Sample Exam 4 from the Fall 0f 2012

Transcription

1 ECON Introduction to Macroeconomics John Lovett Sample Exam 4 from the Fall 0f It s The U.S. is still a bit below it s normal rate of production but appears to be on it s way to recovery. Two economists sees the following headline; Americans are Starting to Save Significantly Higher % s of their Income Hillary states; Good. This is just what the U.S. economy needs. Hillary is: (Check any and all blanks that apply to Hillary based on her statement). (-1 per incorrect blank up to a max of -2) worried about short-run economic issues. worried about crowding out. worried about long-run economic issues. worried about the current great recession Draw a C graph showing what Hillary is happy about. You should indicate three situations: The economy s initial situation (use the subscript 2014) Where Hillary thinks the economy would go if Americans did NOT increase their savings. 1 Where Hillary thinks the economy will go now that Americans ARE increasing their savings Indira states; That s bad. This is not what the U.S. economy needs. Indira is: (Check any & all blanks that apply to Indira based on her statement). (-1 per incorrect blank up to a max of -2) worried about short-run economic issues. worried about crowding out. worried about long-run economic issues. worried about the current great recession Draw a C graph showing what Indira is worried about. You should indicate three situations: The economy s initial situation (use the subscript 2014) Where Indira thinks the economy would go if Americans did NOT increase their savings. Where Indira thinks the economy will go now that Americans ARE increasing their savings. 1 There are actually two correct answers for this. Hint: Hillary is worried about: 1 st ) Crowding out of Investment, and 2 nd ) how this crowding out of physical investment will affect very long run growth. 1

2 ECON Introduction to Macroeconomics John Lovett 10. Who is Janet Yellen? a. Yikes! I left out the answers. b. I hate it when that happens. c. Oh well. 11. Who is the main policy decision Janet Yellen is currently facing? a. Yikes! I left out the answers. b. I hate it when that happens. c. Oh well. 12. What did Janet Yellen and her organization recently decide regarding the above (11) decision? a. Not again. b. Yep, the answers are missing once again. Use the graph at right to answer question Assume that the natural rate of output Assume that the natural rate of output ( Nat ) for the U.S. does not change. Further, assume that the economy is initially at point Z. 13. Assume the U.S. dollar depreciates greatly, i.e. the dollar loses in value relative to other currencies. What will the short run effects of this be? Toward which point will the economy move in the short-run? 14. What is true of a typical firm s profits as the economy moves from point Z toward the new, short-run, equilibrium you indicated in # 13? a. profits < normal, pressure for output to rise b. profits < normal, pressure for output to fall c. profits > normal, pressure for output to rise Use the graph at right to answer question Assume that the natural rate of output Assume that the natural rate of output ( Nat ) for the U.S. does not change. Further, assume that the economy is initially at point Z. 15. Assume the EU, Japan, Canada and other major trading partners of the U.S enter a severe economic downturn. What will the short run effects of this be? Toward which point will the economy move in the short-run? 16. What is true of a typical firm s profits as the economy moves from point Z toward the new, short-run, equilibrium you indicated in # 15? a. profits < normal, pressure for output to rise b. profits < normal, pressure for output to fall c. profits > normal, pressure for output to rise d. profits > normal, pressure for output to fall e. none of the above d. profits > normal, pressure for output to fall e. none of the above 2

3 ECON Introduction to Macroeconomics John Lovett 17. What is true of labor markets at the new, short-run, equilibrium you indicated in # 17? a. U Actual > U Nat, pressure for wages to rise d. U Actual < U Nat, pressure for wages to fall b. U Actual > U Nat, pressure for wages to fall e. It depends on how far the curves shift. c. U Actual < U Nat, pressure for wages to rise 18. At right, draw a C diagram illustrating the changes in # s Assume the U.S. economy is initially at point Z. Then, due to political developments in Latin America the prices of raw metals such as iron, copper, aluminum, and rare earth metals, fall significantly. Toward which point will the economy move? 20. Assume that prices increase by 10%. Further assume that this increase was caused by strength in the demand side of the economy. Finally, assume that this increase in price was unanticipated. Which of the following would be a likely result in the short-run? a. Firms tend to be unresponsive to prices in the short-run. It takes them a while to figure out if the price of their product actually changed. They produce the same amount as before. b. Firms will want to raise their wages in order to encourage more work effort. However, they will not be able to do this in the short-run. Instead, they will cut production. c. Wages rise by 10% and (real) profits are unchanged. Firms produce the same amount as before. d. Wages rise by more than 10% and (real) profits get smaller. Firms respond by producing less. e. Wages rise by less than 10% and (real) profits get larger. Firms respond by producing more. 3

