Download Economics 101

493715633
Econ 1120-INTRODUCTORY MACROECONOMICS
MAKEUP PRELIM #2-Wissink-Spring 2017 – April 14
Clearly Print Your LAST(family) Name: ______________________________________________________
Clearly Print Your First Name: ___________________________________________________
Your Cornell NetId: ___________________
Your Student Number: __________________________
There are two sections in this exam. Answer all questions.
Part I: 18 multiple choice questions @ 3 points each
Part II: 2 problems @ 20 and 26 points, respectively
TOTAL POINTS = 100, TOTAL TIME = 90 minutes.
NO QUESTIONS CAN BE ASKED DURING THE EXAM ABOUT EXAM CONTENT: If you
need to use the restroom, or you need a pencil or scratch paper, or some other supply that we might have,
raise your hand and wait for the proctor to come to you. Only one person can be out of the examination
room at a time, and the proctor will hold onto your exam papers while you are out at the restroom.
NO CELL PHONES, NO IPODS OR SIMILAR DEVICES WITH CALCULATOR “APPS”.
NO GRAPHING CALCULATORS.
NO BOOKS. NO NOTES. NO HELP SHEETS.
NO TALKING TO EACH OTHER.
“X” the SECTION you regularly attend (that is to say, check where you will pick up your
prelim):
"X"
DIS #
TA
Meeting Times
Location
250, 251
Jee Hun Choi
Mondays 8:00-8:50;
9:05-9:55
Goldwin Smith G64
252, 253
Ye Susan Yu
Wednesdays 2:303:20; 3:35-4:25
Rockefeller Hall 105
254, 255
Ikchan An
Fridays 09:05-9:55;
10:10-11:00
Rockefeller Hall 104
256, 257
Khai Sim
Fridays 1:25-2:15;
2:30-3:20
Rockefeller Hall 104
One more time, please…
Clearly Print Your LAST(family) Name: _______________________________________________________
Clearly Print Your First Name: ___________________________________________________
Your Cornell NetId: ___________________
Your Student Number: __________________________
GRADING
MC (3 each, total of 54) =___________________
Q1 (out of 20 points) =_________________
Q2 (out of 26 points) =_________________
TOTAL SCORE: _____________________
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Part I: Multiple Choice. Do them ALL.
CIRCLE the letter for your answer.
_____________________________________________
1. Assume a simple linear frugal ungoverned closed economy
where the consumption function (in billions) is: C = 500 + 0.6Y
and desired investment, Id, is $100 billion. If current aggregate
output/income is Y = $1,000 billion, we can conclude that
A.
B.
C.
D.
E.
undesired changes in inventories will be zero.
there will be an undesired fall in inventory.
there will be an undesired rise in inventory.
aggregate output/income will tend to fall.
the economy is in equilibrium, so there is no tendency for
aggregate output to change.
2. Refer to the table. At an output level of $2,400 billion, there is
a tendency for aggregate output(income)
A.
B.
C.
D.
E.
to fall.
to increase.
to remain constant.
to either increase or decrease.
to increase at an increasing rate.
3. Assume the “Keynesian” AEd multiplier is 2.0. If desired
investment falls by $20 million while exogenous exports rise by
$50 million (other things remaining constant), by how much will
the equilibrium level of income (Y*) rise?
A.
B.
C.
D.
E.
It doesn’t rise, Y* falls.
$90 million.
$60 million.
$50 million.
$75 million.
4. Consider a simple linear frugal economy with no government or
international sector. Suppose the marginal propensity to consume
equals one and subsistence consumption equals $60. If this is the
case, then which one of the statements below is TRUE?
A.
B.
C.
D.
E.
Y* would have to be zero.
Households would save everything and spend nothing.
Marginal propensity to save would also equal 1.
We cannot determine Y*.
The subsistence consumption multiplier would be very small.
5. The current Chair of the Board of Governors of the U.S. Federal
Reserve System is
A.
B.
C.
D.
E.
Ben Bernanke.
Alan Krueger.
Janet Yellen.
Janet Mitchell.
Alan Greenspan.
