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Transcript
ECO 302b Intermediate Macro Spring 2012 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 Taxes Desired Imports Desired Exports Exchange Rate: Real Money Demand Real Money Supply Full-employment output Foreign Income Foreign real interest rate Cd = 60 + 0.6(Y – T) - 200r Id = 60 – 800r G = 35 T = 30 IMP = 0.1∙Y +10∙e EXP = 20 – 10∙e +0.2∙(Y#) e = 2 + 40∙(r – r#) L = 0.5Y - 200r M/P = 300/P YFE = 200 Y# = 100 r# = .05 Assume that expected inflation is zero so that money demand depends directly on the real interest rate. a. Write the equation that describes the desired national savings line as a function of the real interest rate r. (Assume that Y = 200.) b. Write the equation that describes the desired Foreign Lending line as a function of the real interest rate r. (Assume that Y = 200). c. Write the equation that describes the desired net exports line as a function of the real interest rate r. (Assume that Y = 200 and that Y# = 100.) d. 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 = 200? e. What is the equation for the open economy IS curve at given levels of Government Purchases, Investment, etc? (Hint: the equation will give combinations of Y and r where the open economy product market could be in equilibrium, so the equation should look like: Y = (some constant) +/-- (some coefficient) x r 2. Keynesian economic theory states that in the short run, prices in product markets and wages in labor markets do not adjust fast enough to guarantee general equilibrium at full-employment. The quantity of output produced and labor employed varies instead. Give 2 examples of theories which help explain why prices in these markets might not adjust quickly, and explain briefly how these theories result in slow-to-adjust prices and wages. Part II: Select the best answer for each of the following questions and mark it clearly on the page. (3 points each) 1. The “reverse causation” argument is useful to ____ economists because it helps explain why _______. a. b. c. d. e. Keynesian Keynesian classical classical Keynesian unemployment is a lagging variable average labor productivity is counter-cyclical money supply growth is leading and pro-cyclical stock prices are leading variables real wages are pro-cyclical 2. Both classical and Keynesian economists agree that the long-run Phillips Curve is: a. b. c. d. e. dependant on expected inflation downward-sloping vertical over the natural rate of unemployment upward-sloping unstable. 3. The fact that _____ is a leading and pro-cyclical variable is not explained by the Keynesian theory. The fact that _____ is a leading and pro-cyclical variable is not explained by the real business cycle (market-clearing model) theory. a. b. c. e. e. business fixed investment unemployment rate money supply growth residential investment none of the above. employment inflation average labor productivity stock prices 4. The unemployment rate falls when increases to AD occur that are a surprise to everyone in the economy. Increases in AD created by the government in order to manage the economy create inflation but not lower unemployment. This outcome is best explained if wages are set according to: a. b. c. d. e. Menu-Cost Theory. Keynesian Business Cycle Theory Reverse Causation Theory Misperceptions Theory (with rational expectations) Insider – Outsider Theory. Output YE YR O NR NE Labor 5. Above is a production function diagram showing how much labor is used and how much output is produced when the economy both before and after a shift of the economy’s aggregate production function. If the real wage paid to workers is the marginal product of labor, then the diagram above shows that a business cycle expansion caused by the shift of the aggregate production function should have _____ employment, _____ average labor productivity, and _____ real wage. a. b. c. d. e. counter-cyclical pro-cyclical pro-cyclical pro-cyclical counter-cyclical pro-cyclical pro-cyclical counter-cyclical pro-cyclical counter-cyclical counter-cyclical pro-cyclical counter-cyclical counter-cyclical pro-cyclical 6. A shift to the left of desired domestic investment causes the desired national savings and desired investment curves to intersect at a lower real interest rate. If this is an open economy, this would also cause: a. b. c. d. right. e. left. the desired net exports line to shift to the right. the desired net exports line to shift the left. the short-run aggregate supply curve to shift to the right. the desired foreign lending (savings minus investment) curve to shift to the the desired foreign lending (savings minus investment) curve to shift to the 7. Compared to effect it would have in a floating exchange rate economy, the use of expansionary fiscal policy in an open economy with fixed exchange rates would produce a ____ shift in the AD curve because __________. a. bigger b. bigger c. smaller exports d. smaller exports e. bigger exports there will be no appreciation of the domestic currency depreciation of the domestic currency will increase net exports the appreciation of the domestic currency will increase net the depreciation of the domestic currency will increase net the appreciation of the domestic currency will increase net 8. Keynesians believe that the ____ market can remain in disequilibrium for a prolonged period of time, 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 9. If country A has an open economy and floating exchange rates, it’s use of expansionary fiscal policy will (for a given level of country A’s income) cause in country B: a. b. c. d. e. 