4 ECON Introduction to Macroeconomics John Lovett 21. Draw a Final Goods and Services market diagram showing an economy that is operating such that Actual > Natural. Note: It s not U. Label this initial point; point Assume the federal government then passes a tax cut and greatly increases government spending. Toward which point will the economy move in the shortrun? Label your new curve(s) and point(s); point What is true of a typical firm s profits as the economy moves from point 1 to point 2, toward the new, short-run, equilibrium you indicated in # 23 (point 2)? a. profits > normal, pressure for output to rise b. profits > normal, pressure for output to fall c. profits < normal, pressure for output to rise d. profits < normal, pressure for output to fall e. none of the above 24. How did wages change as the economy moved from point 1 to point 2? a. Wages changed in the opposite direction as prices (If prices went up, wages fell. If prices went down, wages rose.) b. Wages did not change, or if they did change, changed little compared to the change in prices c. Wages changed as much as prices. 25. What is true of labor markets at the new, short-run, equilibrium at point 2? a. U Actual > U Natural, pressure for wages to rise d. U Actual < U Natural, pressure for wages to fall b. U Actual > U Natural, pressure for wages to fall e. none of the above c. U Actual < U Natural, pressure for wages to rise 26. At right, draw a C curve (or curves) illustrating the changes from point 1 to point 2. Hint: I m looking for specific axis labels on this one. 4

5 ECON Introduction to Macroeconomics Spring 2012 John Lovett 27 29: The country of Argos is currently experiencing an actual unemployment rate of 5.9%. Government economists estimate that Argos s natural unemployment rate is 7.0%. 27. How does Argos actual production ( Act ) likely compare to its normal capacity ( Nat )? a. Act < Nat b. Act = Nat c. Act > Nat d. none of the above 28. How does Argos Labor Force likely compare to the number of jobs, both filled and unfilled? a. Labor Force < Jobs b. Labor Force = Jobs c. Labor Force > Jobs d. none of the above 29. What is likely going on with wages in Argos? a. There s downward pressure on wages. b. There s no abnormal pressure on wages. They are likely changing at their normal, long-run, rate. c. There s upward pressure on wages. 30. Which of the following best define Say s Law? a. When spending falls, the economy generally enters a recession. b. Investment spending (spending on physical investment) is the least stable type of spending. c. It is an economy s fundamental ability to produce that determines its level of real output. The amount of spending (i.e. Demand) only determines the price level, not real output. d. The poor s share (or %) of total income rises during a recession and falls during a bubble. e. The poor s share (or %) of total income falls during a recession and rises during a bubble. 31. In the Neo-Classical model, the major determinant of a typical person s spending is: a. the current interest rate. b. the current inflation rate. c. his or her expected long-run ability to earn. d. current levels of investment. e. his or her current income Describe the long-run interest rate adjustment process, as explained by Classical economists, by filling in the blanks below. (-1 pt per incorrect blank up to -3 pts total) A decrease in consumption spending means (less, more, the same amount of) savings. This change in savings means banks and other financial institutions have (less, more, the same amount of) money to lend than before. As a result, there is a (shortage, surplus, equilibrium) of loanable funds. This prompts banks to (increase, decrease, leave unchanged) real interest rates. This change in interest causes firms to borrow (less, more, the same amount of) to fund physical investment. This change in physical investment (offsets, exacerbates) the change in consumption spending that started this all. 5

