Download Economics 101

81911944
Econ 1120-INTRODUCTORY MACROECONOMICS
PRELIM #2-Wissink-F2014-November 6
PRINT YOUR NAME: _______________________________________________________________
YOUR NetId:______________________ YOUR STUDENT NUMBER:________________________________
INSTRUCTIONS and EXAM TAKING POLICY:
There are two sections in this exam. Answer all questions.
Part I: 16 multiple choice questions @ 3.5 points each
Part II: 2 problem @ 22 points each
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 where you will pick up your prelim):
________Ye, Yu Susan (yy496)
5760 DIS 255 M 10:10AM - 11:00AM RCK 105
5761 DIS 256 M 11:15AM - 12:05PM RCK 105
5762 DIS 257 M 12:20PM - 01:10PM RCK 105
________Emiru, Tilahun (tme29)
5763 DIS 258 M 11:15AM - 12:05PM GSH G24
5764 DIS 259 M 12:20PM - 01:10PM GSH G24
5765 DIS 260 M 01:25PM - 02:15PM GSH G24
________Agarwal, Isha (ia233)
5766 DIS 261 T 11:15AM - 12:05PM RCK 112
5767 DIS 262 T 12:20PM - 01:10PM RCK 112
5768 DIS 263 T 01:25PM - 02:15PM RCK 112
________She, Yu Leo (ys693)
5769 DIS 264 W 10:10AM - 11:00AM RCK 112
5770 DIS 265 W 11:15AM - 12:05PM RCK 112
5771 DIS 266 W 12:20PM - 01:10PM RCK 112
One more time, please…
PRINT YOUR NAME: ____________________________________
YOUR NetId: _____________
YOUR STUDENT NUMBER: ____________________________
GRADING
MC (out 56 points)=___________________
Q1 (out of 22 points)=_________________
Q2 (out of 22 points)=_________________
TOTAL SCORE: _____________________
81911944
Part I: Multiple Choice. Do them ALL.
CIRCLE the letter for your answer.
_____________________________________________
1. For a simple frugal economy with no government and no
international trade, which one of the following statements is false?
A. At every level of aggregate output/income, aggregate desired
expenditure equals consumption plus desired investment.
B. At every level of aggregate output/income, aggregate
output/income (Y) equals aggregate desired expenditure.
C. At every level of aggregate output/income, aggregate
output/income (Y) equals consumption plus saving.
D. Saving is a leakage out of the spending stream.
E. If planned investment is exactly equal to saving, then aggregate
desired expenditure is exactly equal to aggregate
output/income (Y).
2. Assume a “simple frugal un-governed 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 = $1,200 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. If the consumption function for the economy is
C = 500 + 0.6Yd, then the saving function, S, is
S = -500 + 0.6Yd.
S = -500 - 0.6Yd.
S = -500 + 0.4Yd.
S = 500 + 0.4Yd.
S = 500 + 0.6Yd.
5. Assume a “simple frugal governed closed economy” where the
consumption function is: C = 500 + 0.6Y and desired investment,
Id, government expenditures (G) and Taxes (T) are totally
exogenous. In this economy the value of the government
expenditure multiplier is
A.
B.
C.
D.
E.
0.6
6.0
1.67
-1.67
2.5
6 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.
7. The absolute value of the tax multiplier is smaller than the
government expenditure multiplier
A. because the federal government is bigger than the internal
revenue service.
B. because the immediate impact of an increase in government
expenditures adds fully into aggregate desired expenditures.
C. because people only pay their taxes on April 15.
D. because the immediate impact of a decrease in taxes adds fully
into aggregate desired expenditures.
E. because our tax system is progressive.
8. Which one of the following is NOT included in what the U.S.
government defines as M1?
A.
B.
C.
D.
E.
currency in circulation
checkable deposits
demand deposits
savings accounts
travelers checks
9. Serena transfers $8,000 from her checking account into her
savings account. This transaction will
A.
B.
C.
D.
E.
not change M1 and will decrease M2.
decrease M1 and will not change M2.
increase both M1 and M2.
decrease both M1 and M2.
have no impact on either M1 or M2.
10. Suppose the required reserve ratio, rrr, is 15%. Suppose that
when people in the particular economy of Mistrustville buy
securities from the central bank they pay for them with dollars they
keep at home under their mattresses, since they do not trust the
commercial bankers. As compared to an economy where everyone
keeps all their money as demand deposits in commercial banks and
thus pays the Fed with their checking account money, the odd
behavior of people in Mistrustville will tend to
A.
