Exam #3 Section # 11, 12 or 13 December 2012

Transcription

1 Economics 211 Macroeconomic Principles Exam #3 Section # 11, 12 or 13 December 2012 Name The value of this exam is 102 points plus 10 points for the Bonus Question. Instructor: Brian B. Young Please show your work where appropriate! If you need additional space, please use the back of the page or extra sheets of paper. Multiple Choice 3 points each 1. President Barack Obama and Congress cut taxes and raised government expenditures with the American Recovery and Reinvestment Act of According to the aggregate supply and aggregate demand model a. both the tax cut and the increase in government expenditures would tend to increase output. b. only the tax cut would tend to increase output. c. only the increase in government expenditures would tend to increase output. d. neither the tax cut nor the increase in government expenditures would tend to increase output. 2. The much ballyhooed fiscal cliff consists primarily of significant increases in marginal personal income tax rates and significant decreases in government spending, both of which commence on January 1 st. The net effect, if the fiscal cliff is not resolved, is a. both the tax increase and the decrease in government expenditures would tend to decrease output. b. only the tax increase would tend to decrease output. c. only the decrease in government expenditures would tend to decrease output. d. neither the tax increase nor the decrease in government expenditures would tend to decrease output. 3. The Quantity Theory of Money and the Natural Rate Hypothesis both assume that a. in the long run, we are all dead. b. money is neutral in the long run. c. wages are sticky. d. capital flows to its highest return. Page 1 of 9

2 4. The Taylor rule is a monetary-policy rule stipulating how much the central bank should change the fed funds rate in response to changes in inflation, unemployment, or other economic conditions. The Taylor Rule is an example of a. a target rule. b. an instrument rule. c. a k% rule. d. a or fight rule. 5. In the CBO s analysis of the American Recovery and Reinvestment Act of 2009, we saw that tax cuts and credits for lower- and middle-income people had a much larger output multiplier than tax cuts for high-income people. This is not surprising since people have a higher than do people. a. higher-income; marginal propensity to consume; lower-income. b. the CBO; tolerance for mistakes; most other. c. lower-income; marginal propensity to save; higher-income. d. lower-income; marginal propensity to consume; higher-income. 6. Ignoring any supply-side effects, suppose the government is considering cutting taxes by $100 billion or increasing government purchases by $100 billion. Then a. both policies would increase aggregate demand by the same amount. b. both policies would increase aggregate demand but the tax cut has a smaller effect. c. both policies would increase aggregate demand but the increase in government purchases has a smaller effect. d. the tax cut would decrease aggregate demand and the increase in government purchases would increase aggregate demand 7. A monetarist is an economist who believes that a. changes in the money supply have no effect on the economy. b. monetary policy should be run using feedback rules. c. fluctuations in the money stock are the main source of economic fluctuations. d. monetary policy should be run by discretionary policy. Page 2 of 9

3 8. Keynesians maintain that fluctuations in a. the money stock are the main source of economic fluctuations. b. aggregate demand combined with sticky wages are the main source of economic fluctuations. c. aggregate supply combined with sticky prices are the main source of economic fluctuations. d. aggregate demand and aggregate supply with flexible prices are the main source of economic fluctuations 9. Monetarists maintain that fluctuations in a. the money stock are the main source of economic fluctuations. b. aggregate demand combined with sticky wages are the main source of economic fluctuations. c. aggregate supply combined with sticky prices are the main source of economic fluctuations. d. aggregate demand and aggregate supply with flexible prices are the main source of economic fluctuations 10. In the debate over fixed rules versus feedback rules, Keynesians and monetarists a. agree that fixed rules work best. b. disagree, with Keynesians believing in feedback rules and Monetarists backing fixed rules. c. agree that a feedback rules work best. d. disagree, with Keynesians backing fixed rules and Monetarists backing feedback rules. 11. Suppose aggregate demand unexpectedly falls leaving the economy vulnerable to a recession. In order to stabilize the economy, the government might a. increase the money supply. b. increase government expenditures. c. decrease taxes. d. All of the above are correct 12. When a movement up along the short-run aggregate supply curve occurs, there is also a a. movement down along the short-run Phillips curve. b. movement up along the short-run Phillips curve. c. rightward shift of the short-run Phillips curve. d. leftward shift of the short-run Phillips curve. Page 3 of 9

