Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Economic bubble wikipedia , lookup
Foreign-exchange reserves wikipedia , lookup
Nominal rigidity wikipedia , lookup
Real bills doctrine wikipedia , lookup
Ragnar Nurkse's balanced growth theory wikipedia , lookup
Business cycle wikipedia , lookup
Fear of floating wikipedia , lookup
Monetary policy wikipedia , lookup
Interest rate wikipedia , lookup
Please write your answers on this exam paper. Name ________________________ Student ID________________________ Practice Final Exam Economics 503 Fundamentals of Economic Analysis 2:30-5:30PM Write all of your answers on this white exam paper. Do not hand in the blue books. Multiple Choices (2 points each) 1. We observe in microeconomics that ____________, while in macroeconomics ______________: a. the supply curve is more elastic in the short run than the long run; the short-run aggregate supply curve is more elastic than the long-run aggregate supply curve. b. The supply curve is more elastic in the long run than the short run; the short-run aggregate supply curve is more elastic than the long-run aggregate supply curve. c. the supply curve is more elastic in the short run than the long run; the long-run aggregate supply curve is more elastic than the short-run aggregate supply curve. d. The supply curve is more elastic in the long run than the short run; the long-run aggregate supply curve is more elastic than the short-run aggregate supply curve. ______B___________ 2. You read an analysis that says that the Japanese yen is overvalued relative to the US dollar. This would imply that a. Japan’s real exchange rate is above 1; Japan’s PPP converted GDP is larger than its exchange rate converted GDP. b. Japan’s real exchange rate is above 1; Japan’s PPP converted GDP is smaller than its exchange rate converted GDP. c. Japan’s real exchange rate is below 1; Japan’s PPP converted GDP is larger than its exchange rate converted GDP. d. Japan’s real exchange rate is below 1; Japan’s PPP converted GDP is smaller than its exchange rate converted GDP. ______D___________ 1 Please write your answers on this exam paper. 3. The U.S. Federal Reserve announces that it is raising its target interest rate. We would then observe that a. The Federal Reserve would engage in an open market sale; the HKMA would engage in a foreign currency purchase. b. The Federal Reserve would engage in an open market sale; the HKMA would engage in a foreign currency sale. c. The Federal Reserve would engage in an open market purchase; the HKMA would engage in a foreign currency purchase. d. The Federal Reserve would engage in an open market purchase; the HKMA would engage in a foreign currency sale. ___________ B ______ 4. The demand and supply for a product both increase (i.e. both curves shift out). Which of the following statements is true: a. the equilibrium price of the product must increase; the equilibrium quantity of the product must increase. b. the equilibrium price of the product may or may not increase; the equilibrium quantity of the product must increase. c. the equilibrium price of the product must increase; the equilibrium quantity of the product may or may not increase. d. the equilibrium price of the product may or may not increase; the equilibrium quantity of the product may or may not increase. ________B_________ 5. Which of the following transactions would be included as part of the expenditure method of calculating GDP in Japan. a. b. c. d. e. a German expatriate sells a used Toyota to his neighbor in Tokyo a Japanese fisherman sells fresh fish to a sushi shop in Kyoto a Japanese miller sells flour to a bakery in Los Angeles a German expatriate buys shares in Toyota Motor Co. none of the transactions would be counted. __________C_______ 2 6. Gadgets are a normal good. The supply curve of gadgets is not perfectly elastic. Gadgets are substitutes for widgets. The income of gadget and widget customers goes up by 10%. We should see: a. The price of gadgets rise and the demand curve for widgets shifts out. b. The price of gadgets rise and the demand curve for widgets shift in. c. The price of gadgets fall and the demand curve for widgets shifts out. d. The price of gadgets fall and the demand curve for widgets shift in. __________A_______ 7. The income of gadget and widget customers goes up by 10%. The supply curve in a market for widgets is perfectly elastic but the supply curve of gadgets is not. Widgets are a luxury good while gadgets are a normal good. Gadgets are substitutes for widgets. a. b. c. d. The equilibrium quantity of widgets increases by more than 10%. The equilibrium quantity of widgets increase by less than 10% The equilibrium quantity of widgets decrease by less than 10% The equilibrium quantity of widgets decrease by more than 10%. ___________A_______ Income goes up by 10%, so demand for widgets will shift out by more than 10% at any given price. Since supply for widgets is perfectly elastic, the price will stay constant and the equilibrium quantity will increase by more than 10%. BUT gadget demand also goes up, and since supply is not perfectly elastic, price of gadgets go up. Since widgets and gadgets are substitutes, some of the demand for gadgets will switch to widgets, which will further increase the demand for widgets. 3 Please write your answers on this exam paper. Calculation 1. [3 points] Calculate the elasticity of demand (using the midpoint method) and the marginal revenue for a monopolist facing the following demand curve. Price Quantity 20 Elasticity Marginal Revenue 50 -.555 -20 30 40 2. [4 points] HK’s GDP is HK$1.4 trillion. The population is 7 million. The exchange rate with the US dollar is 7.8 HK$ per US dollar. The price of a market basket of typical goods in HK is HK$12,000 and the price of that same market basket of goods in the USA is US$2,000. Calculate the exchange rate converted GDP of HK in US$ and the PPP converted GDP. Calculate the real exchange rate. Is the Hong Kong Dollar overvalued or undervalued? PPP conversion factor is 6. HK GDP per Capita is HK$200000. In exchange rate converted terms 33333.33. In PPP converted terms is US$33,333.33. 25641.03 REX is 1.3 and the HK dollar is undervalued. 4 Please write your answers on this exam paper. 