6. Consider a simple frugal economy with no government and no
international sector. Assume that only consumption increases
when aggregate output(income) increases. In this economy the
“paradox of thrift” would be that
A. an exogenous desire to save more would result in the same
amount of saving in equilibrium.
B. an exogenous desire to save less would result in the same
amount of saving in equilibrium.
C. an exogenous desire to save more would result in less saving in
equilibrium.
D. an exogenous desire to save more would result in more saving
in equilibrium.
E. an exogenous desire to save less would result in less saving in
equilibrium.
7. The Fed’s preferred method to carry out its monetary policy is
via
A. changing taxes.
B. changing the discount rate.
C. changing the required reserve ratio on demand deposits of the
public.
D. changing government expenditures.
E. engaging in open market operations to change the federal funds
rate.
8. Consider a simple linear frugal governed economy with no
international sector. Which one of the following statements below
is TRUE?
A. Equilibrium will occur where Saving = Actual Investment.
B. Equilibrium will occur where Saving = Desired Investment.
C. Equilibirum will occur where Saving + Taxes = Actual
Investment + Government Expenditures.
D. Equilibirum will occur where Saving + Government
Expenditures = Taxes + Desired Investment.
E. Equilibirum will occur where Saving + Taxes = Desired
Investment + Government Expenditures.
HSBC BANK
Assets
Liabilities and Net Worth
Reserves = ___________ $800 = Demand Deposits of Public
Loans = _____________ $400 = Net Worth
9. Refer to the table above for HSBC Bank. The required reserve
ratio is 25%. If HSBC has no excess reserves, its loans equal
A.
B.
C.
D.
E.
$900.
$1,000.
$600.
$1,800.
none of the above.
10. Suppose Mistrustville’s required reserve ratio (rrr) is only 1%.
Suppose that when people in Mistrustville sell securities to the
central bank they insist on being paid in cash. They keep this cash
at home under their mattresses, since they do not trust the
commercial banks.
As compared to an economy where everyone keeps all their money
as demand deposits in commercial banks, the odd behavior of
people in Mistrustville will tend to
A.
B.
C.
D.
E.
increase the value of the money multiplier.
make monetary policy more effective.
make monetary policy less effective.
make fiscal policy less effective.
make fiscal policy more effective.
11. Suppose that at the current interest rate the quantity of money
supplied exceeds the quantity of money demanded. Given this
information, we know that there will be pressure for
A.
B.
C.
D.
E.
the money supply to increase.
bond prices to decrease and the interest rate to decrease.
bond prices to increase and the interest rate to increase.
bond prices to increase and the interest rate to decrease.
bond prices to decrease and the interest rate to increase.
12. The Fed wants to INCREASE the money supply. In which
answer do both listed options have the potential to increase the
money supply?
A. The Fed sells securities to the public & lowers the required
reserve ratio.
B. The Fed sells securities to the public & raises the required
reserve ratio.
C. The Fed buys securities from the public & raises the required
reserve ratio.
D. The Fed buys securities from the public & lowers the required
reserve ratio.
E. The Fed buys securities from the public & increases the
discount rate.
13. Refer to the figure. At an interest rate of 3%, typical
households
A. will attempt to increase both their
holdings of money and their holdings
of bonds.
B. are satisfied with the amount of money
they are holding.
C. will attempt to increase their holdings
of money by selling bonds.
D. will attempt to reduce their holdings of
money by buying bonds.
E. will attempt to consume less.
14 If the annual market interest rate is 5% and there is no
inflation, a bond with a face value of $10,000 and a maturity date
in exactly two years is worth _________________ today.
A.
B.
C.
D.
E.
$9,523.81
$9,070.29
$10,526.63
$10,000
$10,500
15. Expansionary monetary policy combined with contractionary
fiscal policy is predicted to
A. have uncertain effects on the interest rate and planned
investment.
B. drive income and consumption up.
C. drive income and consumption down.
D. drive the interest rate up and planned investment down.
E. drive the interest rate down and planned investment up.
16. Which one of the following is NOT included in what the U.S.
government defines as M2?
