes a law that makes 4 years of college mandatory for all citizens. After all citizens have their education, the economy will A. move to point such as Y B. remain at point W C. move to point such as X D. move to point such as Z 16. The country of Kemper is on its production function at point W in the above figure. If the labor force increases with no change in capital or technology, the economy will: A. move to point such as Y B. remain at point W C. move to point such as X D. move to point such as Z 10

11 17. If the U.S. could raise its growth rate of GDP per capita to 3.5 percent per year, then GDP per capita would double in years. A. 3.5 years B. 20 years C. 35 years D. 50 years E. 100 years 18. Which of the following is a factor that determines the amount of dollars supplied in the foreign exchange market? A. the exchange rate B. the U.S. interest rate C. foreign interest rates D. A and B alone E. all of the above 19. The quantity of dollars supplied to the foreign exchange market will decrease if: A. imports into the U.S. increase B. fewer U.S. residents travel abroad C. the interest rate in the United States falls D. the Fed conducts an open market purchase of bonds 20. The money demand curve will shift to the left if: A. the nominal interest rate increases B. the nominal interest rate decreases C. the price level increases D. the price level decreases E. real income increases 21. The federal funds rate is the interest rate on short-term loans made by: A. the Federal Reserve to commercial banks B. the federal government to the Federal Reserve C. the Federal Reserve to the federal government D. the federal government to commercial banks E. commercial banks to other commercial banks 11

12 22. For a given level of inflation, if concerns about future weakness in the economy causes businesses to reduce their spending on new capital, then the shifts. A. aggregate demand curve; right B. aggregate demand curve; left C. short-run aggregate supply line; upward D. short-run aggregate supply line; downward E. long-run aggregate supply line; left 23. If the Federal Reserve s policy reaction function changes from r =.04 + π to r =.02 + π, this is an example of monetary and a the aggregate demand curve. A. tightening; shift rightward of B. tightening; shift leftward of C. tightening; upward movement along D. easing; shift rightward E. easing; shift leftward 24. Inflation inertia is the result of the behavior of and the existence of A. the central bank; the Fed s reaction function B. real and nominal interest rates; an output gap C. autonomous aggregate demand; the Fed s policy reaction function D. inflation expectations; long-term wage and price contracts E. potential output; automatic stabilizers. 12

13 25. Suppose in an economy PAE = Y 20,000 r and the central bank acts according to the following policy reaction function: Rate of inflation (π) Real interest rate set by central bank 0.00 (=0%) 0.01 (=1%) If inflation is 0%, the central bank will set a real interest rate of percent and short-run equilibrium output will equal. A. 0; 8,000 B. 1; 8,000 C. 1; 6,000 D. 1; 5,000 E. 1.5; 5, For a given nominal exchange rate and domestic price level, an increase in the foreign price level the real exchange rate. A. increases B. decreases C. may either increase or decrease D. does not change E. offsets any change in 27. The price of gold is $300 per ounce in New York and $435 Canadian dollars per ounce in Toronto, Canada. If the law of one price holds for gold, the nominal exchange rate is Canadian dollars per U.S. dollar. A B C. 1 D E

14 28. Data for an economy shows that the unemployment is 10%, the participation rate is 80 percent, and 200 million people 16 years or older are not in the labor force. How many people are in the labor force in this economy? A. 80 million B. 200 million C. 800 million D. 1,000 million E. 1,600 million 29. If we observe real wages increasing at the same time that employment decreases, it must be the case that: A. There was an increase in technology. B. There was an increase in immigration C. Labor demand must have shifted left D. Labor supply must have shifted left 30. We would expect inflation to over the next year because GDP is currently potential output and oil prices have recently. A. increase, above, risen B. decrease, below, fallen C. increase, below, risen D. decrease, above, fallen E. decrease, below, risen 14