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Transcript
ECO 302b Intermediate Macro Spring 2009 Midterm 3 Part I: Answer completely in the spaces provided, or use the back of the page. (40 points total) 1. An economy is described by the following equations: Desired Consumption Desired Investment Government Purchases Taxes Real Money Demand Real Money Supply Full-employment output Cd = 26 + 0.5(Y – T) - 100r Id = 20 - 100r G = 20 T = 20 L = 0.5Y - 200r M/P = 264/P YFE = 100 Assume that expected inflation is zero so that money demand depends directly on the real interest rate. a. Write the equation that describes the IS curve. b. Write the equation that describes the LM curve. c. Calculate the real interest rate, price level, consumption, and investment if all markets are in equilibrium at the full-employment level of output. d. Suppose that consumers feel more secure about their future wealth, and the consumption function shifts to become: Desired Consumption Cd = 46 + 0.5(Y – T) - 100r Assuming that the price level is fixed in the short run, what will be the new short-run equilibrium output and real interest rate? e. Under the new consumption function in part d, what will be the long run level of output and the new price level? 2. The discovery of a new technology raises the expected future marginal product of capital (MPK). a. Use the classical IS-LM-FE model to determine the effect of the change in MPK on current output, the real interest rate, employment, real wages, consumption, investment, and the price level. Assume that expected future real wages and future incomes are unaffected by the new technology. Assume that current productivity is unaffected. b. Fine the effects of the increase in expected future MPK on current output and prices using the AD – AS diagram based on the misperceptions theory. What accounts for the difference in your answer here compared to part a? Part II: Select the best answer for each of the following questions and mark it clearly on the page. (3 points each) 1. Examples of “aggregate demand shocks” include: (i) change in desired investment arising from changes in expected future marginal product of capital (ii) changes in government expenditures or taxes (iii) changes to consumer confidence that affect the position of the desired national savings curve. a. b. c. d. e. only (i) is true. only (ii) is true. only (iii) is true. only (i) and (ii) are true. (i), (ii), and (iii) are all true. 2. Both classical and Keynesian economists agree that the long-run Phillips Curve is: a. b. c. d. e. vertical over the natural rate of unemployment upward-sloping unstable. dependant on expected inflation downward-sloping 3. People who believe that the natural rate of unemployment can be reduced suggest that ____ might work to lower the natural rate. (i) (ii) (iii) government support for job training and worker relocation increased labor market flexibility more generous unemployment compensation a. b. c. d. e. only (i) is true. only (ii) is true. only (iii) is true. both (ii) and (iii) are true. both (i) and (ii) are true. 4. A government that wants to implement a policy to lower inflation will be more successful if the government ____ credibility and tries to make sure the new policy is _____. a. b. c. d. e. has has does not have does not have none of the above. anticipated unanticipated anticipated. unanticipated 5. The “sacrifice ratio” is the ratio of: a. b. c. d. 1%. e. the percentage of output lost in order to reduce the inflation rate by 1%. the percentage of investment lost when real interest rates rise by 1%. the percentage of GDP lost when tax rates rise by 1%. the percentage of investment lost when the government budget deficit rises by the percentage of real wage decrease when the labor force increases by 1%. 6. Above is the degree of effort (or productivity) a typical employee might offer according to the wage paid. If the prospect of unemployment becomes less frightening to the employee (because unemployment compensation is made more generous), then the effort curve will shift to the _________ and the wage the firm will want to pay will _____. a. b. c. d. e. right rise right fall left fall left rise none of the above. 7. If a firm’s current price for its product is pretty close to the “perfect” (profitmaximizing) price, profits should be pretty close to the maximum level of profit. It might not be worth the bother or cost of adjusting the price to the perfect level. This is the idea behind the ______ theory. a. b. c. d. e. implicit contract insider-outsider menu cost reverse causation misperceptions 8. If existing employees regard a newcomer who is paid less than them as a threat to their jobs, the existing employees will withhold cooperation and undermine the work of the new employee. This makes the employer reluctant to hire new employees at lower wages. This is the idea behind the _____ theory. a. b. c. d. e. misperceptions menu cost implicit contract insider-outsider reverse causation 9. If money demand increases suddenly, then the _______ ; which will cause the _____. a. b. c. d. e. IS curve to shift to the left IS curve to shift to the right LM curve to shift to the left LM curve to shift to the right none of the above. AS curve to shift to the right AS curve to shift to the left AD curve to shift to the left AD curve to shift to the right 10. Keynesians believe that the ____ market can remain in disequilibrium, so business cycle movements can be caused by shifts in _____. a. b. c. d. e. product asset labor product labor AS AD AS AD AD 11. The Phillips Curve relationship between inflation and unemployment appears to be stable when governments do not attempt to manage the economy – but unstable when governments do try to manage the economy. This outcome is best explained by: a. b. c. d. e. Implicit Contract Theory Real Business Cycle Theory Lucas Misperceptions Theory Keynesian Business Cycle Theory Reverse Causation Theory 12. 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. horizontal and stable upward-sloping and stable upward-sloping and unstable vertical and unstable vertical and stable unstable unstable stable stable unstable 13. A government wants to lower inflation by lowering the growth rate of the money supply. If it believes inflation expectations will adjust quickly to a dramatic change in policy, it will prefer the ____ approach to lowering inflation. a. b. c. d. e. gradual Lucas Phillips Bernanke cold turkey 14. The _____ theory explains why there might still be involuntary unemployment even when the labor market is in “equilibrium” (no tendency for wages to either rise or fall). a. b. c. d. e. efficiency wage menu cost quantity reverse causation implicit contract 15. When an economy experiences a prolonged period of high unemployment, some members of the population become less employable because of the lack of job history or experience. Thus the natural rate of unemployment depends on the history of actual unemployment rates. This is the idea behind _____ . a. b. c. d. e. hysteresis psoriasis halitosis implicit contracts. political business cycle. 16. According to the Lucas misperceptions model, a shift to the right of the AD curve will cause a business cycle expansion if the shift is _____. a. b. c. d. e. unexpected. perfectly anticipated. caused by a shift of the IS curve. caused by a shift of the LM curve. caused by a shift of the FE line. 17. The Solow residual is: a. the difference between national savings and desired investment. b. the difference between the quantity supplied and quantity demanded of nonmonetary assets. c. the portion of the change in output that cannot be explained by changes in measured capital or labor inputs. d. the portion of the adult population that is not counted as part of the labor force. e. the difference between actual inflation and expected inflation. 18. The “reverse causation” argument is useful to ____ economists because it helps explain why _______. a. b. c. d. e. Keynesian Keynesian Keynesian classical classical real wages are pro-cyclical unemployment is a lagging variable average labor productivity is counter-cyclical money supply growth is leading and pro-cyclical stock prices are leading variables 19. In 1914, Henry Ford tried to reduce worker turnover and absenteeism in his factory by offering workers $5 per day to work (double the normal wage for factory workers at the time.) The result was: a. b. c. d. e. even more turnover and absenteeism. union protests. his cars became too expensive to sell profitably. absenteeism and turnover fell, and labor productivity went up. the union demanded $6 per day. 20. According to Keynesians, firms keep some workers on the payroll during recessions even if the firm doesn’t need them at that moment – to avoid losing hardto-replace workers. When demand increases, the firm can increase output without adding many new workers. This will make _____ appear to be pro-cyclical, even though there has been no change in the production function. a. b. c. d. e. money supply growth real wages average labor productivity labor force participation inventory investment