A.
B.
C.
D.
E.
currency in circulation and held by the public.
checkable deposits.
savings accounts.
travelers checks.
government bonds held by the public.
17. In a “no inflation” model that includes the goods and services
market and the money market with money demand that depends on
r and Y in the manner discussed in class, which one of the
following pairs of events is predicted to unambiguously lead to an
increase in the equilibrium interest rate, r*?
A. The Fed purchases government securities from the public and
there is a decrease in government expenditures.
B. The Fed decreases the discount rate and it also decreases the
required reserve ratio.
C. The Fed decreases the required reserve ratio and there is also
an exogenous increase in the level of aggregate desired
expenditures via an increase in subsistence consumption.
D. The Fed sells government securities to the public and at the
same time there is an increase in government expenditures.
E. The Fed sells government securities to the public and at the
same time it decreases the required reserve ratio.
18. This multiple choice question is simply a fill in the blank,
instead. Suppose an economy that is completely described by the
following equations:
C  [C  c  Yd ], I d  I , G  G, EX  EX , IM  IM , and T  [T  t  Y ]
The government expenditure multiplier for the economy is:
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Part II: Make sure you read and do ALL parts of each question. Show as much work as
possible. TRY to get started on every question. Show us something. Write legibly and
remember to label all graphs and axes in diagrams.
1. Illustrated below is everything you need to know about the T-accounts for the Fed, the
consolidated Commercial Banks, and one citizen, Sheeza Investor. The required reserve ratio is
10%. Currency in public circulation is $200. All loan activity in the economy is handled via
demand deposits at commercial banks. All banks operate with zero excess reserves.
a. What is the value of the initial money supply, M1?
b. If the Fed decides to sell $12 worth of its securities to Sheeza, by the final position, how
much will the money supply have changed and in what direction? Assume that Sheeza pays
for the securities with money from her checking account. Assume commercial banks do all
their adjusting to meet required reserves by adjusting the amount of loans they hold.
c. What are the final values for the five question marks in the final position T-accounts below?
d. Briefly explain how your answers to (b) change if Sheeza pays the Fed directly with her cash.
Initial Position
Federal Reserve Bank
Commercial Banks
Sheeza Investor
Assets
Liabilities+Net Assets
Liabilities+Net Assets
Liabilities+Net
Worth
Worth
Worth
Securities=$240 $40=Reserves
Reserves=$40 $400=DDp
DDSheeza=$15 $0=Debts
$200=Currency Loans=$360
Securities=$0 $115=Net
Worth
Cash at
home=$100
FINAL Position
Federal Reserve Bank
Assets
Liabilities+Net
Worth
Securities=$228 $28=Reserves
Commercial Banks
Sheeza Investor
Assets
Liabilities+Net Assets
Liabilities+Net
Worth
Worth
$0=Debts
1)
3)
4)
Reserves=$?? $??=DDp
$200=Currency 2)
Loans=$??
START ANSWERS ON NEXT PAGE
DDSheeza=$??
5)
Securities=$??
Cash at
home=$100
$115=Net
Worth
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ANSWERS
2. Suppose that the following set of equations describe ALL the relevant information about the island
nation, Itsanice.
Consumption function: C = 20,000 + 0.8Yd (where Yd = disposable income)
Planned Investment function: Id = 4,000
Government expenditures function: G = 8,000
Tax function: T = 5,000
Export function: EX = 1,000
Import function: IM = 0.3Y (take note that this is only Y and not Yd)
The full employment level of national income is YFull employment = 60,000.
The money market can be safely ignored for now.
Inflation is assumed to be non-existent.
a. Determine the equilibrium level of national income, Y*.
b. Illustrate this macro equilibrium on the “Keynesian Cross” graph.
c. Calculate the multipliers for G, T and Id. Show some work for how you arrived at this particular
value.
d. How could the government use fiscal policy to achieve full employment national income? Be
specific with respect to the values and directions of the policy you suggest. (Only one suggestion
is required.)
