DEPARTMENT OF ECONOMICS University of New Hampshire ECON 401 Principles of Macroeconomics FINAL EXAM O. Kozlova Spring 2011 INSTRUCTIONS: 1. Before you begin, make sure you have all pages of examination including the cover page. 2. Print your name below in capital letters. 3. Please write your answers on the provided exam. Make sure to show all your work. 4. Points for each question are indicated in parenthesis before each of them. Part1 (30 pts.) Part 2 (50 pts.) Part 3 (20 pts.) NAME (Last, First)_ ID # : (A)
Multiple Choice Answers 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36.
PART A (30 POINTS) 1) (5 pts.) Self-Correcting Mechanism 2) (5 pts.) RGDP 3) (5 pts.) A price index of 130 (base year =100)
4) (5 pts.) RGDP Multiplier of 2 5) (5 pts.) The Fundamental Idea 6) (5 pts.) Money multiplier
PART B (50 POINTS): Multiple Choice Identify the choice that best completes the statement or answers the question. 1. Aneta has owned an Italian sports car for several years and now she wants to sell it. She paid $8,500 for it in 1993 and she has just sold it for $19,000 in 2001. How is this sale included in the GDP for 2001? a. $8,500 is included in 2001 GDP b. $19,000 is included in 2001 GDP c. The increase in value of $10,500 is included in 2001 GDP d. It is not included in 2001 GDP 2. The amount of goods and services the economy could produce if the labor force is fully employed is called a. nominal GDP. b. real GDP. c. actual GDP. d. potential GDP. 3. Labor productivity is calculated by dividing GDP by a. population. b. the price level. c. capital stock d. labor force. 4. If the discouraged workers were included in the labor force, a. the unemployment rate would fall. b. the labor force would decrease. c. the employment rate would rise. d. the unemployment rate would rise. 5. Richard loses his job at the railroad due to a downturn in general business conditions. He is experiencing a. structural unemployment. b. cyclical unemployment. c. seasonal unemployment. d. frictional unemployment. 6. What determines the productivity growth rates of a country? a. Amount of working capital currently available. b. Rates of increase of capital, technology, and workforce quality c. Current level of gross domestic product. d. Current levels of human capital, physical capital, and technology. 7. Which of the following would a macroeconomist classify as capital? a. a software program for an accounting firm b. a share of stock in General Electric c. a corporate bond from IBM d. All of the above are types of capital. 8. Lower levels of education and training are often associated with low levels of a. production. b. productivity. c. inflation. d. both a and b. 9. Aggregate demand is defined as the total spending a. of all consumers, business firms, government agencies, and foreigners on final goods and
services produced in the United States. b. by all consumers, business firms, government agencies, and foreigners in the United States. c. consumers, businesses, government agencies, and foreigners wish to make in one year. d. of consumers, businesses, and government agencies on final output. 10. If the MPC is.80, then a change in disposable income of $60 billion will lead to a change in consumption of a. $30 billion. b. $42 billion. c. $48 billion. d. $60 billion. e. $70 billion. Figure 8-2 11. In Figure 8-2, which of the following moves can be explained by a decrease in the price level? a. A to B b. A to C c. A to D d. A to E 12. The most volatile component of aggregate demand is a. consumption spending. b. government spending. c. investment spending. d. net exports. 13. Which of the following is not part of the investment component of GDP? a. residential construction b. plant and equipment c. net imports d. business structures
Figure 9-1 14. In Figure 9-1, at $7,000 billion real GDP, a. inventories are increasing. b. spending falls short of output. c. spending exceeds output. d. Both a and b are correct. 15. If the level of investment spending increases by $100 and the MPC in the economy is 0.8, then the cumulative spending increase after three rounds of spending is a. $280. b. $260. c. $244. d. $220. 16. The aggregate supply curve shows for each price level the a. total amount of money supply at each price level. b. amount of frictional unemployment that will occur. c. amount of structural unemployment that will occur. d. quantity of goods and services that businesses are willing to produce. 17. The typical movement of the aggregate supply curve resulting from an increase in productivity is that it a. shifts inward and becomes flatter. b. shifts inward. c. shifts outward. d. becomes flatter. e. becomes steeper. 18. At levels of output close to full employment, the aggregate supply curve is probably a. very flat. b. very steep. c. sloped downward. d. perfectly elastic.
