Instructions and Rules:

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Augustus Booth
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1 Name: Honor Pledge Signature: Section: Due Date: 5 pm on Monday, 11/23 (Place inside box outside my office door) Instructions and Rules: This is a timed (1 hour no breaks), closed book, takehome exam. You may use a calculator. No cell phones are allowed. This exam has 15 multiple choice questions, 1 short answer question, and 1 extra credit question. The multiple choice questions are worth 60 points (4 each), the short answer question is worth 40 points, and the extra credit question is worth 5 points. The total number of points possible for this exam is 105. Please record your multiple choice answers on the Multiple Choice Answers page. No credit will be given to students who do not record their answers in the Multiple Choice Answers section. Space has been provided for you to show your work on the short answer question. If you believe there is no right answer or more than one right answer to any question, explain your reasoning on the Appeals page. I will not consider an appeal unless you have recorded your argument on the exam sheet during the exam period. When you have finished the review, sign the Honor Code Pledge. 1

2 Multiple Choice Answers 2

3 Appeals 3

4 Scratch work 4

5 Multiple Choice Questions 1: Multiple Choice If real GDP per capita doubles between 2005 and 2020, what is the average annual growth rate? (a) 4.7% (b) 0.5% (c) 15% (d) 21% 2: Multiple Choice When production in an economy grows more quickly than the population in that economy, which of the following must be occurring? (a) Real GDP is falling. (b) Real GDP per capita is falling. (c) Real GDP per capita is rising. (d) Real GDP is rising. 3: Multiple Choice Consider the following data for a closed economy: Y = $12 trillion C = $8 trillion I= $2 trillion G = $2 trillion TR = $2 trillion T = $3 trillion Based on the information above, what is the level of private saving in the economy? (a) $3 trillion (b) $4 trillion (c) $5 trillion (d) $8 trillion 5

6 Scratch work 6

7 4: Multiple Choice Refer to the data from Question 3. What is the level of public saving? (a) $0 (b) $1 trillion (c) $2 trillion (d) -$1 trillion 5: Multiple Choice The loanable funds market is in equilibrium, as shown in the figure above. An increase in the supply of loanable funds could result in which of the following combinations of the real interest rate and quantity of loanable funds at a new equilibrium? (a) The real interest rate is 5 percent, and the quantity of loanable funds is $150 million. (b) The real interest rate is 5 percent, and the quantity of loanable funds is $90 million. (c) The real interest rate is 3 percent, and the quantity of loanable funds is $150 million. (d) The real interest rate is 3 percent, and the quantity of loanable funds is $90 million. 7

8 Scratch work 8

9 6: Multiple Choice Refer to graph from Question 5. The loanable funds market is in equilibrium, as shown above. As a result of an increase in the government budget deficit, the for loanable funds will, thereby the equilibrium real interest rate and the equilibrium quantity of loanable funds. (a) demand; rise; increasing; decreasing (b) supply; rise; decreasing; increasing (c) demand; fall; decreasing; decreasing (d) supply; fall; increasing; decreasing 7: Multiple Choice Refer to graph from Question 5. If the current real interest rate is 5 percent, which of the following is true? (a) The loanable funds market is in equilibrium. (b) There is a surplus of loanable funds in the market. (c) There is a shortage of loanable funds in the market. (d) The quantity of loanable funds being demanded in the market is less than $90 million. 8: Multiple Choice Refer to graph from Question 5. The market is in equilibrium. If the government budget deficit rises, which of the following would you expect to see? (a) The quantity of loanable funds demanded by firms will rise above $120 million. (b) The quantity of loanable funds demanded by firms will fall below $120 million. (c) The budget deficit will have no impact on the quantity of loanable funds demanded by firms. (d) The interest rate will fall below 4 percent. 9

10 Scratch work 10

11 9: Multiple Choice Why does the short-run aggregate supply curve shift to the left in the long run, following an increase in aggregate demand? (a) Workers and firms adjust their expectations of wages and prices downward and they accept lower wages and prices. (b) Workers and firms adjust their expectations of wages and prices downward and they push for higher wages and prices. (c) Workers and firms adjust their expectations of wages and prices upward and they push for higher wages and prices. (d) Workers and firms adjust their expectations of wages and prices upward and they accept lower wages and prices. 10: Multiple Choice Workers expect inflation to fall from 4% to 1% next year. As a result, this should (a) shift the short-run aggregate supply curve to the left. (b) shift the short-run aggregate supply curve to the right. (c) move the economy up along a stationary short-run aggregate supply curve. (d) move the economy down along a stationary short-run aggregate supply curve. 11: Multiple Choice Interest rates in the economy have fallen. How will this affect aggregate demand and equilibrium in the short run? (a) Aggregate demand will rise, the equilibrium price level will rise, and the equilibrium level of GDP will rise. (b) Aggregate demand will rise, the equilibrium price level will fall, and the equilibrium level of GDP will rise. (c) Aggregate demand will fall, the equilibrium price level will fall, and the equilibrium level of GDP will fall. (d) Aggregate demand will fall, the equilibrium price level will rise, and the equilibrium level of GDP will fall. 11

12 Scratch work 12

13 12: Multiple Choice After an unexpected level and in the price of oil, the long-run adjustment decreases the price the unemployment rate as they return to their original levels. (a) increase; increases. (b) increase; decreases. (c) decrease; increases. (d) decrease; decreases. 13: Multiple Choice In the long run (a) GDP = potential GDP. (b) unemployment is below its natural rate. (c) LRAS and SRAS lie on the same line. (d) unemployment is above its natural rate. 14: Multiple Choice If potential GDP is equal to $600 billion, what does the long-run aggregate supply curve look like? (a) It is a horizontal line at $600 billion of GDP. (b) It is a vertical line at a level of GDP below $600 billion. (c) It is a vertical line at $600 billion of GDP. (d) It is a vertical line at a level of GDP above $600 billion. 15: Multiple Choice A decrease in the price level will (a) shift the short-run aggregate supply curve to the left. (b) shift the short-run aggregate supply curve to the right. (c) move the economy up along a stationary short-run aggregate supply curve. (d) move the economy down along a stationary short-run aggregate supply curve. 13

14 Short Answer Question 1: Short Answer (40 points) Answer the following two subquestions. State any assumptions that you make. (a) List down four variables that cause the short-run aggregate supply curve to shift. For each variable, identify whether an increase in that variable will cause the short-run aggregate supply curve to shift to the right or to the left. (20 points) 14

15 (b) Starting from a long-run equilibrium, use the basic aggregate demand and aggregate supply diagram to show what happens in both the long run and the short run when there is an increase in household wealth that results from an economic expansion. (20 points) 15

16 Extra Credit Question Extra Credit: (5 points) In the aggregate demand framework, what is the international trade effect? 16

Table 9-2. Base Year (2006) 2013 Product Quantity Price Price Milk 50 $2 $3 Bread 100 $3 $3.50

Table 9-2. Base Year (2006) 2013 Product Quantity Price Price Milk 50 $2 $3 Bread 100 $3 $3.50 1) The advice to "keep searching, there are plenty of jobs around here for which you are qualified," would be most appropriate for which of the following types of unemployment? A) frictional unemployment