3. [4 points] The base year is 2000. The following table shows the hourly wages in 1997 and 2007 along with the CPI for those years. Calculate the wages measured in 2000 dollars. Which is higher in inflation adjusted terms? Wages 1997 2007 CPI 10 12 Real Wages 90 110 11.11111 10.90909 4. [4 points] The demand curve in an industry is Q D 10 .1 P while the supply curve is Q S .15 P . Calculate the equilibrium price and quantity. 10 .1P .15P P 40 Q6 5 Please write your answers on this exam paper. Short Answer 1. [6 points] Americans feel very optimistic and their high animal spirits increase demand in that country. The US Federal reserve follows a policy of countercyclical monetary policy. a. Would the central bank in the USA respond with an open market purchase or an open market sale of government bonds? To raise interest rates, the Fed must shrink money supply. They would need an open market sale. b. Compare the effects of these events on the sales of two firms in Hong Kong. Firm A is a real estate developer which builds residential housing. Firm B is a company that makes watches for sale at the best department stores across the world. Which type of firm is likely to experience the strongest increase in demand as a result of the two events in the US? Explain the difference in 5 sentences or less. The open market sale and the high animal spirits push up interest rates in the USA. This raises interest rates in HK. The high interest rates will have negative impact on borrowing for housing, but is also likely to have negative effects on consumer durable purchases. However, the HK Watch company should also receive some additional demand from the USA export market 2. [3 points] You have information on the income elasticity of demand for three types of goods. Classify the goods by type: normal good, a luxury good or an inferior good? Good Tomatoes Plums Spinach Income Elasticity of Demand .5 -.5 -2.5 6 Type of Good Normal Inferior Inferior Please write your answers on this exam paper. Macroeconomics 3. [3 points] We observe the inflation rate in the US being 2% and the money market interest rate being set at 3%. Assuming that the Federal Reserve sets the interest rate target according to the Taylor rule, would we say that the Federal Reserve believes the economy is in a recession or an expansion. The Taylor rule suggests that i .025 .5 ( TGT ) .5 Output Gap Given an inflation target of 2%, we could say the inflation gap = 0. Then we could write this as .03 i .045 .5 Output Gap So that the only explanation is the Fed thinks there is a Output Gap .03 recession. 4. [2 points] List two costs of high expected inflation a Shoe Leather Costs – Inconvenience costs from not holding money. b. Menu Costs – Costs of changing price levels 7 Please write your answers on this exam paper. Graphing Questions Since the mid-1990’s, the United Kingdom has followed a monetary policy of “inflation targeting.” The way we might think of this policy, the central bank will choose some price level P* and to set monetary policy to keep the equilibrium price level in the economy near P*. When the price level threatens to go above P*, the central bank will raise interest rates and cut interest rates when the price goes below P*. Assume that the economy is in an initial equilibrium where the price level is P* and the output level is equal to potential output. Assume that monetary policy will impact the economy before the self-correcting mechanism activates. 1. [4 points] Use 1 graph to describe what would happen to GDP in the economy when (A) the UK real estate market crashes; and (B) the central bank acts to maintain the price level. Clearly mark (A) the equilibrium after the crash in asset prices occurs and before monetary policy affects the economy; and (B) the equilibrium after monetary policy has an effect. YP P* SRAS B A AD AD’ 8 Please write your answers on this exam paper. 2. [4 points] Use 1 graph to describe what would happen to GDP in the economy (A) when the price of oil rises sharply; and (B) the central bank acts to maintain the price level. Clearly mark (A) the equilibrium after the rise in oil prices occurs and before monetary policy affects the economy; and (B) the equilibrium after monetary policy has an effect. YP SRAS A P* B AD ADʹ 9 Please write your answers on this exam paper. A series of financial scandals suddenly makes the Australian stock market very attractive (relative to other stock markets around the world) to both Australians and foreign investors. 3. [4 points] Use a graph of the Australian Forex market to demonstrate the impact of these events on the Australian Dollar exchange rate (i.e. the number of Australian dollars needed to buy one US dollar). YP R Supply Supply′ 1 R* R** Demand′′ 2 Supply′′ Demand Q People want to buy oz dollar to buy oz stocks so they bring US dollars to oz forex market (supply shifts out) and oz people keep their money home (demand shifts in). 10 Please write your answers on this exam paper. 4. [4 points] The demand for watermelons is highest during summer and lowest during winter. Yet, watermelon prices are normally lower in summer than in winter. Use a demand and supply graph to demonstrate how this is possible. Be sure to carefully label the curves in your graph and to clearly indicate the equilibrium summer price and the equilibrium winter price. Winter Summer S D The demand for watermelons is highest in summer which should make the demand higher. Holding supply constant, this would make watermelon prices higher than in winter. However, the supply of watermelons also rises in summer, perhaps more than demand. This makes the equilibrium price of watermelon lower in summer. 11 Please write your answers on this exam paper. 5. [4 points] Draw a graph showing what happened in Japan near the turn of the millennium when the interest rate hit its zero lower bound. Money Supply i i* i** Money At zero lower bound, money demand becomes perfectly elastic and extra liquidity does not further reduce interest rates. 12 Please write your answers on this exam paper. 6. [4 points] We see that real interest rates around the world are going up. Draw a graph of the loanable funds market which shows what this would do to domestic savings, domestic investment, the domestic real interest rate, the domestic capital account and the domestic trade balance. B S+KA rW rW AD S D S* S** D**D* S↑,r↑,I↓,KA↓ When real interest rate goes up, the demand for loanable funds drops and supply increases, the economy does not need to rely so much no foreign borrowing. 13