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Review Questions for Midterm #1 Intermediate Macroeconomics ECO 241 / Waters The first covers the material for Chapters 1-5 and part of 6. There will be True/False, multiple choice and essay / problem questions. The latter will be inspired by the review questions below. 1) Jane’s Computers buys 100 monitors for $50 each from Don, and pays its employees $10,000 to build computers. The store then sells the 100 computer/monitor combinations for $200 each. What is the contribution to GDP of the computer/monitor combinations? Explain how the combination would be broken down using the three different approaches to calculating GDP. 2) A northerly country produces tuna steaks and snowboards. They produced the following quantities at the following prices in the last two years. Tuna steaks 2005 Quantity Price 800 $20 2006 Quantity Price 1000 $30 Snowboards 600 500 $40 $140 a) Using 2005 as the base year, what is the % increase in real GDP? b) Using the GDP deflator, what is the inflation rate for the year? 3) Given the following information about the macro-economy, find the equilibrium level of output Y*. If government spending falls by $50, how does Y* change? Show on a graph of the expenditure function with the equilibrium condition. Autonomous consumption = $300 MPC = 0.75 Investment = $100 Taxes = $100 Government spending = $150 What is savings both before and after the change in spending? 2a) 0%, 2b) 150%; 3) Y*=1900, Y*’=1700, S*=150, S*’=200; 4) Y*=1433, i*=23% 4) The investment in problem 3 is given by I = 100 – 500i where i is the interest rate, find an equation for the IS relation. Let real money demand and supply be the following (M/P)D = Y – 1000i (M/P)S = 1200 Find the LM relation and the equilibrium output and interest rate given by the two relations. 5) The Federal Reserve just lowered interest rates. Show their action on a graph showing the supply and demand for real money and show the effect on an IS-LM graph. What is the effect on equilibrium output? 6) Due to fears about a possible recession, autonomous consumption falls. Show the change on a graph of the expenditure function and an IS-LM graph. 7) Leading into the Great Depression, there was a stock market crash reducing the wealth of many people and the Federal Reserve responded with a policy change that lowered the money supply. Show the change in equilibrium output on an IS-LM graph showing both changes. 8) Using an IS-LM graph show the “crowding out” effect of an increase in government spending. Would this be an argument for or against the current stimulus proposals? 9) Which of the following is a shift and which is a movement along the curve on the IS-LM graph? a) A loss of confidence causes consumers to reduce their spending. b) An increase in income causes an increase in money demand pushing up interest rates. c) The price level falls causing a reduction in money demand and a corresponding fall in interest rates. d) The interest rate rises leading to a reduction in investment spending. 2a) 0%, 2b) 150%; 3) Y*=1900, Y*’=1700, S*=150, S*’=200; 4) Y*=1433, i*=23%