ECON 10020/20020 Principles of Macroeconomics Practice Exam II

Transcription

1 ECON 10020/20020 Principles of Macroeconomics Practice Exam II Dennis C. Plott University of Notre Dame Department of Economics Spring 2015

2 Name (print neatly and clearly): General Instructions 1. Read and follow all instructions/directions carefully. 2. Make sure your exam consists of 8 pages, not including the cover page. 3. An inability to follow instructions/directions will result in points being deducted. 4. The only device allowed is a simple calculator; i.e., anything that can store or retrieve information (including a graphing calculator) is NOT allowed. 5. Use of books, notes, another person, and/or aid of any kind is absolutely NOT allowed. 6. Answer all questions in blue or black ink only; i.e., no pencils or colored inks. The only exception: graphs may be drawn in pencil. Note: use a guide of some sort (e.g., a ruler) for all graphs. 7. Do not use white out or similar products, but neatly cross/scratch out anything you do not want graded. 8. Write, mark, and draw your answers neatly and clearly. If your answer is illegible (i.e., difficult to read in the least), then it will not be graded. It is your job to clearly communicate. 9. Label all graphs fully and completely; i.e., axes, intersections, curves, etc. 10. Support your answers as thoroughly as possible; i.e., graphically, conceptually, and mathematically. Note: this may not be feasible for all questions asked. State and define any concept utilized and list and name any equation used. In other words, show all of your work. 11. For the True/False/Uncertain questions clearly indicate your choice by writing either True, False, or Uncertain underneath the respective question. 12. Unless explicitly instructed otherwise, all questions require a justification to receive credit. 13. Do not use white out or similar products, but neatly cross/scratch out anything you do not want graded. 14. Assume the nominal wage is fixed in the short-run, all markets begin in long-run equilibrium, and capital stock is fixed in both the short-run and long-run except for negative shocks. For changes in the variables of interest, reference the initial level, unless instructed otherwise, in both the short-run and long-run. Original Score (%) Adjustment (%) Actual Score (%) University of Notre Dame (ND) 1

3 1. Open Loanable Funds (Goods) Market Small Country vs. Large Country Trade Deficit vs. Trade Surplus 2. Aggregate Demand Aggregate Supply Net Exports = Exports Imports Exam II Study Guide Self-Correcting Mechanism vs. Monetary Policy vs. Fiscal Policy 3. Exchange Rates Fixed vs. Floating Nominal vs. Real Appreciation vs. Depreciation 4. Money and Banking M1 vs. M2 How banks create money no T-accounts Actual (Total) Reserves, Excess Reserves, Required Reserves Simply Money Multiplier FDIC 5. Monetary Policy Relative Effectiveness: Open vs. Closed Expansionary vs. Contractionary Tools Goals Open Market Operations (OMO) Complications 6. Fiscal Policy Relative Effectiveness: Open vs. Closed Multipliers Fiscal Tax Balanced Budget Expansionary vs. Contractionary Complications Current Debates Austerity Budget Deficit vs. Budget Surplus 7. International Trade Comparative vs. Absolute Advantage Specialization Sources of Comparative Advantage Terms of Trade University of Notre Dame (ND) 2

4 1. A relatively recent article in The Economist 1 polled business executives about their expectations regarding economic conditions concerning future investment projects. The article reports some economies (e.g., Eurozone) managers are more optimistic about future business conditions. The Eurozone is a large open economy with a floating exchange rate that currently has a trade surplus. (a) Use the open loanable funds (goods) market to show graphically, ceteris paribus, what effects, if any, the change in expected future business profits would have on the Eurozone s: (i) quantity of investment; (ii) quantity of savings; (iii) quantity of net exports; (iv) closed (autarky) real interest rate and (v) real world interest rate in the long-run. Clearly explain the economic rationale for why the curve(s) shift, if at all. State explicitly what happens to each of the variables; i.e., increase, decrease, unchanged, or ambiguous. r S, I 1 The Economist Global Business Barometer 12 March 2015 University of Notre Dame (ND) 3

5 (b) Demonstrate the change in expected future business profits using the open AD SRAS LRAS graph, ceteris paribus, in both the short-run and long-run. Clearly explain the economic rationale for why the curve(s) shift, if at all. State explicitly what occurs to the (i) price level, (ii) natural rate of output, (iii) output, (iv) nominal wage, and (v) money supply; i.e., increase, decrease, unchanged, or ambiguous. P Y University of Notre Dame (ND) 4

6 (c) Assume the European Central Bank (i.e., the Eurozone s central bank) wants to target the price level. Suggest a monetary policy (i.e., expansionary and/or contractionary), explain how monetary policy is performed in detail, and demonstrate the change in monetary policy using the open AD SRAS LRAS graph, ceteris paribus, after the initial short-run shock (i.e., short-run from part (b) above), but before the nominal wages and prices are fully flexible. Clearly explain the economic rationale for why the curve(s) shift, if at all. State explicitly what occurs to the (i) price level, (ii) natural rate of output, (iii) output, (iv) nominal wage, and (v) money supply; i.e., increase, decrease, unchanged, or ambiguous. How does the monetary policy situation differ, comparing the variables of interest, from the selfcorrecting version [part (b)]? P Y University of Notre Dame (ND) 5

7 U.S. Dollar ($) Price Euro (e) Price of of One Euro (e) One U.S. Dollar ($) 1 January April (d) According to the table, has the euro (e) appreciated or depreciated relative to the U.S. dollar ($)? Is the change in the euro consistent with the change in the Eurozone s income in the short-run? Explain. 2. For each transaction listed below, indicate the amount by which that transaction changed the money supply, if at all. Consider each event independently. Explain or justify your answer. (a) Vera deposits $5,000 of currency into her checking account at Harris Bank. (b) Jonah applies for and receives a loan from Bank of America to pay for a trip to Cancun, Mexico. The loan proceeds of $1,500 are credited to Jonah s checking account. (c) Jonah purchases a Cancun vacation package from Apple Vacations for $1,000 and pays for it by writing a check. Apple Vacations deposits Jonah s check into its checking account. University of Notre Dame (ND) 6

8 3. Taiwan and Japan both produce DVD players and computers. Use the Ricardian model of trade and refer to the following table in answering the questions that follow. Assume there are constant opportunity costs, two countries, and two goods, for simplicity. Show all work. Production and Consumption Without Trade Production With Trade DVD Players Computers DVD Players Computers Taiwan 2, ,000 0 Japan 4,000 2,000 2,400 2,800 (a) What are the opportunity costs of (i) one DVD in terms of computers and of (ii) one computer in terms of DVD players in Taiwan? In Japan? (b) Which country, if any, has an absolute advantage in DVD players? In computers? Explain. (c) Which country, if any, has a comparative advantage in DVD players? In computers? Explain. (d) If the two countries engage in international trade, what will Taiwan produce? produce? Explain. What will Japan University of Notre Dame (ND) 7

9 (e) True, False, or Uncertain: Taiwan and Japan would trade with a world price of 3 DVD players for each computer. Explain. 4. True, False, or Uncertain: Changes in the Federal Funds rate often leads to qualitatively similar changes in the prime rate. Explain ensuring to define the relevant terms. University of Notre Dame (ND) 8