Download Midterm 3

ECO 302b
Intermediate Macro
Spring 2014
Midterm 3
Part I: Answer completely in the spaces provided, or use the back of the page. (30
points total). Show your work. Answers that appear like miracles out of nowhere
may not be given credit.
1.
An economy is described by the following equations:
Desired Consumption
Desired Investment
Government Purchases
Desired Imports
Desired Exports
Exchange Rate:
Real Money Demand
Money Supply
Full-employment output
Foreign Income
Foreign real interest rate
Price Level
Cd = 0.6(Y) -- 200r
Id = 24 – 400r
G = 30
IMP = 0.1∙Y +20∙e
EXP = 19 + (0.1) (Y#) – 20∙e
e = 0.4 + 10∙(r – r#)
L = 0.5Y - 200r
MS = 39
YFE = 100
Y# = 100
r# = .02
P=1
Assume that expected inflation is zero so that money demand depends directly on
the real interest rate.
a.
Write the equation that describes the LM curve.
b.
Write the equation that describes the desired national savings line as a
function of the real interest rate r. (Assume that Y = 90.)
c.
Write the equation that describes the desired Foreign Lending line as a
function of the real interest rate r. (Assume that Y = 90).
d.
Write the equation that describes the desired net exports line as a function
of the real interest rate r. (Assume that Y = 90 and that Y# = 100.)
e.
Plot (with reasonable accuracy) on a graph the desired foreign lending and
desired net export lines. What (approximately) will be the interest rate and current
account balance if the product market is in equilibrium when Y = 90?
f.
Suppose in the economy above, Y = 90, but then foreign interest rates
suddenly rise to r# = .04. Show the effects of the rise in foreign interest rates using
the FLd and NXd diagram and the IS-LM diagram.
g.
Although the exchange rate has been floating in the past, the government
does not want the exchange rate to change suddenly, and intervenes in the foreign
exchange market to maintain the exchange rate at the original level. Therefore the
central bank intervenes in the foreign exchange market to prevent the exchange
rate from changing. Assuming this intervention is NOT STERILIZED, show the effects
of the intervention using the FLd and NXd diagram and the IS-LM diagram
Part II:
Select the best answer for each of the following questions and mark it
clearly on the page. (3 points each)
1.
For an open economy, the real interest rate which sets desired national
savings equal to desired investment determines where:
a.
b.
c.
d.
e.
desired net exports will be equal to zero.
desired foreign lending will be equal to zero.
the product market will be in equilibrium.
the asset market will be in equilibrium.
the foreign exchange market will be in equilibrium.
2.
If the exchange rate of the euro to the US dollar is 1 euro = USD 1.50, and a
Big Mac costs USD 5 in the USA and 4 euros in the EU, the real exchange rate of the
euro is:
a.
b.
c.
d.
e.
1.20
0.8
6
2.67
0.67
3.
A Keynesian economy (with a fixed price level) with floating exchange rates
has a current account deficit. In order to bring the CA to zero but keep the
equilibrium output constant, the country should use:
a.
b.
c.
d.
e.
expansionary fiscal policy and expansionary monetary policy.
contractionary fiscal policy and expansionary monetary policy.
contractionary fiscal policy and contractionary monetary policy.
expansionary fiscal policy and contractionary monetary policy.
none of the above.
4.
The NXd line will shift to the right if:
a.
b.
c.
d.
e.
domestic income rises.
foreign income falls.
foreign interest rates rise.
desired national savings rises.
desired domestic investment shifts to the left.
5.
A country has an upward-sloping SRAS curve and an open economy. The
short-run level of output is below full-employment, and the country has a current
account surplus at the level of output where the product and asset markets are in
equilibrium. If the country uses expansionary fiscal policy to increase output, the
domestic real interest rate will _____, the foreign exchange value of its currency will
_____, and the current account balance will _____.
a.
b.
c.
d.
e.
increase
decrease
increase
decrease
increase
decrease
increase
increase
decrease
increase
decrease
decrease
decrease
increase
increase
6.
According to the efficiency wage model, employers choose a wage rate in
order to maximize the productivity per dollar spent on wages. The model also
implies:
(i)
unemployed workers cannot always obtain jobs by offering to work at a
wage slightly lower than the wage currently paid to existing workers.
(ii)
an increase in labor supply might not change full-employment output.
(iii)
there may be involuntarily unemployed workers even when the labor market
is working as well as we can expect.
a.
b.
c.
d.
e.
only (i) is true.
only (ii) is true.
only (iii) is true.
only (i) and (iii) are true.
(i), (ii), and (iii) are all true.
7.
In the days of the gold standard, every big discovery of gold led to an
expansion of the money supply. The business cycle expansions that followed the
gold discoveries cannot be explained by the _____ theory, but can be explained by
the _____ theory.
a.
b.
c.
d.
e.
Keynesian
classical (market-clearing)
reverse causation
Keynesian
reverse causation
reverse causation
reverse causation
classical (market-clearing)
classical (market-clearing)
misperceptions
8.
According to the misperceptions model (if firms and individuals have rational
expectations), then increases in the money supply that are anticipated by workers
and firms will cause:
a.
b.
c.
d.
e.
a temporary rise in output but not employment.
a permanent rise in output and employment.
no change in output or employment.
a temporary rise in employment but not output.
a permanent rise in employment but not output.
9.
The main difference between Keynesian theory and classical theory is that
Keynesian theory does not rely on adjustment of prices being able to quickly
generate a market equilibrium in the:
a.
b.
c.
d.
e.
product market
capital market
asset market
labor market
money market
10.