Figure 10-2 19. In Figure 10-2, which segment of the aggregate supply curve has the smallest multiplier effect? a. AB b. BC c. CD d. DG Figure 10-3 20. In Figure 10-3, we would expect the aggregate supply curve in graph (b) to a. shift to the right, eliminating the recessionary gap. b. shift to the left, eliminating the inflationary gap. c. become steeper in the upper portion, eliminating the inflationary gap. d. become flatter in the upper portion, eliminating the recessionary gap. 21. To eliminate an inflationary gap, the expenditure schedule should a. shift upward. b. shift downward. c. become flatter. d. become steeper. 22. A "conservative" would most likely argue in favor of a. tax increases when fiscal stimulus is necessary, and spending cuts when fiscal restraint is necessary.
b. tax cuts when fiscal restraint is necessary, and spending cuts when fiscal stimulus is necessary. c. tax cuts when fiscal stimulus is necessary, and spending cuts when fiscal restraint is necessary. d. spending increases when fiscal expansion is necessary, and tax increases when fiscal stimulus is necessary. 23. The main idea behind supply-side tax cuts is that a. tax cuts increase spending, which increases aggregate supply. b. some tax cuts can increase aggregate supply. c. people like lower taxes and will spend more if they get them. d. it is easier to shift aggregate supply than aggregate demand. Figure 11-2 24. Which graph in Figure 11-2 best reflects a supply-sider's view of the impact of an increase in the personal income tax rate? a. 1 b. 2 c. 3 d. 4 25. Critics of supply-side economics argue that a major flaw is a. the small magnitude of supply-side effects. b. the large size of demand-side effects. c. increased income inequality. d. All of the above. 26. If you have a checking account at a local bank, your bank account there is a(n) a. asset to the bank and an asset to you. b. liability of the bank and a liability of yours. c. liability of the bank and an asset to you. d. asset to the bank and a liability of yours. 27. Do bankers create money? a. No, they cannot do this as private businesses. b. No, they are prevented by federal law. c. Yes, through multiple deposit creation. d. Yes, by opening checking accounts for customers. 28. Milly Miser removes $250,000 from her mattress and opens a checking account. This single transaction increases the money supply by a. $250,000.
b. $50,000. c. $0. d. -$250,000. 29. The actual control of the Federal Reserve System resides in the a. Congress of the United States. b. member banks. c. Senate Banking Committee. d. Board of Governors. 30. Proponents of Fed independence maintain that a. independence helps ensure low unemployment rates. b. money is too important to be left to the bankers. c. independence permits objective decisions not based on politics. d. only the Federal Reserve knows how to act wisely. 31. Open market operations generally involve the purchase and sales of a. government securities. b. stocks and bonds. c. coins and currency. d. Federal Reserve notes. 32. The money supply contracts when the Fed a. replaces old worn-out notes and bills. b. borrows from the Treasury. c. sells government securities. d. purchases stocks from corporate businesses. Table 13-1 EFFECTS OF AN OPEN MARKET TRANSACTION ON THE BALANCE SHEETS OF BANKS AND THE FED (In millions of dollars) BANKS FEDERAL RESERVE SYSTEM ASSETS LIAB. ASSETS LIAB. Reserves +$10 U.S. Gov't Bank Reserves U.S. Gov't Sec. +$10 +$10 Securities -$10 33. In Table 13-1, the Federal Reserve System has a. sold $10 million in government securities to banks, taking payment in cash. b. sold $10 million in government securities to banks, taking payment from the bank's reserves. c. purchased $10 million in government securities from banks, paying for them with increases in banks' reserves. d. purchased $10 million in government securities from banks, paying for them with new Federal Reserve notes. 34. When will the difference between the actual deficit and the structural deficit be the largest? a. in an inflationary gap b. at full employment c. at potential real GDP d. in a recession Figure 15-2
35. Assume that a contractionary monetary policy has shifted the aggregate demand curve in Figure 15-2 from D 0 D 0 to D 1 D 1. Fiscal authorities who wish to restore real GDP to the full-employment level will a. run a budget surplus by increasing taxes or cutting government spending. b. run a balanced budget to prevent the interest rate from rising and cutting off investment. c. run a budget deficit by cutting taxes or increasing government spending. d. ignore the change in monetary policy since it has no effect on fiscal policy. Figure 15-3 36. Figure 15-3 shows the impact of deficit spending and the corresponding economic expansion on the demand curve for money. If the Federal Reserve does not want interest rates to rise, it will a. shift the money supply curve to the right by monetizing the deficit. b. shift the money supply curve to the left by open market sales of government securities. c. maintain the current targets for both M 1 and M 2 money stocks. d. engage in contractionary monetary policy, such as increases in the discount rate.
PART C (20 POINTS): Answer in the space provided, the following two short-answer questions. 1. (10 pts.) What is the national debt? Is the U.S. National Debt really $14 trillion? Is it too big? On what basis do you make this determination and how does it compare with other European countries? Is it a burden on future generations? Make sure to talk about the crowding out effect and the composition of the federal outlays in your answer.
2. (10 pts.) The Federal Reserve has been acting to help the economy out of recession. What actions has it been taking? Show using money market diagram, making sure to label all the curves axes and making sure to explain shifts in any curves. Then use the AS-AD diagram to illustrate how these actions will help, making sure to able all axes and curves. Be sure to talk about the Keynesian money transmission in your answer.
3. (10 pts.) What is Fiscal Policy? President Barak Obama and the government undertook a massive fiscal stimulus in 2009 around $700 billion increase in government spending and tax cuts. Use fundamental idea and the AS-AD diagram to talk about how fiscal stimulus helped the US economy avoid a deep recession? More specifically, show what happens in your diagram if G increases by $200. Tell me by how much AD curve shifts (assume MPC= 0.8).