Download Agricultural Economics 430 - Department of Agricultural Economics

Agricultural Economics 430
Macroeconomics of Agriculture
Fall 2008
Penson
Second Hour Examination
NAME: _____ANSWER KEY____________________________
SID NUMBER: ______________________________
This examination consists of six questions. Please read each question
carefully. The term “describe fully” asks that you answer all aspects of the
question. Avoid giving extraneous information (i.e., “filler”). Use
graphs/formulas whenever possible to help tell your story. Use the back of a
page if necessary. Good luck!
Question 1 _____ of 20 points
Question 2 _____ of 15 points
Question 3 _____ of 15 points
Question 4 _____ of 15 points
Question 5 _____ of 15 points
Question 6 _____ of 20 points
TOTAL
_____ of 100 points
2
1. Please complete the following table describing the short-run effects of
specific macroeconomic policy actions on the “Big 5” variables with a
“+” denoting an increase in the variable in each column heading and a
“–” denoting a decrease. (20 points; 1 points each)
Macroeconomic
policy action
Federal Reserve
lowers the reserve
requirement ratio
Increase in the
federal marginal
income tax rate
Reduction in the
level of government
spending
Federal Reserve
raises the discount
rate
GDP
growth
rate
Inflation Unemploy Interest Exchange
rate
-ment rate
rate
rate
+
+
_
_
_
_
_
+
_
_
_
_
+
_
_
_
_
+
+
+
3
2. We have used IS/LM analysis to capture the equilibrium in the
nation’s product and money markets. Please graphically illustrate the
effects that the combination of hike in the fractional reserve ratio by
the Federal Reserve and a fiscal policy featuring a tax cut will have on
the equilibrium interest rate, level of GDP and general price level.
Make sure you label all graphs. (15 points)
AS1
AS2
LM2
LM1
i2
i1
Y1 = Y2
AD
P1 = P2
AS
4
3.
Please define or graphically illustrate each of the following terms in
the context of this course: (3 points each, 15 points)
Recessionary gap
Occurs where YE < YFE
Potential GDP
Occurs in the classical range of the aggregate supply curve, or where
it becomes perfectly inelastic.
Money multiplier
The reciprocal of the fractional reserve requirement ratio or (1/rrm)
Demand pull (excess demand) inflation
Occurs when the general price level in the aggregate product market is
pulled up by an increase in aggregate demand.
Discount rate
The rate banks pay when borrowing from the discount window at the
Federal Reserve.
5
4. Please graphically illustrate the concept of “macro-to-market-tomicro” relationship we have discussed in this class assuming (1) a
perfectly competitive firm and then (2) assuming a monopoly. (15
points)
Perfectly competitive case:
AD
D
AS
S
MC
PC
CPI
QPC
QC
Y
Monopoly case:
AD
AS
D
MC
CPI
MR
Y
QM
6
5. Given the following demand and supply equation for a market, please
answer the questions below
MS = 1/rrm(TR)
MD = 75 –125(i) + 1.0(Y)
MS ≡ MD
where i represents the rate of interest, Y represents national income,
rrm represents the fractional reserve requirment ratio, and TR
represents total reserves.
Assume national income in 2007 was $1,500 and is projected to be 2
percent higher in 2008. Also assume the reserve requirement ratio is
0.20 and total reserves are equal to 150. (15 points)
(SHOW ALL WORK FOR FULL CREDIT)
a. What market clearing interest rate would you project for 2008?
(1/.20)(150) = 75 – 125(i) + 1,530
750 = 75 – 125(i) + 1,530
125(i) = 1,530 + 75 – 750
125(i) = 866
i = 6.84
b. What level of the total reserves would be needed to achieve a
market interest rate in 2008 of 9 percent? (Hint: using percentage
rather than decimal equivalent; e.g., using 9 rather than .09)
5(TR) = 75 – 125(9) + 1,530
5(TR) = 480
TR = 96
7
6. Given the following set of graphs, please briefly describe in the box
below how you characterize the product market in this economy.
Please graphically illustrate how you would eliminate this problem in
the product market, indicating in the box which policy you chose and
the impact on the business sector’s capital stock. Illustrate its effects
on all five four graphs. Clearly label all graphs using arrows to
indicate the direction of change. (20 points)
Problem in product market:
Inflationary gap
MS
Choice of policy and why:
MD
Federal Reserve sold government bonds
Federal Reserve raised reserve requirements
Federal Reserve raised discount rate
i
Impact on the capital stock:
Higher interest rates reduced investment and
hence lowered the capital stock from what it
would have been.
AD
AS
YFE
YPOT
P
i
I
AI
Y
LD
LS
WR
UR
L
%P