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478184334
Econ 1120-INTRODUCTORY MACROECONOMICS
PRELIM #2-Wissink-Fall 2015 – November 5
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 @ 26 and 20 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
252,
253
Luoyi (Roy)
Su
Mondays 12:20-02:15
Goldwin Smith
G22
256,
257
Naveen
Sunder
Wednesdays 10:10-12:05
Rockefeller Hall
102
250,
251
Sylverie
Herbert
Fridays 09:05-11:00
Uris Hall 202
254,
255
Tilahun
Emiru
Fridays 01:25-03:20
Rockefeller Hall
102
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 26 points) =_________________
Q2 (out of 20 points) =_________________
TOTAL SCORE: _____________________
478184334
Part I: Multiple Choice. Do them ALL.
CIRCLE the letter for your answer.
_____________________________________________
1. If the consumption function for the economy is:
C = 500 + 0.6Yd, then the saving function, S, is:
A.
B.
C.
D.
E.
S = -500 + 0.6Yd.
S = -500 - 0.6Yd.
S = -500 + 0.4Yd.
S = 500 + 0.4Yd.
S = 500 + 0.6Yd.
2. 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 rise in inventory.
there will be an undesired fall in inventory.
aggregate output/income will tend to fall.
the economy is in equilibrium, so there is no tendency for
aggregate output to change.
3. 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.
4. Assume the “Keynesian” AEd multiplier is 3.0. 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.
By $90 million.
By $210 million.
By $50 million.
By $75 million.
5. In a simple frugal economy with no government and no
international trade, which one of the following will occur when the
economy is at equilibrium Y*?
A.
B.
C.
D.
E.
S = C + Id and at the same time, S = Id
Y = S and at the same time, C = Id
C = Y and at the same time S = 0
Id = C
Y = C + Id and at the same time, S = Id
6. Consider a simple linear frugal governed economy with no
international sector and only one non-zero marginal propensity, the
marginal propensity to consume (MPC). Assume MPC = 0.9. If
Y* rises by $100 billion due to an increase in desired investment
spending, the increase in desired investment spending must have
been
A.
B.
C.
D.
E.
$100 billion.
$90 billion.
$50 billion.
$10 billion.
$1 billion.
7 Consider an economy completely described by the following
two equations:
S = -120 + 0.30Y and Id = 10 +0.10Y. The “paradox of thrift”
applied to this particular economy suggests that
A. an exogenous increase in the desire to consume will make it so
that in equilibrium people actually consume less.
B. an exogenous increase in the desire to save will make it so that
in equilibrium people actually save less.
C. an exogenous increase in the desire to save will make it so that
in equilibrium people save the same amount.
D. an exogenous increase in desired investment leads to less
saving in equilibrium.
E. an exogenous increase in desired investment leads to less
consumption in equilibrium.
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.
9. 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.
10. 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
government bonds held by the public
travelers checks
11. Bob lives in a country with a MONOPOLY commercial bank
named Big Bank. The required reserve ratio (rrr) is 5%. Big Bank
is always fully loaned-up. Bob finds $100 under his sofa and
deposits it into his Big Bank checking account. Bob’s deposit of
$100
A. will not change demand deposits at all.
B. will ultimately increase demand deposits by less than or equal
to $100.
C. will ultimately increase the money supply by $2,000.
D. has the potential to increase total demand deposits by $2,000.
E. has the potential to increase Big Bank’s loans by $2,000.
12. The Fed wants to DECREASE the money supply. In which
answer do both listed options have the potential to decrease 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 & lowers the discount
rate.
13. Assume an economy and banking “world” like the one
assumed in lecture. The required reserve ratio (rrr) is 40%. If the
Fed wants to increase the money supply by $600 it should
A.
B.
C.
D.
E.
increase the required reserve ratio.
sell $240 worth of government securities to the public.
buy $240 worth of government securities from the public.
buy $600 worth of government securities from the public.
buy $359 worth of government securities from the public.
