Download Agricultural Economics 430 - Department of Agricultural Economics

Agricultural Economics 430
Macroeconomics of Agriculture
Fall 2008
Penson
First Hour Examination
September 18, 2008
NAME:____________________________________________
This examination consists of five questions. Please read each question
carefully. The term “describe fully” asks that you answer all aspects of the
question. Avoid giving extraneous information (i.e., “filler”). Use
graphs/formulas whenever possible to help tell your story. Make sure you
fully label all graphs. Use the back of the page if necessary.
Question 1 _____ of 20 points
Question 2 _____ of 25 points
Question 3 _____ of 20 points
Question 4 _____ of 20 points
Question 5 _____ of 15 points
TOTAL
_____ of 100 points
1
1.
Given the following model for planned consumption expenditures,
please answer the questions below:
Ct = 140 + 0.95(Yt - Tt)
where:
Ct
Total planned consumption expenditures in year t
Yt
Personal income in year t
Tt
Total personal taxes due in year t
Gt
Total government spending in year t
and where:
Yt = 1,200
Tt = 50 + 0.25(Yt-1)
Gt = 250
(Show all work for full credit)
a. If personal income last year was $800, what is the level of total
consumption expenditures in the current year (year t)? (10 points)
b. How much would consumption expenditures and savings in the
economy change if the income tax rate was 30 percent instead of
25 percent? (8 points)
c. What is the marginal propensity to save in year t? (2 points)
2
2.
Given the following demand and supply equation for a market, please
answer the questions below:
QD = 100 –2(P) + 2.5(Y – T)
QS = 20 +4(P)
where P represents price of the product, Y represents personal income
and T represents personal taxes.
Assume disposable personal income in 2007 in this economy was
$700 and is projected to be 10 percent higher in 2008.
(Show all work for full credit)
a. What equilibrium price and quantity would you expect in this
market in 2008? (10 points)
b. If Congress enacts a tax increase in 2007 that cuts disposable
personal income by 10 percent, what price would you expect in
2008? How much would the quantity demanded by consumers in
this market change as a result of this tax hike? (10 points)
c. What is the income elasticity over this range of the demand curve
for this market? (5 points)
3
3. Please define or graphically illustrate each of the following terms.
Make sure you correctly label all graphs used in your answers: (4
points each)
Capacity depreciation
Life cycle hypothesis of consumption
Recessionary GDP gap
Bottleneck in supply
Autonomous consumption
4
4.
Given the following equation for total investment expenditures, please
answer the questions below:
It = 500 – 20(it)
where:
It
Total investment expenditures in year t
Kt-1 Capital stock at the start of year t
Dt
Depreciation in year t
it
Interest rate in year t
and where:
Dt = 100
Kt-1 = 1,000
(Show all work for full credit)
a. What is the level of net investment expenditures if interest rate is
5 percent? (HINT: use 5.0 rather than 0.05) (8 points)
b. What is the level of the capital stock at the end of year t? (6
points)
c. Describe the factors that influence the desired capital stock at the
end of the year. What is the relationship between the desired
capital stock and the level of investment expenditures in the
current year? (6 points)
5
5. We discussed the macro-to-market-to-micro linkage in the economy.
Assume conditions of perfect competition. Please illustrate the effects
that a tax cut passed by Congress and sighed by the President would
have upon the price of price of corn received by a corn farmer. Make
sure you correctly label all graphs. (15 points)