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LBCC – ECON 1
Principles of Macroeconomics
Essay Exam #4
Name:
Score:
Directions: Use BOLD type to answer each of the following essay questions. Please retain the yellow
highlights. Be sure to use complete sentences and fully answer each question to the best of your ability.
The exam is due by 12/13/2013 at midnight. Save your template as a .doc or .docx file and email to the
instructor at [email protected] Please name your file “First Name Last Name Exam 4”. The subject line
of your email should state “Exam 4”. Late exams will not be accepted. Each question is worth 10 points,
for a total of 80 points.
Question 1: Suppose that a decrease in the demand for goods and services pushes the economy into recession.
What happens to the price level? If the government does nothing, what ensures that the economy still eventually
gets back to the natural rate of output? (10 points)
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Question 2: What is the difference between monetary policy and fiscal policy? Give examples. (10 points)
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Question 3: Explain the logic, according to liquidity preference theory, by which an increase in the money
supply changes the aggregate demand curve.
(10 points)
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Question 4: Suppose that consumers become pessimistic about the future health of the economy. What will
happen to aggregate demand and to output? What might the president and Congress have to do to keep output
stable? Explain. (10 points)
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Question 5: In the long run what primarily determines the natural rate of unemployment? In the long run what
primarily determines the inflation rate? How does this relate to the classical dichotomy? Explain. (10 points)
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Question 6: Explain the connection between the vertical long-run aggregate supply curve and the vertical longrun Phillips curve. (10 points)
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Question 7: Explain the main arguments in favor of economic stabilization. Explain why policy lags could make
stabilization policies counterproductive. (10 points)
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Question 8: What’s the basis for arguing that deficits are likely to lead to lower living standards in the future?
(10 points)
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