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. If the interest rate is high, speculators tend to hold onto
A. bonds instead of money because they expect the interest rate to
fall, and when it does, they will be in a position to sell bonds to
people at a nice high price.
B. bonds instead of money because the opportunity cost of money
is low.
C. money instead of bonds because the brokerage fees and other
costs of buying bonds are high when the interest rate is low.
D. money instead of bonds because there is a speculation motive
for holding a larger amount of money.
E. cash instead of bonds because they will want to buy bonds in
the future.
16. Contractionary monetary policy combined with expansionary
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.
17. Refer to the money market figure. At an interest rate of 3%,
typical households
A. will attempt to increase their
holdings of money by selling
bonds.
B. are satisfied with the amount
of money they are holding.
C. will attempt to increase both
their holdings of money and
their holdings of bonds.
D. will attempt to reduce their
holdings of money by
buying bonds.
E. will attempt to consume less.
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 investment multiplier for the economy is:
478184334
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. Seppo and Vin (among others) are neighbors who live in Grayville, a country with a fractional
reserve banking system with a required reserve ratio (rrr) of 25%. Assume there is only one
monopoly commercial bank in Grayville, Blackbank. Blackbank always loans up to where its excess
reserves = $0. The symbol for Grayville’s currency is $.
The Fed (that is the central bank) in Grayville wants to buy up $500 in government securities from
the public. Suppose it buys $200 worth of securities from Seppo and $300 worth of securities from
Vin. Suppose the Fed pays both Seppo and Vin by depositing payment into their respective checking
accounts at Blackbank, denoted DD-Vin and DD-Seppo. Note DDp refers to ALL of the public’s
checking accounts at Blackbank – including Vin’s and Seppo’s.
ORIGINAL T-Accounts
THE FED
Blackbank
Assets
Liabilities +Net Worth
Securities
$20,000 Reserves
$5,000
Currency
$2,500
Net Worth
$12,500
Assets
Reserves
Loans
$17,000 Net Worth
Seppo
Assets
Vin
Liabilities +Net Worth
DD-Seppo
Currency
$2,000 Debt
Net Worth
Securities
$2,000
Liabilities +Net Worth
DDp
$20,000
$0
$4,500
Assets
DD-Vin
Currency
Liabilities +Net Worth
$4,000 Debt
$1,000 Net Worth
Securities
$0
$5,500
$500
FINAL T-Accounts
THE FED
Assets
Securities
Blackbank
Liabilities +Net Worth
Reserves
Assets
Reserves
Liabilities +Net Worth
DDp
Currency
$2,500
Loans
Net Worth
Net Worth
$12,500
Seppo
$2,000
Vin
Assets
DD-Seppo
Liabilities +Net Worth
Debt
$0
DD-Vin
Liabilities +Net Worth
Debt
$0
Currency
Net Worth
Currency
Net Worth
Securities
$4,500
Assets
Securities
$5,500
Questions:
a. Fill in any missing cells (see bold) in the ORIGINAL T-Accounts.
b. Given the information in the top half of the T-Accounts for Grayville, what is the value of the
money supply (M1) PRIOR to the Fed’s purchase of the securities from Seppo and Vin? (Note
that Seppo and Vin are just two of many people that live in Grayville.)
c. What final impact does the open market operation above have on the money supply (M1) of
Grayville assuming Blackbank uses its portfolio of loans to make adjustments to its reserves
position? (Note: Assume Seppo and Vin are no longer involved after the initial transaction and
that all subsequent transactions are carried out in the commercial banking system.)
d. Fill in all the missing blanks (see bold) in the FINAL T-Accounts illustrated on the previous
page as they would appear once the money supply has reached its new final position.
e. How would your answer to part (c) change if it turns out that Vin immediately withdraws the
$300 that was credited to his checking account and puts the cash in a vault behind a picture of
Adam Smith that hangs in his living room? Note: If you can’t come up with a number answer, at
least tell us the direction in which your answer would change and why.