4 13. Unplanned inventories increase when a. real GDP is less than aggregate planned expenditure. b. actual aggregate expenditure is greater than aggregate planned expenditure. c. actual aggregate expenditure is equal to GDP. d. aggregate planned expenditure is less than GDP. 14. An economy has neither imports nor income taxes. The MPC is 0.75 and real GDP is $120 billion. The government increases expenditures by $4 billion. The multiplier is and the change in real GDP from the increase in government expenditures is billion. a. 5; $25 b. 4; $16 c. 5; $16 d. 4; $ An increase in the price level shifts the a. AD curve leftward. b. AD curve rightward. c. AE curve downward. d. AE curve upward. 16. With free international trade, a country a. cannot consume at a point outside of its PPF. b. can consume at a point outside its PPF. c. cannot consume at a point on its PPF. d. None of the above answers is correct. 17. The interest rate paid to hold the Turkish Lira is 10.00% while the interest rate paid to hold the U.S. Dollar is 0.125%. According to interest rate parity, over the course of one year, we should expect a. the lira to appreciate by 9.875% against the dollar. b. the lira to depreciate by 9.875% against the dollar. c. the dollar to appreciate by 9.875% against the lira. d. the dollar to depreciate by 9.875% against the lira. e. both b. and c. are correct. Page 4 of 9

5 18. Ceteris paribus, the adjustment of exchange rates creates a situation in which a given amount of money buys the same basket of goods and services in different currencies. The previous statement describes a. interest rate parity b. purchasing power parity c. the law of demand for foreign exchange. d. the relative inflation hypothesis. 19. Ceteris paribus, in the foreign exchange market which of the following increases the demand for U.S. dollars? a. The German interest rate rises. b. The expected future exchange rate falls. c. The U.S. interest rate rises. d. None of the above answers will increase the demand for U.S. dollars. 20. The core incentive for two nations to trade with one another is a. purchasing power parity. b. absolute advantage. c. immobility of factor inputs. d. comparative advantage. 21. When two nations drop their trade barriers and begin to trade freely with one another a. everyone in both nations is better off. b. the economies of both nations benefit, but some individuals are left much worse off. c. the economies of both nations lose, but some individuals are left much better off. d. there are winners and there losers but, overall, you can t say whether gains from trade can be realized without more information. 22. A country may employ barriers to free trade because trade barriers bring to special interest group members and impose on everyone else. a. small benefits; small costs b. small benefits; large costs c. large benefits; small costs d. large benefits; large costs Page 5 of 9

6 23. In the balance of payments accounts, if the current account balance has a $3 billion deficit and there was no change in official reserves during that year, then we know that a. the balance of payments must register a $3 billion surplus. b. the capital account balance must have a $3 billion surplus. c. the official settlements account balance must have a $3 billion surplus. d. net transfers were $3 billion. 24. China s recent purchase of Canadian energy company Nexen, Inc. should appear as a credit on a. China s Current Account b. Canada s Current Account c. China s Capital Account d. Canada s Capital Account Short Answer 10 points each #1 The short-term interest rate on Sylvania s silvo currency is 2% while the shortterm interest rate on Freedonia s freedo currency is 12%. In the spot market, one silvo buys two freedos. If interest rate parity holds, how many freedos can we expect to buy with one silvo 12 months from today? The 12-month futures contract for silvos is trading at US$0.7700; the same contract on freedos is trading at US$ If you cover a currency carry trade position with futures, is there an opportunity to profit? If so, exclusive of leverage and transactions costs, what is your annual rate of return? Page 6 of 9

7 #2 You are given the following information about an economy: 1) at full employment, the unemployment rate is 5.5% and real output is $900 billion; and 2) the following table applies: State: Inflation rate: 5% 2.5% 1% Unemployment rate: 3% 5.5% 8% Real output: $930 billion $900 billion $850 billion Assuming the price level in Period 0 was 150, graphically show the economy s long-run and short-run Phillips Curve and corresponding long-run and short-run aggregate supply curves in Period 1. Also, please label the axes for full credit. Phillips Curves Aggregate Supply Page 7 of 9

8 #3 You are given information about an economy that, at equilibrium expenditures, the following table applies State: Price level: Real output: $850 billion $900 billion $950 billion Further, assume that the slope of the AE curves is 0.5. Graphically depict this situation in the Aggregate Expenditure model and, then, derive three points on the AD curve. Also, please label both the axes and all three of your AE curves for full credit. Aggregate Expenditure Aggregate Demand 45 Page 8 of 9

9 Bonus Question 10 points Write a short essay contrasting the types of fiscal policy you would recommend in each of the following situations: 1. The economy appears to be on the precipice of a deep recession and policy makers need to boost aggregate demand quickly and at the least cost. 2. The economy s long-run economic growth rate has slowed to an anemic level and policy makers need to revive growth by shifting LRAS to the right. Justify your answers by mentioning such topics as automatic stabilizers, infrastructure, education, tax rates, consumption v. investment, marginal propensities to consume for various income brackets, and the values of relative multipliers. If you feel as though you did not fully comprehend all the topics we covered in this course, remember If you understood what I said, I must have misspoken. --- Federal Reserve Chairman Alan Greenspan, Happy Holidays! Page 9 of 9