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 left of the NX line and a shift to the right of the AD curve. a shift to the right of the LM curve and a shift to the right of the AD curve. 10. At lunch hour, all McDonald’s employees are busy cooking and selling hamburgers. Before and after lunch, the employees are cleaning the dining area, restocking the storeroom, filling out accounting reports, etc. These other activities are a necessary part of the process of serving hamburgers to customers, but do not need to be done at exactly the same moment the customer is in the restaurant. An economist measuring labor productivity of McDonald’s employees would measure hamburgersserved-per-hour of labor. The economist thinks the lunch hour rush of customers is like a business cycle boom. According to this analysis, labor productivity in McDonald’s will be: a. b. c. d. e. lagging. the cause of lunch hour. pro-cyclical. leading. counter-cyclical. Productivity (effort) 100% Wage 11. Above is the degree of effort (or productivity) a typical employee might offer according to the wage paid. The employer would try to select the wage level where: a. the employee’s effort begins to rise above zero. b. the slope of the effort curve is maximized. c. the employer gets the maximum amount of productivity per dollar spent on wages. d. the chance that the employee will quit is minimized. e. the employee’s effort is maximized. 12. American auto assembly workers are represented by a labor union, which also represents workers at companies that supply parts used by the auto industry. When an auto company purchases parts from a non-union company that offers lower prices (because it pays lower wages), these parts are often lost, damaged, misplaced, installed incorrectly, etc. when the autos are assembled. This phenomenon is an example of ____ theory. a. b. c. d. e. misperceptions menu cost implicit contract insider-outsider reverse causation 13. 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 left of the NX line and a shift to the right of the AD curve. 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. Profits Π* Π1 P1 P* P2 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*. The firm chooses not to change prices as long as its current price is between P1 and P2. This suggests that the firm’s menu cost is: a. b. c. d. e. the distance from P1 to P*. the distance from π* to 0. the slope of the profit curve at P*. the difference between π* and π1. the distance from P1 to P2. 15. The desired net exports line in a floating exchange rate economy is ______ because a rise in domestic real interest rates causes: a. upward-sloping higher domestic income will stimulate exports. b. downward-sloping higher domestic interest rates stimulate appreciation of the domestic currency and lower net exports. c. vertical no change in net exports d. upward-sloping higher foreign incomes increases demand for domestic products e. horizontal any change in the real interest rate would trigger an infinite change in net exports. 16. 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 17. “Stagflation” is the name given to the phenomenon of the 1970’s when unemployment was rising even as inflation was rising. Using SRAS – AD analysis, stagflation occurs if: a. b. c. d. e. the SRAS shifts to right at the same time AD shifts to the left. the SRAS is constant while the AD shifts to the left. the SRAS shifts to right at the same time AD shifts to the right. the SRAS shifts to the left faster than AD shifts to the right. the SRAS shifts to the left at the same as AD shifts to the left. 18. 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 19. Increases in the money supply occur: (i) (ii) (iii) before the Christmas shopping season in the USA before presidential elections during the gold standard era, following big gold discoveries. Which theory states that the increase in the money supply will cause an increase in economic activity only in case (iii)? a. b. c. d. e. menu-cost theory. Misperceptions theory with rational expectations. Keynesian theory. Standard market-clearing (classical) model. Reverse causation theory. 20. For a big country, most domestic output is consumed domestically, and most domestic employment is related to production of goods for the home market. For a small country, a large share of output is exported, and a lot of the country’s consumption is of imported goods. Variations in the exchange rate are ____ disruptive to a small country’s economy, so it is likely to choose to use a ____ exchange rate. a. b. c. d. e. less floating more fixed more floating less fixed none of the above. Part III. Extra Credit (1 point each). Do not waste time on these until you are finished with the rest of the exam! 1. Show how the shape below can be divided into 2 identical shapes with one cut. 2. Who are these guys? Match the photo with the name: Dominque Strauss Kahn Andrew Abel Dean Croushore Bernie Madoff Ben Bernanke . 3. Mark with a check the names of the guys who are the authors of your textbook for this semester.