Answer Space:
Answer Space:
2. Suppose that the following set of equations describe ALL the relevant information about the island
nation, Itsanice. Itsanice’s currency is called the dollar and its symbol is $.
The Goods and Services Market (Keynesian Cross) can be described by:
Consumption function: C = 20,000 + 0.8Yd (where Yd = disposable income)
Planned Investment function: Id = 3,000 – 4,000r. Current Id = 2,000
Government expenditures: G = 1,000
Taxes: T = 400
Exports: EX = 600
Imports: IM = 400
The money market can be described by:
Required reserve ratio (rrr) = 10% = 0.10
Money Demand function: MD= 1500 – 1,000r
Total Reserves = Required Reserves = 125. Excess Reserves = 0.
Other:
The full employment level of national income is YFull employment = 114,000.
Inflation is assumed to be non-existent.
Questions:
a. Determine the equilibrium level of national income, Y*. Show your work!
b. Illustrate this equilibrium using the 3-panel diagram from class. Make sure you label ALL the
values on the horizontal and vertical axes in ALL three panels in your graph.
c. Calculate the multipliers for Gbar, Tbar and Ibar. Show some work for how you arrived at your
particular values.
d. How could the government use its fiscal policy variable Gbar to achieve full employment national
income? Be specific with respect to the value and direction of the policy you suggest.
e. Instead of using fiscal policy, how might the Fed use monetary policy to achieve full employment
national income? DO NOT FIND AN EXACT NUMBER. Just explain what the Fed would do
using a verbal narrative with arrows. Indicate how this monetary policy would “look” in your 3panel diagram.
PLEASE START ANSWERS ON NEXT PAGE
Answer Space:
Answer Space:
ECON 1120 F2015 PRELIM 2 Answers
1 C
By the identity Yd = C + S, we can solve for the saving function: S = Yd – C = Yd – (500 + 0.6Yd) = 500 + 0.4Yd.
2 C
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.
3 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.
4 B
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 * 3 = $90 million.
5 E
A simple frugal economy with no government or international sector is defined by AEd = C + Id. In
equilibrium, Y = AEd, so Y = C + Id. Since Y = C + S is identically true, it follows that C + S = C +
Id  S = Id.
6 D
Using the marginal propensity to consume, we can calculate the multiplier on investment: KI = 1/(10.9) = 1/0.1 = 10. Since KI = ΔY/ ΔI, we can solve for the change in desired investment: ΔI = 100/10
= $10 billion.
7 B
Graphing the saving and investment functions, it can be seen that, when the saving function shifts
upwards, equilibrium savings will decrease.
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 C
Janet Yellen was sworn in as Chair of the Fed Board of Governors on February 3, 2014.
10 D
Government bonds are a type of security and do not qualify as money.
11 D
Bob’s deposit of $100 increases by the monopoly bank’s reserves by $100. Using the money
multiplier (1 / 0.05 = 20), we see that total demand deposits can increase by, at most, 20 * 100 =
$2000.
12 B
Selling securities to the public will decrease the money supply, as well raising the reserve
requirement ratio.
13 C
The money multiplier is 1 / 0.4 = 2.5. Therefore, if the Fed wants to increase money supply by $600,
it will have to decrease reserves in the commercial banking system by 600 / 2.5 = $240. It can do so
by purchasing $240 worth of government securities to the public.
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 A
Choice A corresponds to the speculative motive for holding bonds. Recall that, if the interest rate is
high, bond price is low: the investor is betting that the price will eventually go up and that, when it
does, he will be able to turn a profit.
16 D
Contractionary monetary policy will increase the interest rate and decrease desired investment.
Similarly, expansionary fiscal policy will increase the interest rate (increase in aggregate output 
increase in money demand  higher interest rate), which will depress desired investment.
17 A
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.
18 KI = 1/(1-c+ct)