Suppose now we recognize that there is a money market and that 1) investment depends on
interest in the typical way and 2) money demand depends on interest and aggregate
output/income in the usual way. Inflation can still be safely ignored.
e. How will these wrinkles affect the efficacy of the fiscal policy plan you suggested to achieve
YFull Employment? SHOW THIS ON AN APPROPRIATE SET OF GRAPHS.
f. How will your fiscal policy plan have to be altered, that is, what would you change and in what
way/direction? No numerical calculations are required, just a verbal exposition.
g. How could “The Fed” help the government’s fiscal policy makers out? Explain.
START ANSWERS ON NEXT PAGE
ANSWERS
ANSWERS
ECON 1120 Wissink S2017 Answers PRELIM 2 MAKEUP
1 B
Aggregate desired expenditure at Y = $1000 is $1200 (which is C+Id), so not enough was produced
to satisfy all of desired expenditure. Thus, there will be unplanned depletions of inventory.
2 C
When aggregate output equals $2400, AEd = C + Id + G = $2400. Since Y = AEd, the economy is in
equilibrium and aggregate output will have a tendency to remain constant.
3 C
The net exogenous change in AEd equals 50 – 20 = $30 million. Using the Keynesian multiplier, we
can find the change in income that will result: Y* = 30 * 2 = $60 million.
4 D
If marginal propensity to consume equals 1, the consumption function will be C = 60 + Y. Note that,
since the slope of this function is 1, it will be parallel to the 45º helping line. Since the two lines will
never intersect in the Keynesian cross diagram, it is impossible determine equilibrium output.
5 C
Janet Yellen was sworn in as Chair of the Fed Board of Governors on February 3, 2014.
6 A
Plotting the saving function (which we can infer would be a positively sloped line, given what we are
told about consumption) and desired investment (which is just a horizontal line, since we are told that
it does not depend on output), we can see that that an upward shift in the saving function would not
change the equilibrium level of saving.
7 E
Although B, C, and E are all options available to the Federal Reserve, open market operations are the
primary way by which it conducts monetary policy.
8 E
In a simple linear frugal governed economy with no international sector, it must be case that, if the
economy is in equilibrium, saving equals desired investment and taxes equal government
expenditures. Since we can think of saving and taxes as the sources that fund desired investment and
government expenditures, respectively, S and T will be on side of the equation whereas Id and G will
be on the other.
9 B
From the required reserve ratio and given the assumption that HSBC holds zero excess reserves, the
bank will have 800 * 0.25 = $200 in reserves. Since assets = liabilities + net worth, we know that
loans = 800 + 400 – 200 = $1000.
10 C
By not keeping all of their money as demand deposits in commercial banks, the people of
Mistrustville reduce the amount of reserves in the banking system. As a result, the banks have fewer
reserves to lend out when the central bank engages in expansionary monetary policy by purchasing
securities, limiting the money creation effect. Monetary policy is therefore less effective than it
would be otherwise.
11 D
If quantity of money supplied exceeds quantity of money demanded, there will be pressure on the
interest rate to decline. The inverse relationship between bond prices and the interest rate means that
bond prices will go up as well.
12 D
Buying securities to the public will increase the money supply, as well lowering the reserve
requirement ratio.
13 C
At an interest rate of 3%, there will be upward pressure on the interest rate. As the interest rate
increases, bond prices are going down, suggesting that typical households are selling bonds and
increasing their money holdings.
14 B
Since PV = FV/(1+r)^T, where FV is the face value of the bond, r is the interest rate, and T is the
time until the bond matures, we have: PV = 10000/(1+0.05)^2 = $9070.29.
15 E
Expansionary monetary policy will decrease the interest rate and increase desired investment.
Similarly, contractionary fiscal policy will decrease the interest rate (decrease in aggregate output 
decrease in money demand  lower interest rate), which will increase desired investment.
16 E
Government bonds are a type of security and do not qualify as money.
17 D
The Fed selling government securities to the public is a form of contractionary monetary policy,
which causes the interest rate to go up. An increase in government expenditures will increase
aggregate output, which shifts the money demand curve outward and places upward pressure on the
interest rate.
18 1/(1-c+ct)