B.
C.
D.
E.
create inflationary pressures.
make monetary policy less effective.
make monetary policy more effective.
make fiscal policy less effective.
make fiscal policy more effective.
11. 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.
12. Bob lives in a country with a MONOPOLY commercial bank,
MACROBANK, Inc. The required reserve ratio is rrr = 5%.
MACROBANK always works to be fully loaned up. Bob finds
$100 under his sofa and deposits it into his checking account at this
commercial bank. Bob depositing this money from under his
couch into a checking account at his bank
A. will initially not change demand deposits at all.
B. will initially change the value of the money supply, M1, by
$100.
C. will ultimately increase the value of the money supply, M1, by
$2,000.
D. has the potential to ultimately increase total demand deposits in
the banking system by $2,000.
E. has the potential to ultimately increase the bank’s loans by
more than $2,000.
13. Suppose that at the current level of money supply, aggregate
output/income and market interest rate, you observe that the
quantity of money supplied exceeds the quantity of money
demanded. Given this information, you would expect there to be
endogenous pressure for
A.
B.
C.
D.
E.
money supply to increase.
bond prices to decrease and the interest rate to decrease.
bond prices to increase and the interest rate to increase.
bond prices to increase and the interest rate to decrease.
bond prices to decrease and the interest rate to increase.
14. What is the initial round of events (in order) that results when
the FED carries out an open market purchase of government
securities from the public?
A. Aggregate output decreases, demand for money decreases, the
interest rate decreases, planned investment increases, and
aggregate output increases.
B. Money supply decreases, the interest rate increases, planned
investment decreases, aggregate output decreases, and money
demand decreases.
C. Money demand decreases, the interest rate increases, planned
investment decreases, aggregate output decreases, and money
demand decreases.
D. Money supply increases, the interest rate decreases, planned
investment increases, aggregate desired expenditures increase,
and equilibrium output increases.
E. Money supply increases, the interest rate increases, planned
investment decreases, aggregate output decreases, and the
money demand remains unchanged.
15. A policy mix that consists of an expansionary fiscal policy and
an expansionary monetary policy is predicted to
A.
B.
C.
D.
E.
definitely increase Y but not C.
definitely increase both Y and r.
definitely increase r and have an ambiguous effect on Y.
definitely increase Id and have an ambiguous effect on r.
definitely increases both Y and C.
16. The crowding out effect associated with discretionary fiscal
policy will be rather small when
A. the money multiplier is very large.
B. the demand function for money is very sensitive to changes in
Y.
C. the desired investment function is very insensitive to changes
in r.
D. the commercial banks hold zero excess reserves.
E. the demand function for money is very insensitive to changes
in r.
81911944
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. Suppose that the following set of equations describe ALL the relevant information about the
island nation, Sunnyvale. The currency in Sunnyvale is the dollar and its symbol is $.
Consumption: C = 20,000 + 0.8Yd (where Yd = disposable income)
Desired Investment: Id = 4,000
Government expenditures: G = 8,000
Taxes: T = 5,000
Exports: EX = 1,000
Imports: IM = 100 + 0.05Yd (where Yd = disposable income)
The full employment level of national income is YFull employment = 120,000.
The money market can be safely ignored for now.
Inflation is assumed to be non-existent.
a. Calculate the multipliers for government expenditures, taxes, and planned investment
spending – show some work for how you arrived at their particular values.
b. Determine the equilibrium level of national income, Y*.
c. What is the value of the government’s deficit or surplus at Y*?
d. Suppose the government decided to simultaneously increase G by $2,000 and increase T by
$2,000. What would happen to Y*? What would happen to the government’s deficit or
surplus?
e. Based on your answer to “Parts a & b” how could the government use government
expenditures (G) alone to achieve full employment national income? Be specific with
respect to the value and direction of the policy you suggest.
Suppose now we recognize that there is a money market and that 1) investment depends on
interest in the typical way and 2) money demand depends on interest and aggregate
output/income in the usual way. Inflation can still be safely ignored.
f. How will this wrinkle impact the efficacy of the fiscal policy plan you suggested to achieve
YFull Employment? How will your fiscal policy plan have to be altered, i.e., what would you
change and in what way/direction? For full credit you must use the 3-panel graph we used in
class to explain. Note that exact numerical calculations are NOT required.