6 ECON Introduction to Macroeconomics Spring 2012 John Lovett Describe the long-run wage adjustment process, as explained by Classical economists, by filling in the blanks below. (-1 pt per incorrect blank up to -4 pts total) An increase in spending causes prices to (rise, fall, remain unchanged). Since firms are selling their products for these new prices. At given wage rate, firms want to hire (more, less, the same amount as before) labor. i.e. demand for labor (increases, decreases, is unchanged). In the meantime, wages (increase, decrease, are unchanged) and, in the short-run, (more, less, the same amount as before) workers than usual are hired. Eventually (i.e. in the long-run), however, wages (increase, decrease, are unchanged). This change in wages causes firms to (increase, decrease, not change) the amount of labor they hire. Once wages fully adjust, hiring and production are (more than, less then, the same amount as) they were at the beginning before the increase in spending. 37. Assume the economy is in a mild recession and the government has just increased its spending by $50 billion. What would a hard core Non-Activist (Neo-Classical) economist think of this rise in government spending? a. Long-term growth will be hindered because the government is taking away resources the private sector needs. b. Total spending in the economy will increase, but only by $50 billion. ro-cyclical discretionary policy is needed to further stimulate the economy. c. Total spending in the economy will increase by more than $50 billion. This is because of respending effects. d. The value of the dollar will fall significantly and total spending will fall greatly. 38. Economist 1 states; I believe market psychology makes investment spending highly volatile. Economist 2 states; I believe insufficient aggregate demand will occur frequently in the private sector. Identify the economists. a. Both economists are probably Activist economists. b. Both economists are probably Non-Activist economists. c. Economist 1 is probably a Non-Activist. Economist 2 is a probably an Activist. d. Economist 1 is probably a Activist. Economist 2 is a probably a Non-Activist. e. none of the above 39. Julie and John just received an $1,800 tax rebate. They decide to spend almost of it on new goods and services instead of saving it (or paying down their debt). Julie and John are: a. behaving most like the Non-Activists or Neo-Classicals predict. b. behaving most like the Keynesians or Activists predict. c. behaving most like an economist from the German Historical School would predict. 6

7 ECON Introduction to Macroeconomics Spring 2012 John Lovett # s 40 42: Assume the U.S. is initially at point 1 as indicated at right. 40. What policy would a Classical economist recommend to address the situation? a. No active government intervention is needed. b. The government should increase spending and cut taxes. c. The government should decrease spending and raise taxes. 41. What policy would a Keynesian economist recommend to address the situation? a. No active govt intervention is needed. b. The govt should increase spending and cut taxes. c. The govt should decrease spending and raise taxes. Good 2 C Nikki is a hard-core Neo-classical economist. The economy is currently in a severe recession. What does Nikki think about the Fed adopting a policy of giving the economy Good 1 monetary stimulus during recession? Nikki thinks: a. this policy would be appropriate and would lead to shorter and milder recessions. b. That while monetary policy will make the economy more stable (ex. decrease the length and severity of the recession, it is not worth it in the long-run. c. Monetary policy will not affect the economy s stability. Whether or not the active use monetary policy is adopted will not affect the length or severity of a recession. d. Nikki thinks that the active use of monetary policy will actually destabilize the economy. Recessions will be more frequent and more severe. 43. Assume there is no active government intervention to stabilize (or de-stabilize) the economy. Further, assume the economy was expecting 0% inflation prior to the recession. According to Non- Activist economists, which of the diagrams below best describes the first two years of a typical recession? a. b. c. d. Year 1 Year 0 Year 2 Year 1 Year 2 Year 0 Year 1 Year 2 Year 0 Year 1 Year 0 Year 2 ot ot ot ot 44. Ben is a typical person. Assume that, thanks to a booming economy, Ben works a lot of overtime at work. In April, his disposable income rises by $700 a month. Ben suspects that the increase is probably only temporary. A Non-activist would predict that, in April, Ben s spending will (pick the one best answer): a. fall by $1,200 b. fall by $600 c. fall by $100 d. increase by $50 e. increase by $600 f. increase by $1,200 7

8 ECON Introduction to Macroeconomics Spring 2012 John Lovett Indicate () which school each economist likely belongs to based on their statements. Use one and only one check per row. One has been done for you. Use only one check per row. Statement Anti-Centrist Classical Keynesian Neo-Benthamite 45. Individuals and firms react to the here and now. Spending falls greatly during waves of pessimism and increases significantly during times of irrational exuberance. 46. During recessions, spending falls and savings increases. The financial sector, now awash in savings, cuts interest rates, thereby boosting borrowing and spending. 47. Without government intervention, recessions are infrequent, mild, and short-lived. (This one has been done for you because, while the book covers it, I m not sure we will get to it in class.) 48. Government cannot be trusted to do or even know what is right for the economy. # s Oh the many choices! Assume the economy is initially at point Z as shown t right. A B 49. At point Z, there is pressure for wages to: a. rise. b. remain unchanged. c. fall. 50. Assume labor markets adjust the way you indicated in the question 49? If the economy reacts the way Classical/neo-Classical economists believe, toward which point will the economy move? H G Z C D F E Nat 8