Compared to effect it would have in a closed economy, the use of
expansionary fiscal policy in an open economy with floating exchange rates would
produce a ____ shift in the AD curve because __________.
a.
bigger
exports
b.
smaller
exports
c.
smaller
exports
d.
bigger
exports
e.
bigger
depreciation of the domestic currency will increase net
the appreciation of the domestic currency will decrease net
the depreciation of the domestic currency will increase net
the appreciation of the domestic currency will increase net
there will be no appreciation of the domestic currency
11.
The desired net exports line in a floating exchange rate economy is ______
because a rise in domestic real interest rates causes:
a.
downward-sloping
exports.
b.
vertical
c.
upward-sloping
domestic products
d.
horizontal
exports.
e.
none of the above.
depreciation of the domestic currency and higher net
no change in net exports
higher foreign income that increases demand for
less demand for products and therefore lower net
12.
If country A has an open economy and floating exchange rates, it’s use of
expansionary monetary policy will (for a given level of country A’s income) cause in
country B:
a.
b.
c.
d.
e.
a shift to the right of the LM curve and a shift to the right of the AD curve.
a shift to the left of the IS curve and a shift to the left of the AD curve.
a shift to the right of the IS curve and a shift to the right of the AD curve.
a shift to the left of the FL line and a shift to the left of the AD curve.
a shift to the right of the NX line and a shift to the left of the AD curve.
Productivity
(effort) 100%
Wage
13.
Above is the degree of effort (or productivity) a typical employee might offer
according to the wage paid. The employer wants to pay wage W1 because that wage
maximizes the value of output per dollar spent on wages. Suppose the government
passes new labor market regulation making it more difficult to fire a worker for
being unproductive – the employer needs greater proof than before of the worker’s
lack of effort. The effect of this regulation would be:
a.
the effort line would shift to the left, resulting in a higher wage and higher
employment.
b.
the effort line would shift to the right, resulting in a higher wage and lower
employment.
c.
the effort line would shift to the right, resulting in a lower wage and higher
employment.
d.
the effort line would shift to the left, resulting in a lower wage and higher
employment.
e.
none of the above.
Profits
Π*
P*
Price
14.
The graph above shows how a firm’s profits respond to a change in the firm’s
price. Suppose the firm’s “perfect” price is P* at which it would earn a profit of π* If
the firm incurs a small menu cost mc in order to carry out a change in prices, the
firm will choose to keep prices constant as long as:
a.
The difference between the current price P and the perfect price P* is less
than mc.
b.
The difference between the current price P and the perfect price P* is
greater than mc.
c.
The difference in profits at the current price and the profits from the perfect
price is less than mc.
d.
The difference in profits at the current price and the profits from the perfect
price is greater than mc.
e.
profits are greater than mc.
15.
The Phillips Curve relationship between inflation and unemployment is what
would result if the SRAS were _____ and the AD curve was _____.
a.
b.
c.
d.
e.
upward-sloping and stable
upward-sloping and unstable
vertical and unstable
vertical and stable
horizontal and stable
unstable
stable
stable
unstable
unstable
16.
According to the Friedman-Phelps expectations-augmented Phillips curve, a
rise in the natural rate of unemployment would cause:
a.
b.
c.
d.
e.
unanticipated inflation to rise.
a decrease in average labor productivity.
interest rates to rise.
the Phillips curve to shift to the right.
the LM curve to shift to the left.
17.
Suppose a country with a fixed exchange rate system wants to preserve the
fixed exchange rate by buying or selling its currency in the foreign exchange market
without having these transactions affect the money supply. The country undertakes
a second transaction to return the money supply to its original level. This second
transaction is called _____, and it involves buying or selling _____ assets.
a.
b.
c.
d.
e.
intervention
appreciation
sterilization
open market operations
speculation
foreign
foreign
domestic
liquid
borrowed
18.
Both classical and Keynesian economists agree that the long-run Phillips
Curve is:
a.
b.
c.
d.
e.
unstable.
dependant on expected inflation
downward-sloping
vertical over the natural rate of unemployment
upward-sloping
19.
A country that operates a fixed exchange rate system promises that its
central bank will ____ intervene in the foreign exchange market to ____
international reserve assets when the quantity supplied of its currency is greater
than quantity demanded. This intervention also has the effect of causing the money
supply to _____.
a.
b.
c.
d.
e.
always
always
never
never
always
buy
sell
buy
sell
buy
increase
decrease
increase
increase
decrease
20.
A country that uses a fixed exchange rate system finds that expansionary
fiscal policy has ____ effect on aggregate demand than it would have under a
floating exchange rate system. The use of expansionary monetary policy has _____
effect than it would have under a floating exchange rate system.
a.
b.
c.
d.
e.
a larger
a larger
a smaller
a smaller
the same
less
more
more
less
an equal
Part III. Extra Credit (1 point each). Do not waste time on these until you are
finished with the rest of the exam!
1.
Below are pictures of my dog and 4 famous swindlers – Robert Vesco, Jay
Gould, Bernie Madoff, and Charles Keating. Which is which?
a.
b.
c.
d.
e.
(1) dog; (2) Vesco; (3) Gould; (4) Madoff; (5) Keating
(1) Keating; (2) dog; (3) Vesco; (4) Gould; (5) Madoff
(1) dog; (2) Madoff; (3) Keating; (4) Vesco; (5) Gould
(1) dog; (2) Gould; (3) Madoff; (4) Keating; (5) Vesco
(1) Vesco; (2) Gould; (3) Madoff; (4) Keating; (5) dog
2.
Which is funniest? (Option receiving the most votes is correct.)
a.
b.
c.
d.
stool sample
herbivore
step ladder
big fan