PLEASE START ALL ANSWERS ON NEXT PAGE:
ANSWERS:
ANSWERS:
2. Assume the following balance sheets for the Federal Reserve, the Commercial Banks and
Jane Q. Public. Assume that the required reserve ratio equals 5% and that once money enters the
banking system as Demand Deposits it stays in the banking system, as do all loans and all
monies received when loans are used to make purchases. Also assume that all commercial banks
operate with zero in excess reserves and all commercial banks keep all their reserves at the
Federal Reserve Bank.
Federal Reserve (The Fed)
ALL Commercial Banks
Jane Q. Public
Assets
Liabilities
Assets
Liabilities
Assets
Liabilities
Securities $125 $45 Reserves
Reserves $ 45 $900 Deposits Deposits $20 $ 0 Debts
$80 Currency Loans
$855
Securities $50 $70 Net
in
Worth
circulation
a) What is the current value of the money supply?
Now…Consider what happens when The Fed purchases $10 worth of government securities
from Jane Q. Public. Assume The Fed writes Jane Q. Public a check for $10; Jane immediately
turns in her government securities to The Fed, takes the $10 check and deposits it into her local
bank.
b) Fill in the balance sheets below for how things look immediately after these transactions.
Federal Reserve (The Fed)
Assets
Liabilities
Securities
ALL Commercial Banks
Assets
Liabilities
Reserves
Reserves
Currency
in circ.
Loans
Deposits
Jane Q. Public
Assets
Liabilities
Deposits
$0
Debts
Securities
$70
Net Worth
c) Fill in the balance sheets below for how things look at the final equilibrium position,
assuming all commercial banks are operating with zero in excess reserves.
Federal Reserve (The Fed)
Assets
Liabilities
Securities
ALL Commercial Banks
Assets
Liabilities
Reserves
Reserves
Currency
in circ.
Loans
Deposits
Jane Q. Public
Assets
Liabilities
Deposits
$0
Debts
Securities
$70
Net
Worth
d) What has happened to the money supply, and by how much, as a consequence of the Fed’s
Open Market operation?
e) Identify two changes to the description of this economy which would decrease the efficacy of
this Fed’s Open Market operation. Briefly defend your position.
ANSWERS:
ANSWERS:
ECON 1120 F2014 PRELIM 2 Answers to multiple choice questions
1. B
If the economy is out of equilibrium, then the statement B need not be true. When output is greater than desired
expenditure, there is unplanned inventory investment. When desired expenditure exceeds output, inventory
investment is smaller than the desired level.
2. C
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. C
By the identity Yd = C + S, we can solve for the saving function: S = Yd – C = Yd – (500 + 0.6Yd) = -500 + 0.4Yd.
5. E.
To obtain multipliers, set Y*= C(Y*)+Id+G+X-IM and solve for Y* and then look at the coefficients on the
exogenous variables.
6. B
Graphing the saving and investment functions, it can be seen that, when the saving function shifts upwards,
equilibrium savings will decrease.
7. B
When government spending increases, planned aggregate expenditure increases initially by the full amount of the
rise in G. When taxes are cut, the initial increase in planned aggregate expenditure is only the MPC times the
changes in taxes.
8. D
Savings accounts are not liquid enough to be counted in M1. They are however counted in M2.
9. B
M1= currency +demand deposits + traveler’s checks +other checkable deposits. M2= M1+savings accounts +
money market accounts +other near monies.
10. B
11. C
Janet Yellen was sworn in as Chair of the Fed Board of Governors on February 3, 2014.
12. D
Note that the money multiplier= 1/rrr= 1/0.05=20. Since change in demand deposits= money multiplier*change in
reserves, the ultimate increase in demand deposits= 20*$100= $2000.
13. D
Note that bond prices are inversely related to interest rates. As the quantity of money supplied exceeds the quantity
of money demanded, bond prices increase and interest rate decreases.
14. D
As the money supply curve shifts to the “right” or “out,” the equilibrium interest rate decreases. With lower interest
rate, we have larger planned investments (as planned investments is a function of interest rate). This leads to larger
AEd and Y*.
15. E
Expansionary fiscal policy results in higher interest rate, and expansionary monetary policy results in lower interest
rate. So, the effect on interest rate is ambiguous. Since the effect on interest rate is ambiguous, the effect of desired
investments is also ambiguous as desired investments is a function of interest rate. Expansionary fiscal and monetary
policy increase Y. And, since C is positively related to Y, C also increases.
16. C
The crowding-out effect is the tendency for increases in government spending to cause reductions in private
investment spending due to higher interest rate. If desired investments is very insensitive to changes in interest rate,
then the crowding-out effect would be small.